The impact of fiscal deficit on economic growth: empirical evidence from Pakistan and Afghanistan




GDP, FDI, GDP growth, Fiscal deficit, High fiscal deficit, Economic stability, Economic crisis, National debt, Inflation rate, Revenue, Expenditure


The economic crises of Pakistan and Afghanistan are linked to the high fiscal deficit in the past, which has affected economic growth. The research aims to investigate the effect of fiscal deficit on economic growth with the data from 1973 to 2022 in Pakistan and 2002 to 2022 in Afghanistan and the ARDL procedure to estimate the model. The study investigates whether the fiscal deficit improves economic growth and how much the deficit can be minimised to maintain economic stability in Pakistan and Afghanistan. This study found that, over a long period, the fiscal deficit adversely impacts GDP growth in Pakistan. Similarly, the national debt has an adverse effect on GDP growth in Afghanistan. Moreover, in the near run, the fiscal deficit has a negative effect on GDP growth in Pakistan. Similarly, the national debt has a negative effect on GDP growth in Afghanistan. Therefore, this study concluded that the fiscal deficit harms GDP growth and does not support the Keynesian theory regarding the deficit in Pakistan and Afghanistan. Thus, this study endorsed that the government should increase the revenue to cover expenditures to eradicate or lessen the fiscal deficit and debt.


Adam, C., & Bevan, D. (2001). Non-linear effects of fiscal deficits on growth in developing countries. Department of Economics, University of Oxford.

Adam, C. S., & Bevan, D. L. (2005). Fiscal deficits and growth in developing countries. Journal of Public Economics, 89(4), 571-597. DOI:

Adama, J. I., Ohwofasa, B. O., & Ayodele, V. A. (2019). Fiscal deficit and the growth of domestic output In Nigeria. Theoretical and Practical Research in the Economic Fields, 10(2), 150-15. DOI:

Adhikary, B. K. (2011). FDI, trade openness, capital formation, and economic growth in Bangladesh: a linkage analysis. International Journal of Business and Management, 6(1), 16-28.

Aero, O., & Ogundipe, A. (2016). Fiscal deficit and economic growth in Nigeria: Ascertaining a feasible threshold. International Journal of Economics and Financial Issues, 8(3), 296-30. DOI:

Ahmad, K., & Wajid, S. (2013). What matters for economic growth in Pakistan: fiscal policy or its composition? Asian Economic and Financial Review, 3(2), 196-215.

Ahmad, N. (2013). The role of budget deficit in the economic growth of Pakistan. Global Journal of Management and Business Research Economics and Commerce, 13(5), 1-4.

Ajayi, L. B., & Oke, M. O. (2012). Effect of external debt on economic growth and development of Nigeria. International Journal of Business and Social Science, 3(12), 297-304.

Ali, S., Ahmad, N., & Khalid, M. (2010). The effects of Fiscal Policy on economic growth: empirical evidence based on time series data from Pakistan. The Pakistan Development Review, 49(4), 497-512. DOI:

Almfraji, M. A., & Almsafir, M. K. (2014). Foreign direct investment and economic growth literature review from 1994 to 2012. Procedia - Social and Behavioral Sciences, 129, 206-213. DOI:

AlShawabkeh, I. A., & Warrad, T. A. (2023). Effect of public debt on the twin deficits using a Threshold time series model: case study of Jordan 1980-2020. Migration Letters, 21(S1), 561-574. DOI:

Aminullah, Jan, N., Rehman, Z. U., & Fazal, A. (2023). The impact of tourism industry on the economic growth of Pakistan. Journal of Humanities, Social and Management Sciences (JHSMS), 4(2), 18-40. DOI:

Ayanwale, A. B. (2007). FDI and economic growth: evidence from Nigeria. African Economic Research Consortium Research Papers, 165, 1-48.

