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Excessive Defense Expenditures and Economic Stabilization: The Case of Pakistan

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Toward the end of 1988, Pakistans deteriorating resource situation caused a financial crisis, many remnants of which still exist today. In 1988 the governments budget deficit reached 8.5 percent of Gross Domestic Product GDP, inflation accelerated, the current account deficit doubled to 4.3 percent of Gross National Product GNP, the external debt service ratio reached 28 percent of export earnings, and foreign exchange reserves fell in half, to 438 million, equal to less than 3 weeks of imports World Bank, 1991. These developments have eroded the ability of the government to affect the countrys development process. In fact, the encouragement of private-sector activity, particularly investment, is the only viable option open to the authorities. It follows that for policy purposes the most important issue involves restructuring government expenditures and their financing in a manner that would provide the maximum inducement to private-sector capital formation, especially in manufacturing. Operationally, this means finding an optimal balance between the governments three most important budgetary items defense, public consumption, and infrastructural development. What is more important, because there is abundant evidence that the governments deficits have crowded out a certain amount of private investment, the authorities must achieve, this balance within the context of a reduced level of expenditures, tax increases, or both. Defense expenditures are an obvious candidate for expenditure reductions. As noted in the next section, the countrys defense burden is one of the heaviest in the world. At around 7 percent 1992 of Gross GNP, it is more than twice that of India. Moreover, while over recent years global defense expenditures have been declining, Pakistans has expanded From 5.4 percent of GNP in 1980, it reached 6.8 percent in 1985.

Subject Categories:

  • Economics and Cost Analysis
  • Government and Political Science
  • Military Forces and Organizations

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