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Title Internal & External Sources of Financial Growth Leading to Economic Development of Pakistan: Dynamic Analysis of Selected Islamic Countries

Author(s) Ms. Javeria Siddiqui

Abstract Many countries, these days are financially and economically integrated. Indeed, financial indicators are linked with the economic growth of an economy. Local and global financial and macroeconomic factors, in addition to the capital flows from the Islamic Countries have historically played a significant role in the economic growth and development of Pakistan. Different countries are trying to realign their interest while pursuing their long term political and economic objectives. Statistical analysis of data reveals that financial and capital flows, in terms of FDIs, from one economic and regional block to various Islamic Economies have shown a trade-off which means increasing flow of FDIs to one Islamic country is observed at the cost of decreasing FDIs in some other country. There are various empirical methods to research such type of relationships between financial flows and economic growth. This study has been conducted with the objective of finding such relationship between financial sector growth and economic growth of in connection with Bangladesh, Indonesia, Kuwait, Malaysia, Pakistan, Qatar, Saudi Arabia, Türkiye, UAE, for the period of 2002Q1- 2020Q4 using dynamic econometric models. The issue of causality between financial sector growth and economic growth had remained inconclusive. Pre-dominantly literature reveals significant role of financial system as one of the essential fundamentals of economic growth and development of an economy. This study initially applies Granger Causality Test, in order to examine financial and economic connectivity of Pakistan with the other Islamic countries. The study uses Autoregressive Distributed Lag (ARDL) approach to cointegration to examine the long run relationship between economic growth and financial sector growth,. This study employs the Generalized Autoregressive Conditional Heteroscedasticity (GARCH) models to examine the impact of financial sector growth and its volatility on economic growth volatility. These models have clear provision for the inclusion of internal and external variables not only in the mean equation but also in the variance equation enabling us to test effectiveness of external (from Islamic countries) and domestic financial volatility on the economic growth of Pakistan. The study finds unequivocal direction of relationship from financial sector growth towards Economic Growth of Pakistan. There is a great potential of financial integration between Pakistan and the selected Islamic countries. This study also finds that any volatility occurring in terms of Foreign Direct Investment, Bank Deposits, Domestic Credit to Private sector, and Net Financial Assets, creeps into fluctuation of Pakistan’s Economic Growth. The results shows economic growth volatility of Pakistan is affected by financial sector growth and its volatility.

Type Thesis/Dissertation

Faculty Management Sciences

Department Economics

Language English

Publication Date 2022-07-29

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