Deficit Financing in Developing Countries: Applications and Consequences
April 4th, 2019
By Zubair Hasan
Budgetary deficits and
adverse external payments have emerged as major public policy concerns in
recent times. The purpose of this paper is to discuss briefly various aspects
and forms of deficit financing as modern economies increasingly use it to
address these concerns. Historical evidence shows that controlled deficit
finance can be a useful tool to mobilize physical resources for economic
development. Borrowings from the IMF are available to meet deficits during
financial turmoil and chronic balance of payments deficits for country bailout.
The paper warns of the dangers of reckless indulgence in deficit financing,
internal or external – and indicates precautions to avoid the pitfalls. It
puts, presumably for the first time deficit finance for various purposes from
different sources in a single framework.