Intersectoral Financial Transactions in Pakistan

The impact of the external shocks on Pakistan's developmentand on the accumulation balances of institutional sectors during thepast two decades is quite well known. The shifts in the accumulationbalances of institutions are invariably accompanied by changes in thenature and the magnitude of the claims placed with the fmancial systemand with the rest of the world. At present, little is known about thenature of these changes, during this period, nor about the financialinterdependence and the interaction among the private, the public andthe external sectors of the economy. The growing financial problems ofthe country require a proper appreciation of the changing importance ofdifferent instruments in the debt portfolio of the government and otherinstitutions and of the way capital formation is financed. A number ofstudies have used the flow-of-funds accounts framework to analyse thefinancial problems of developing countries, for example, [Jansen (1989);Roe (1985) and Bhatt (1972)]. In Pakistan, however, this subject has notreceived much attention. This paper is an attempt to fill this vacuum.It describes sectoral interactions within a flow-of-funds accountsframework, and distinguishes various channels through which sectoralaccumulation balances come to an equilibrium by financial flows:intermediation through the formal banking system, direct capitaltransfers between institutions, government deficit fmancing fromborrowing etc. Within this framework the impact of the changes ininvestment or in the federal deficit are traced to changes in thefmancial behaviour of the other sectors. The paper gives a presentationof the flow-of-funds accounts designed to understand the mechanics offinancing investment and the government deficit. And helps to answerquestions like what are the components of the federaldeficit