Interest Payments, Fiscal Deficit and Economic Growth :A Case Study of Pakistan

The huge fiscal deficit negatively affects economic growth in the long run consistent to results of Mohanty (2013). The findings coefficient of FD is -0.44 indicate that there is a negative and significant relationship between fiscal deficit and economic growth in the long run. Coefficient of DEXP is 0.71 and has a positive and significant impact, so that it will enhance the productivity of both human capital and physical capital, which increases economic growth. Fiscal deficit for capital expenditure is not a problem up to some threshold level. Auto Regressive Distributive Lag (ARDL) model, error correction model (ECM), impulse response function and variance decomposition are used for time-series data analysis. Interest payments have a negative and significant coefficient, which analysis the negative correlation between growth and interest payments. The lagged value of the error correction term is negative and significant. It is showing convergence from short-run disequilibrium towards the long-run equilibrium so, a short-run relationship also exists among variables of interest payments, fiscal deficit, development expenditure and economic growth.