Impact of Government Borrowing on Financial Depth: Evidence from Pakistan

Abstract

The study aims to explore the influence of government borrowing from both central banks and commercial banks on financial development, with a specific focus on private borrowing or credit to the private sector. By analyzing the relationship between government borrowing practices and financial development indicators, the research seeks to elucidate how government borrowing behaviors affect the overall financial depth of an economy. This paper utilizes government borrowing, represented by public domestic debt, as a proxy for government borrowing behavior. Conversely, private borrowing, specifically credit to the private sector, is employed as an indicator of financial development. The study aims to investigate the relationship between these variables, recognizing that increased government borrowing from banks often restricts the availability of funds for private borrowing. Consequently, this phenomenon may lead to a reduction in private investment, a trend that is explored in detail within this study. In addition to government borrowing, several other factors influence private borrowing, including taxes, savings rates, and inflation. This study focuses on analyzing the impact of these variables on private borrowing using time series data from Pakistan spanning from 1972 to 2016. The ARDL methodology is employed to examine the relationships between these variables and private borrowing over the specified time period. The data for this study has been sourced from multiple reliable sources, including the World Development Indicators (WDI), reports from the State Bank of Pakistan, and various issues of the Economic Survey of Pakistan. These sources provide comprehensive and authoritative data on economic indicators, lending credibility to the findings of the study.