Pakistan’s current crisis converges on balance of payments (BOPs). Several factors contribute to this crisis, including a significant and growing Current Account (CA) deficit, debt repayments, dwindling foreign exchange reserves, a depreciating rupee and a high budget deficit. These issues are further compounded by rising inflation, stagnating output growth and the stringent requirements of the International Monetary Fund (IMF) program on macro fundamentals. At the core of this crisis lies an acute shortage of foreign exchange reserves. Consequently, the current economic predicament is often characterized as a balance of payments crunch, with primary analytical and policy focus on the current account deficit. This paper looks at fiscal expenditures to establish two propositions: Firstly, there is a strong positive relationship between Pakistan’s fiscal deficit and current account deficit, where the fiscal deficit further exacerbates the current account deficit and capital financial account deficit on account of tradeables and global capital flows. Secondly, to accurately reflect this relationship, the National Income Accounting framework needs revision.
A Sun, study studied this question.