Effects of Banking Sector Credits in Estimating Import Demand of Pakistan: Evidence from FMOLS and DOLS Approach

Abstract

The improvement in trade balance through financial development policies is one of the concern issues in developing countries. In this context, the current research highlights the importance of banking sector credits to estimate the import demand function of Pakistan. The annual dataset is used from the period 1985 to 2020. This study developed three models of import demand by incorporating sector wise bank credit to industrial, agriculture and services sector as proxy of financial development. The long run coefficients estimated through Dynamic Ordinary Least Square (DOLS) indicate that credit to agriculture sector found negative and significant impact on import demand. In contrast industrial sector credit found positive and significant with import demand. This result reveals that the credit to industrial sector is more responsible to increase import bill in Pakistan. Moreover, consumption expenditure is the main driver of import demand in all models. The coefficient of relative price has shown negative and significant impact on import demand in all estimations. The Fully modified ordinary least square (FMOLS) test reconfirmed the previous findings. However, CUSUM test also confirms the stability of parameters of the models. It is recommended that import substitution policy should be adopted to curb the industrial sector demand for imported items as well as the central bank should increase the share of credit to agriculture sector for deteriorating the import bill of Pakistan.

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