Economic Growth of Pakistan N AEEM A KRAM * 1. INTRODUCTION Heavy indebtedness of the developing countries is one of the major challenges at the beginning of 21st century. Needless to point out that government can finance its budget and development efforts by borrowing or taxing the output. However, taxes tend to distort the structure of relative prices, borrowing, if pushed beyond the carrying capacity of an economy, creates problems of intergenerational equity, and it can cause a transfer of resources that tends to be undermining growth. Yet borrowing has to be done to finance the public expenditure in order to increase social welfare and promote economic growth.