Government Borrowing and Financial Development: A Case for Pakistan (original) (raw)
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Does Government Borrowing Crowd out Private Sector Credit in Pakistan
Journal of Finance & Economics Research
We investigate the impact of government borrowing from the scheduled banks on the credit to private sector in Pakistan, using monthly data from 1998:M6 to 2015:M12. We find that a one percentage point growth in the government borrowing leads to 8 basis points crowding out of the private sector credit in four months. Albeit small, there is negative impact of government borrowing on the private sector credit. The results remain unchanged even after implementation of the interest rate corridor since August 2009.
2000
To meet the public deficit, Government of Pakistan has been disproportionately borrowing from the scheduled banks and general public which are also the source of funding for private investment. Even the public sector corporations are doing the same. From the crowding out perspective borrowing and public expenditure are the same, as borrowing is mainly undertaken for financing expenditures. The issue of crowding out or crowding in effect of public borrowing on private investment needs considerable attention. The current study has investigated the crowding-out effect of public borrowing on private investment in the country. An investment function of three independent variables, i.e. public borrowing, GDP and lending rate has been estimated through unit root test, co-integration test and vector error correction model. The time series data of 34 years, i.e. fiscal year of 1971-72 to 2005-06, taken from Federal Bureau of Statistics and Finance Division, Government of Pakistan has been used. The results do not corroborate the crowding-out hypothesis in Pakistan explaining the market imperfections and substantial amount of excess liquidity. The results provide the evidence of crowding-in effect, which explains the direction of public expenditures towards private sector through contractors, politicians and bureaucrats, instead of public projects. The provision of subsidy, transfer payments, and substantial amount of micro-credit also explain the phenomenon of crowding-in. The evidence has important implications for fiscal management. To avoid unnecessary inflation and external indebtedness associated with deficit financing, government should rely on domestic sources. As long as excess liquidity prevails in financial system, the domestic resources, other than State Bank of Pakistan may be used to meet the deficit without hurting private investment.
This research paper investigates the determinants of financial development. Credit to private sector is used as proxy of financial development in this study. Panel data from 1990 to 2012 on 27 developed and 30 developing countries has been used. The main interest of the research paper is to explore how different variables or indicators affect the credit to private sector as percentage of GDP (CPS) 1. The Hausman test is used to check weather fixed effect model is more appropriate or random effect model. Hausman test is in favor of Fixed Effect Model. The role of different important variables which effect the financial development have been found by using fixed effect model. It is concluded from empirical results that all exogenous variables except NFDI and RL have significant effect on financial development. Section I: Introduction The importance of financial development and economic growth have become more pronounced in recent years; in addition to other vital factors, the long term economic growth and welfare are correlated with the degree of financial development. There are different indicators to measure financial development such as size, depth, access, efficiency and stability of a financial system. The financial systems include markets, intermediaries, range of assets, institutions and regulations. A strong financial system guarantees the high capital accumulation (the rate of investment), trading, hedging, insurance services, diversified saving and portfolio choices etc. which facilitate and encourage the inflow of foreign capital and technological innovation. The greater financial development leads to poverty reduction, income inequality, mobilization of savings, better access of the poor to finance, high return investment, promotion of sound cooperate governance and enhancement of economic growth as well as welfare. The key importance of financial development and economic growth is generally acknowledged in the literature. However, the area of public sector borrowing from domestic banks and its impact on financial development and credit to private sector is still under-research. The public debt is often seen as a burden for both developing and developed countries. Since the early 1990s, there has been a fiscal improvement in both developing and developed countries due to restricted public debt; however, the fiscal adjustment in developed countries has been more noticeable than developing countries (World Economic Outlook, 2001). In recent years, the public debt in advanced countries has been falling while the emerging market countries do not follow the same trend. It is because advanced countries preferred to give credit to private sector than the public sector to avoid the crowding out situation. The crowding out situation limited the excess of private sector on credit from domestic banks both in developed and developing countries. The supply and demand of credit to the public and private sectors depends upon the macroeconomic conditions. If the level of public debt is high in the economy and macroeconomic variables indicate that the country's economic situation is vulnerable, domestic banks may be expected to prefer to finance public sector instead of private sector, which is more risky borrower. Thus, the private sector credit by the domestic banks may decline in such economies (IMF, Research Department, 2004), The credit to private sector is essential for the private investment and development in an economy. The domestic banks play a pivotal role in increasing employment, efficiency, productivity and inducing growth in an economy. However, in large emerging countries than advanced ones, the domestic banks mostly prefer to finance public sector to private sector. Thus, the private sector faces problems in finding credit for investment in form of crowding out systematically (Caballero and Krishnamurthy, 2004). The importance of financial sector cannot be denied as efficient financial system is a perquisite condition for 1 We use credit to private sector as percent of GDP (CPS) as proxy of financial development.
