Crowding out in pakistan amid government borrowings

 At open doors dogs come in; Of course it was written well before the stagflation of Pakistan’s economy but it seems it was written for Pakistan Governments financial administration. In economics, there is a term ‘crowding out’ which means when government increase its spending by borrowing, it results in increased interest rates for borrowing. Thus, private investors being cost-efficient in nature, withdraw their capital investments plans due to lack of economical capital financing. Government in Pakistan, borrows keenly pushing economic growth to depression. 

         Lets see how this occurs. When government passes a tender for borrowing it increases the demand for cash to be borrowed. Since, the supply of cash is limited in an economy, to avoid devaluation of money, increased demand for money encourages the money supplier agents such as banks to give loans at much higher interest rates. To meet the inelastic supply of welfare services government borrows this money at higher interest rates setting a new, higher interest rate in the market. It discourages the private sector investors to invest money as cost of capital financing becomes so high. They now, instead of investing money, become more inclined towards saving money in banks because of increased interest rates being hyped.

        This reduces the business activities in the economic system. In the absence of business activities banks increase their interest rates on already given loans to maintain their revenue and temporarily cease depositing money in savings account. This way whole economic cycle crashes if public sector isn’t competent enough to meet the needs of consumers. 

    In case of Pakistan, the consumer needs are met by private sector products completely. So, crowding out, makes it more difficult for private players to continue their production at present rates and they increase prices which, in turn, cause inflation to rise and employment level to decline as private firms cannot afford paying more labour costs. 

     In a nutshell, Government’s financial administration seriously needs to reconsider their fiscal policy. Lowering the public expenditure  will cause considerable decrease in public borrowings, encouraging private agents to come and settle in the arena, producing new job opportunities and aiding to the recovery of economic growth.