GOVERNMENT BORROWING AND FINANCIAL DEVELOPMENT: A CASE FOR PAKISTAN

ABSTRACT: Private sector of any economy plays an important role in the economic development of the country. It not only provides employment to the people of the country but also offers goods and services according to the taste of the people. Private investment mainly depends on private borrowing which works as blood for private sector. Private borrowing or credit to private sector is important part of the financial system which measures the depth of financial development. This paper aims to investigate the impact of government borrowing from the central and commercial banks on financial development. In this paper, government borrowing is measured by public domestic debt while credit to private sector (private borrowing) is used as proxy of financial development. Usually, it is observed that when a government borrows more money from banks it creates a shortage for private borrowers. So in this way, the volume of private investment declines. Some other factors also affect private borrowing like taxes, savings and inflation. This study has used yearly time-series data of Pakistan from 1972 to 2015. ARDL bounds-testing approach to cointegration has been used to investigate the relationship of variables. The data is taken from WDI, the reports of the state bank of Pakistan and different issues of economic survey of Pakistan.