American Journal of Industrial and Business Management, 2015
Bank credit plays an important role in the economy of any nation. The current study examined the association among bank credit to private sector and economic growth in Pakistan. Economic growth was taken as dependent variable, while bank credit to private sector, interest rate, inflation, investment to GDP and government consumptions were taken as independent variables. Secondary data were collected from World Bank Indicator, ranging for the period 1973 to 2013. Descriptive research and correlation were used to check the normality of data. Unit root test was used to check the stationarity of variables. Co-integration VECUM and Granger Casuality test were statistically used to test the variable relationship and casuality effect of the variable. Regression analysis was used to analyze the impact of bank credit on economic growth. The findings of the study showed that bank credit had extensive relationship with economic progression; in short term the relationship was also significant. Regression analysis showed that there was adverse impact of bank credit on economic growth in Pakistan. However, problem associated with bank credit facility is the constraint and regulation imposed by SBP on the percentage of credit to be given to the Entrepreneurs. For solitary in the meantime bank lending has a casual influence on economic growth, there is a policy need to give devotion to liberalization the monetary sector.
Internal Debt and Private Investment: Evidence from Pakistan
In most of the developing countries financial sectors are characterized by limited availability of loanable funds. Public sector borrowing leads to crowding out of the private sector as well as high interest rates and inflation. In Pakistan, government has relied more on borrowing from the domestic sources as well. The study explores the impacts of internal debt on private investment in Pakistan applying the OLS technique for the period of 1972 to 2009. The study indicates that the stock of internal debt and debt servicing affects the private investment negatively in Pakistan. This implies that internal debt and internal debt servicing crowd out private investment in Pakistan due to shallow financial system and underdeveloped financial markets. The study also suggests some polices to retire the internal debt which includes the privatization of state owned enterprises, use of externally borrowed resources and the foreign exchange flows from external trade.
Developing economies relies on public debt to finance its expenditure and to accelerate economic growth. Traditional economists consider public debt a big hindrance in the way of growth as it crowd out private investment in long run and thus growth is slowdown. The current study is an attempt to empirically test this hypothesis while taking Pakistan economy as a case study. Sample period of the study is spanning from 1972 to 2013 and for estimation purposes Autoregressive Distributed Lag (ARDL) model/Bound test for Cointegration and Error Correction Method (ECM) is employed. Empirical results of the study shows that the direct impacts of public debt on economic growth is positive but statistically insignificant, showing no direct role of public debt on economic growth while indirectly through crowding out of private investment the economic growth process become slow down. These results support debt overhang and crowding out hypothesis of Public debt. Moreover, the significance of Error Correction Term (ECM) is a proof of the existence of stable long run relationship and suggests that the disequilibrium is corrected with high speed of adjustment. It is suggested that government may create such type of environment which encourage capital inflows and utilize this capital for a productive purposes to overcome the crowding out effects of public debt.