Barro, R. J. (1989). The Ricardian approach to budget deficits. Journal of Economic Perspectives, 3(2), 37-54. DOI:

Barro, R. J. (1990). Government spending in a simple model of endogeneous growth. Journal of Political Economy, 9(5). DOI:

Barro, R. J. (1995). Inflation and economic growth. Annals of Economics and Finance, 14(1), 85. DOI:

Bernheim, B. D. (1989). A Neoclassical perspective on budget deficits. Journal of Economic Perspectives, 3(2), 55-72. DOI:

Bhari, A. A. A., Lau, W.-Y., Aslam, M., & Yip, T.-M. (2020). The nexus between fiscal deficit and economic growth in Malaysia. JATI-Journal of Southeast Asian Studies, 25(1), 79-94. DOI:

Bhoir, R. B., & Dayre, S. R. (2015). Does India's economic growth independent of fiscal deficit? The Business & Management Review, 5(4), 189-192.

Blanchard, O., & Giavazzi, F. (2002). Current account deficits in the euro area: the end of the Feldstein-Horioka puzzle? Brookings Papers on Economic Activity, 2002(2), 147-200. DOI:

Bléjer, M. I., Jer, M. I. I. B., & Cheasty, A. (1993). How to measure the fiscal deficit: analytical and methodological issues: International Monetary Fund.

Brender, A., & Drazen, A. (2008). How do budget deficits and economic growth effect reelection prospects? Evidence from a large panel of countries. American Economic Review, 98(5), 2203-2220. https://doi: 10.1257/aer.98.5.2203 DOI:

Calderón, C., & Fuentes, J. R. (2013). Government debt and economic growth. Inter-American Development Bank (IDB) working paper series, 424.

Chimobi, O. P., & Igwe, O. L. (2010). Budget deficit, money supply and inflation In Nigeria. European Journal of Economics, Finance and Administrative Sciences, 19(5), 52-60.

Claeys, P. (2008). Budgetary spillovers and long-term interest rates. In B. van Aarle & K. Weyerstrass (Eds.), Economic Spillovers, Structural Reforms and Policy Coordination in the Euro Area (pp. 55-106). Heidelberg: Physica-Verlag HD. DOI:

Eisner, R., & Pieper, P. J. (1984). A new view of the federal debt and budget deficits. The American Economic Review, 74(1), 11-2.

Esso, L. J., & Keho, Y. (2010). The savings-investment relationship: cointegration and causality evidence from Uemoa countries. International Journal of Economics and Finance, 2(1), 174-181.

Fatima, G., Ahmed, A., & Rehman, W. (2011). Fiscal deficit and economic growth: an analysis of Pakistan's economy. International Journal of Trade, Economics and Finance, 2(6), 501-50. DOI:

Fischer, S. (1993). The role of macroeconomic factors in growth. Journal of Monetary Economics, 32(3), 485-512. DOI:

Gülcan, Y., & Bilman, M. E. (2005). The effects of budget deficit reduction on exchange rate: evidence from Turkey. Dokuz Eylül University DP Series, 5(07), 1-9.

Gupta, S., Clements, B., Baldacci, E., & Mulas-Granados, C. (2005). Fiscal policy, expenditure composition, and growth in low-income countries. Journal of International Money and Finance, 24(3), 441-463. DOI:

Hassan, H., & Akhter, A. (2014). Budget deficit and economic growth of Bangladesh: A VAR-VECM approach. Janata Bank Journal of Money, Finance and Development, 1(2), 1-13.

Hussain, M. E., & Haque, M. (2017). Fiscal deficit and its impact on economic growth: evidence from Bangladesh. Economies, 5(4), 1-19. DOI:

Iqbal, N., ud Din, M., & Ghani, E. (2017). The fiscal deficit and economic growth in Pakistan: New evidence. The Lahore journal of economics, 22, 53-72. DOI:

Keynes, J. M. (1937). The general theory of employment. The Quarterly Journal of Economics, 51(2), 209-223. DOI:

Khan, F., Noor, S., Rehman, Z. U., & Rahman, G. (2022). Does schooling contribute to economic growth? a comparative study in Pakistan and Afghanistan. Pakistan Journal of Social Sciences, 42(3), 535-545.

