Foreign Capital Flows and Defense Expenditures: Patters of Causation and Constraint in Pakistan

Abstract

This analysis shows the extent to which defence expenditures have affected the borrowing decisions of the government of Pakistan. Has the government resorted to increased borrowing in these markets to expand allocations to the military? Or, in contrast, have increased defence expenditures tended to restrict access to external credit? Weapons purchased with scarce foreign exchange lead to the availability of fewer resources for tbe import of investment goods essential for self-sustaining growth. On the one hand, external financing of defence expenditures would reduce the short-run sacrifices often associated with military expenditures. On the other hand, it appears that international lenders such as the International Monetary Fund (IMF) may be increasingly inclined to restrict lending to countries with high levels of defence expenditures.