Advantages Of Deficit Financing

Such loans will not create inflation. Because most of such loans have been provided by the people by making savings and reducing consumption. The repayment of loan and interest is made in local currency.  Govt. easily gets such loans. Moreover, the scattered savings of the people are properly utilized.
4.    People have a sense of security while lending over to govt. But this method has the following demerits:
The lenders to govt. get loans against certificates from commercial banks etc. they can spend such amounts on consumption. In this way, inflation could not be controlled. Moreover, the purchasing power of the people will increase on the basis of increased earning in the form of interest against lending to govt. This may boost consumption expenditures. If people or organizations purchase govt. certificates with the help of hoarded money, the consumption of the people will not decrease. Hence inflation could not be controlled.


In order to meet the budget deficit govt. can issue new notes. Thus printing of new currency notes is also a method of deficit financing. In Pakistan, govts. also depend upon such method.

Followings are the advantages of printing new money :

(1)     In case of UDCs when process of development starts the govt. expenditures increase rapidly. But taxes do not yield sufficient incomes. The bank borrowing leads to crowdingout and private investment is sabotaged. The non-bank sources provide smaller amounts of loans. The private sector is hesitant in making investment. In such situation, the last resort with the govt. is to print new notes.

(2)   When govt. enhances its expenditures by printing new notes the employment opportunities in the country increase. The incomes of the people would increase and prosperity will prevail in the country.

(3)  If new money is spent on the quick yielding projects, inflation will not rise.

(4)   Govt. has to pay interest against bank and no-bank borrowings. But in case of printing of new money,govt. does not have to face any expenditures Thus it is not an expensive method.

(5)   Pakistan is fully surrounded by international demonstration effect. Moreover, the savings are low because of low incomes. As a result, the economic development is being obstructed. In such circumstances, if govt. prints new money, people will have to make the forced savings. Because of new notes the inflation will rise and the common man will have to pay more prices. The more prices given by the people would represent the forced savings of the people. With such savings govt. can meet its development and non-development expenditures. Thus the forced savings alongwith normal savings would become helpful to accelerate the pace of economic development. This is the reason that Arthur Lewis is in favour of printing new notes for the sake of economic development.

(6) The developing countries are not only confronted with economic backwardness, but social backwardness also. Therefore,for the sake of industrial and agri. development; removal of illiteracy, and provision of infra-structure etc. heavy funds are required. And such could be made available through printing of new money.

But the followings are the demerits of Printing of New Money:

(1)         The new notes lead to create open and clearcut inflation. Particularly, in our country where the production cannot be enhanced due to structural reasons. The increase in currency will lead to increase the prices.

(2)   The inflation due to new notes will badly affect the fixed income group.
Because of inflation, the purchasing power of such class wir decrease. As a result, the efficiency of such class will decrease. Moreover, inflation will encourage unsocial activities.

(3)    The rising prices will lead to create uncertainty in investment activities.
People will divert their resources in unproductive fields, like purchase of grain, gold, lands and property etc. Moreover, in such situation the artificial shortage is also created. As a result, not only the resources are unoptimally allocated, but the incomes are also unequally distributed.

(4)   With new notes when inflation is created, the internal as well as external value of currency will decrease. The fall in the foreign value of currency will have a negative effect on the BOP of a country. To remove such deficit the policy of devaluation is followed. But it will also aggravate the situation.


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