Sensitivity Analysis of Domestic Credit to Private Sector in Pakistan: A Variable Replacement Approach Applied with Con-Integration

Abstract

This study has been conducted to empirically examine the determinants of domestic credit to private sector (DCPS) in Pakistan over the period from 1980 to 2009. The relationship is determined using Johansen and Juselius’s framework and NLS and ARM based error correction model to complete the long run and short run relationship analysis. We have conducted variable replacement based sensitivity analysis by examining two sets of exogenous variables. It showed that DCPS has no relationship with economic growth in Pakistan so far. Consequently, in Pakistan the development of financial sector is not making any contribution to the economic development. Further government borrowings for non development expenditures is making the lending actions of the banks oligopolistic, which is hindering the conventional flow of financing to private sector for economic development. Therefore, the monetary authority in Pakistan should adopt steeper target oriented policies for financial sector to extend credit for economic development.