Domestic Debt and Inflationary Effects: An Evidence from Pakistan
Muhammad Javed Ahmad, Muhammad Ramzan Sheikh, Khadija Tariq

Abstract
Inflation is a severe problem in many countries, especially of the less developed countries. This study investigates the impact of domestic debt on inflation in Pakistan for the period 1972 to 2009. The study observes that domestic debt and domestic debt servicing enhance the price level in Pakistan. The effect of the volume of domestic debt and domestic debt servicing on price level is found to be positive and statistically significant. Floating debt i.e. treasury bills comprise a large part of total domestic debt, which are short-term securities and have a high return in the form of interest rate. Therefore, due to their high and certain return, banks or non-bank public entities procure treasury bills and receive a high return on them, enhancing income, aggregate demand and price level. Further, the interest rate i.e. the cost of domestic borrowing or debt servicing is one of the major reasons for the budget deficit in Pakistan. So, the government has to rely on various sources to finance the budget deficit which leads to inflation. The study also proposes polices to reduce the domestic debt, namely enhancing the tax base and lowering expenditures through structural reforms.

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