FINANCIAL DEVELOPMENT, PRIVATE CREDIT AND ECONOMIC GROWTH IN PAKISTAN: EVIDENCE FROM THE BANKING SECTOR

Abstract

This paper examines the financial development, private bank credit and relationship between economic growth and same in Pakistan. It is based on the annual Pakistan data from World Bank's World Development Indicators (1990-2024), where financial-sector variables have included the data from IMF, International Financial Statistics (IFC) and national accounts sources. The explanatory variable is domestic credit to the private sector extended by banks, as a percentage of GDP and the dependent variable is annual real GDP growth. Gross capital formation, inflation, foreign direct investment, current account balance and lagged GDP growth are control variables. The Stata-oriented tables include descriptive statistics, correlations, unit-root diagnostics, baseline regressions, robustness checks and an interaction between private bank credit and a stable-inflation regime. The results indicate that in bivariate correlation, a positive link exists between private bank credit and investment, while in partial correlation, controlling for inflation, investment, external balance and persistence, a partial positive impact of private bank credit on the yearly growth of GDP is not robust. The negative macroeconomic correlates with growth that persist across the sample of years are inflation. The findings show that, overall, there is a "fundamental caution": Private credit plays an important role in financial development, but its growth pay-off is sensitive to macroeconomic stability, credit allocation quality, and productive absorption, and crediting the pay-off simply to a higher credit-to-GDP ratio may be wrong.