The Impact of Financial Development on Economy of Pakistan
This study aims to examine the impact of financial development on economy sector of Pakistan. Regional economic growth and financial development cycles can trace major global and unobserved factors evolved overtime. However, economic growth and financial development are explaining the fluctuations in the economy, which plays an important role for development of any economic sector. Whereas, Augmented Dickey Fuller Test (ADF) and Phillips Perron (PP) test are used to check the individual stationarity of each variable. Augmented Dickey Fuller test is used to estimate the unit root test. Johnson co-integration test is also used to check the long run relationship between the variables. The overall results shows a positive significantly impact of financial development on economic growth of Pakistan, expected some years of nineties when stock markets became in negative figure. However, F-statistics shows overall positive significant impact of the model. Introduction During recent decades, a great deal of attention has received the relationship between financial development and economic growth. The most productive sectors for investment both domestic and foreign savings are mobilizing by the process of financial development supports. In the financial intermediation, some variables have been used as a proxy. In term of size and efficiency different financial intermediaries in the whole financial development must relatively be significant by the selected variables. Mauro (1995) starts even though their stock markets have been relatively underdeveloped high saving rates and fast growth have experienced by Japan and continental Europe, their stock markets have been well developed by low saving and slower growth have been characterized by United States and United Kingdom.
Crowding Out Effect of Public Borrowing: A Case of Pakistan
2009
To meet the public deficit, Government of Pakistan has been disproportionately borrowing from the scheduled banks and general public which are also the source of funding for private investment. Even the public sector corporations are doing the same. From the crowding out perspective borrowing and public expenditure are the same, as borrowing is mainly undertaken for financing expenditures. The issue of crowding out or crowding in effect of public borrowing on private investment needs considerable attention. The current study has investigated the crowding-out effect of public borrowing on private investment in the country. An investment function of three independent variables, i.e. public borrowing, GDP and lending rate has been estimated through unit root test, co-integration test and vector error correction model. The time series data of 34 years, i.e. fiscal year of 1971-72 to 2005-06, taken from Federal Bureau of Statistics and Finance Division, Government of Pakistan has been used. The results do not corroborate the crowding-out hypothesis in Pakistan explaining the market imperfections and substantial amount of excess liquidity. The results provide the evidence of crowding-in effect, which explains the direction of public expenditures towards private sector through contractors, politicians and bureaucrats, instead of public projects. The provision of subsidy, transfer payments, and substantial amount of micro-credit also explain the phenomenon of crowding-in. The evidence has important implications for fiscal management. To avoid unnecessary inflation and external indebtedness associated with deficit financing, government should rely on domestic sources. As long as excess liquidity prevails in financial system, the domestic resources, other than State Bank of Pakistan may be used to meet the deficit without hurting private investment. JEL Classification: G28, H2, E22, E4, E51.
Determinants of Financial Development. A Case Study of Pakistan
SSRN Electronic Journal, 2018
This study aims to investigate the determinants of financial development in case of Pakistan. Data collected during the time period of 1995-2015. Regression analysis and correlation analyses has been used for the interpretation of results. Five factors have been tested to measure their impact on financial development. Inflation, trade openness, market capitalization, investment rate and interest rate have been used to measure their role as determinants of financial development. Empirical findings indicate that all variables inflation, trade openness, market capitalization, investment rate and interest rate have significant impact on financial development. This study is beneficial for policy makers, researchers and financial institutions. However it has several limitations as only five variables have been tested only in the perspective of a developing country.
Impact of Financial Developments on an Economic Performance: A Study of Pakistan
International Review of Management and Business Research, 2014
This paper investigates the role of financial development toward economic performance in Pakistan. To examine the role of financial development on economic performance in Pakistan we have taken 42 years' time period. The regression analysis is used to check the relationship among variables. Findings of the study suggest that GDP growth is having highly significant and positive relationship with domestic credit, imports and exports. However GDP growth is having negative relationship with trade openness and liquid liabilities. Results also suggest that there is a need of relaxation of monetary policy to distribute productive credit in business community. This expansion of funds will improve productivity and positive impact on GDP growth.