Modeling the Relationship between Banking Sector Credit and Economic Growth: A Sectoral Analysis for Pakistan

Abstract

This study examined the impact of banking sector credit on sectoral and sub-sectoral level of economic growth of Pakistan by using time series data from 1982 to 2017. The empirical aggregated analysis indicates that the magnitude of the private sector credit has positive sign, but insignificant influence on aggregate level of economic growth. On the other hand, sectoral analysis reveals that agriculture sector is not positively influenced by providing credit to agriculture sector. In contrast, industrial sector relies more on banking sector finance for its long-lasting projects. Moreover, sub-sectoral analysis shows that manufacturing, transport and communication, construction, and wholesale and retail trade sectors have positive influenced by their respective sector’s credits. Furthermore, government spending showed positive sign and significant impact on all the sectors’ growth except in case of transport and communication. Similarly, investment also showed positive and significant impact in case of all analysis except in case of industrial and manufacturing sector growth. Hence, the results suggest that monetary authorities should design appropriate credit policies by considering the sectoral-specific characteristics. Moreover, banks should provide medium to long-term loans to agriculture and industrial sub-sectors and ensure that, their impact efficiently transmitted to real economic growth.

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