Kryeziu, N. H., & Hoxha, E. (2021). Fiscal deficit and its effects on economic growth: empirical evidence. International Journal of Finance & Banking Studies (2147-4486), 10(1), 62-70. DOI:

Lau, W. Y., & Yip, T. M. (2019). The Nexus between fiscal deficits and economic growth in ASEAN. Journal of Southeast Asian Economies, 36(1), 25-36. DOI:

Lozano-Espitia, I. (2008). Budget deficit, money growth and inflation: evidence from the Colombian case. Borradores de Economía,, 537, 1-25. DOI:

Maji, A., & Achegbulu, J. O. (2012). The impact of fiscal deficits on economic growth in Nigeria. International Business and Management, 4(2), 127-132.

Mankiw, N. G., Romer, D., & Weil, D. N. (1992). A contribution to the empirics of economic growth. The Quarterly Journal of Economics, 107(2), 407-437. DOI:

Meilisa, M., Handra, H., & Yonnedi, E. (2024). The long-term effect of foreign debt and foreign direct investment (FDI) on economic growth. Indonesia E. Journal of Management, Accounting, General Finance and International Economic Issues, 3(2), 325-338. DOI:

Mohanty, R. K. (2012). Fiscal deficit-economic growth nexus in India: a cointegration analysis. School of Social Sciences, Jawaharlal Nehru University, New Delhi.

Navaratnam, R., & Mayandy, K. (2016). Causal nexus between fiscal deficit and economic growth: empirical evidence from South Asia. International Journal for Innovation Education and Research, 4(8), 1-19. DOI:

Nayab, H. (2015). The relationship between budget deficit and economic growth of Pakistan. Journal of Economics and Sustainable Development, 6(11), 85-90.

Nazari, M., Asadi, E., & Imanian, M. (2023). Uncertainty, budget deficit and economic growth in OPEC member countries. Energy Sources, Part A: Recovery, Utilization, and Environmental Effects, 45(2), 3519-3529. DOI:

Nweke, G. O., Odo, S. I., & Anoke, C. I. (2017). Effect of capital formation on economic growth in Nigeria. Asian Journal of Economics, Business and Accounting, 5(1), 1-16. DOI:

Ojong, C., Owui, H. O., & Effiong, C. (2013). Effect of budget deficit financing on the development of the Nigerian economy: 1980-2008. European Journal of Business and Management, 5(3), 61-84.

Olu, J. F., & Idih, E. O. (2015). Inflation and economic growth in Nigeria. Journal of Economics and International Business Management, 3(1), 20-30.

Onwioduokit, E. (2012). An empirical estimation of the optimal level of fiscal deficit in the West African Monetary Zone. Journal of Monetary and Economic Integration, 12(1), 1-33.

Onwioduokit, E. A., & Bassey, G. E. (2014). Fiscal deficit and economic growth in the Gambia: A search for threshold. Developing Country Studies, 4(19), 162-18

Onwioduokit, E. A., & Inam, U. S. (2018). Budget deficit and economic growth in Liberia: an empirical investigation. American Journal of Social Sciences and Humanities Research, 2(6), 68-78.

Pegkas, P. (2015). The impact of FDI on economic growth in Eurozone countries. The Journal of Economic Asymmetries, 12(2), 124-132. DOI:

Pelagidis, T., & Desli, E. (2004). Deficits, growth, and the current slowdown: what role for fiscal policy? Journal of Post Keynesian Economics, 26(3), 461-469.

Qehaja-Keka, V., Qehaja, D., & Hoti, A. (2023). The effect of fiscal deficits on economic growth: evidence from eurozone countries. Economic Studies, 32(6).

Rahman, N. H. (2012). the relationship between budget deficit and economic growth from Malaysia’s perspective: An ARDL approach. Paper presented at the 2012 International Conference on Economics, Business Innovation, Singapore.

Rangarajan, C., & Srivastava, D. K. (2005). Fiscal deficits and government debt: implications for Growth and Stabilisation. Economic and Political Weekly, 40(27), 2919-2934.

Rehman, M. U., Shah, Z., & Rehman, Z. U. (2023). Impact of the foreign remittances on economic growth and poverty reduction: an analysis of Pakistan’s economy. Journal of Humanities, Social and Management Sciences (JHSMS), 4(1), 58-77. DOI:

Rehman, Z. U., Azam, M., & Tariq, M. (2021). Government tax revenue composition and economic growth: Empirical evidence from South Asian Countries. Journal of Management Research, 7(2), 230-247.

