Causes of a budget deficit in developing countries

Causes of a budget deficit in developing countries

Budget deficit

The budget deficit is the most important part of any economy that needs to put under control because increasing budget deficits tends to increase different problems in the economy. An estimated 3% budget deficit is considered as normal for any developing economy. The developing economies like China, Syria, Pakistan and Japan etc are facing budget deficits due to various reasons which have destabilized their economy to an extent (Jones, 1997). There are some facts about the budget deficits in the developing countries which are recognized and focused in the whole world. Following are the developing countries which are facing budget deficits either more or less:

Argentina

Bolivia

Botswana

Brazil

Bulgaria

Burkina

Burundi

Cameroon

Chad

Chile

China

Colombia

Congo

Costa Rica

Côte d'Ivoire

Dominican

Ecuador

Egypt

Ethiopia

Fiji

Ghana

Guatemala

Haiti

Hungary

India

Indonesia

Iran, Islamic Republic of

Jamaica

Jordan

Kenya

Korea

Lesotho

Malaysia

Mauritius

Morocco

Nepal

Nicaragua

Pakistan

Panama

Papua New Guinea

Paraguay

Peru

Philippines

Senegal

Seychelles

Sierra Leone

Sri Lanka

Republic of St. Lucia

St. Vincent and the Grenadines

Dem. Rep. of Madagascar Swaziland

Thailand

Togo

Republic Mexico Trinidad and Tobago

Tunisia

Facts about budget deficit in developing countries

Budget deficits directly affect the output, money supply, balance of payments, domestic price level and international reserves.

One major issue in developing countries is that to finance their domestic credit, it starts to speed up its money supply over the demand which certainly resulted in foreign reserve outflows (Mankiw, Romer, and Weil 1992).

The monetary expansion in developing countries which is connected with incredible sources to finance their huge budget deficits is the major reason that contributes to balance of payments disequilibrium.

In these countries capital markets are not developed and are in developing phase and interest rates which are determined sometimes creates financial environment in which built-in bias has been created towards the money supply expansion. Thus in presence of constraints of supply, surplus of money supply contributes to expand imports and general price level (Mankiw, Romer, and Weil 1992).

The average budget deficit of China is calculated to be -1.94% of the GDP reaching its all time high 0.58% in December 2007 and a record low of -3.05% of GDP in December 1991.

Similarly, the budget deficit of Pakistan varies between 5.4% to 8.7% of the GDP since the two decades. An estimated 6% budget deficit faced by Pakistan every year. Pakistan has been suffering continuously since last 65 years and the deficit is managed through international loans and because of that the debt has become so huge that it has now started to destabilize the country's economic growth.

The budget deficit which Japan is facing is the structural deficit and therefore it is uncertain that if will change for better. The long time budget deficit has made Japan to face the debt crunch. The reduction in the social security money has almost reached to 0.8% of the GDP and the Japan budget deficit reached to record 6.8% of the GDP in 1999 but it was controlled to 1.4% in the same year (Jones, 1997).

Syria, being another developing country recorded a recent budget deficit of $4.8 billion i.e. 9% of their GDP. The main reasons for this deficit were certainly political issues and international loans.

Issues of budget deficit in the ...