Rehman, Z. U., Khan, M. A., & Tariq, M. (2020). Indirect taxation and economic growth relationship: empirical evidence from Asian countries. Pakistan Journal of Humanities & Social Sciences Research, 3(1), 131-144. DOI:

Rehman, Z. U., Tariq, M., & Khan, M. A. (2018). The role of human capital in economic development in the selected central Asian countries. Dialogue (Pakistan), 13(3), 235-244.,ZiaMarwat.pdf

Roy, A. G., & Berg, H. V. D. (2009). Budget deficits and US economic growth. Economics Bulletin, 29(4), 3015-3030.

Sadat, S. S., Najarzadeh, R., & Agheli, L. (2022). The impact of budget deficit on economic growth of Afghanistan. Journal of Economic Cooperation & Development, 43(3), 1-20.

Safdar, N., Liaquat, M., & Bibi, S. (2021). Role of external debt and trade deficit in economic performance of Pakistan. Annals of Social Sciences and Perspective, 2(1), 1-14. DOI:

Saleh, A. S., & Harvie, C. (2005). The budget deficit and economic performance: a survey. The Singapore Economic Review, 50(02), 211-243. DOI:

Salmon, J. (2021). The impact of public debt on economic growth. Cato Journal, 41(3), 487.

Schclarek, A. (2004). Debt and economic growth in developing and industrial countries. School of Economics and Management, Department of Economics, Lund University, 1-40.

Shetta, S., & Kamaly, A. (2014). Does the budget deficit crowd-out private credit from the banking sector? The case of Egypt. Topics in Middle Eastern and North African Economies, 16(2), 251-279.

Soharwardi, M. A., Sarwar, J., Khan, M. I., & Miraj, M. (2022). Fiscal and monetary policy dilemma in Pakistan to support economic growth. Journal of Economic Impact, 4(3), 233-243. DOI:

Tan, E. C. (2006). Fiscal deficits, inflation and economic growth in a successful open developing economy. Review of Applied Economics, 2(1), 129-139.

Taylor, L., Proaño, C. R., de Carvalho, L., & Barbosa, N. (2012). Fiscal deficits, economic growth and government debt in the USA. Cambridge Journal of Economics, 36(1), 189-204. DOI:

Thirlwall, A. P. (2006). The structure of production, the balance of payments and growth in developing countries: an essay in memory of Mohammed Nureldin Hussain 1954–2005. African Development Review, 18(1), 98-122. DOI:

Thirunavukkarasu, V., & Achchuthan, S. (2013). Fiscal deficit and economic growth: a study on Sri Lankan economic perspective. Developing Country Studies, 3(3), 166-174.

Tung, L. T. (2018). The effect of fiscal deficit on economic growth in an emerging economy: Evidence from Vietnam. Journal of International Studies, 11(3), 191-203. DOI:

Umaru, A., & Zubairu, A. A. (2012). Effect of inflation on the growth and development of the Nigerian economy (An empirical analysis). International Journal of Business and Social Science, 3(10), 183-191.

Umaru, A. D., & Gatawa, A. U. (2014). Fiscal deficit and economic growth in Nigeria (1970-2011): A disaggregated approach. Journal of Research in National Development, 12(1), 01-09.

Uwakaeme, O. (2015). Economic Growth in Nigeria: An Empirical Investigation of Determinants and Causal Relationship (1980–2012). American Journal of Economics, 5(1), 9-20.

World Development Indicators. (2024). World Development Indicators (WDI). The World Bank.

World Data. (2024). Indicators of economy in Afghanistan.



How to Cite

Masheed, Q., Hassanzai, S. H., Ullah, A., & Rehman, Z. U. (2024). The impact of fiscal deficit on economic growth: empirical evidence from Pakistan and Afghanistan. Liberal Arts and Social Sciences International Journal (LASSIJ), 8(1), 22–47.



Research Articles | Original Research