Sovereign-Bank Nexus and Private Sector Credit in Pakistan: Does Government Borrowing Crowd out Bank Lending?

Abstract

This paper investigates if government borrowings from banking system (GBBS) are correlated with crowding out of private sector banks' credit in the Pakistani economy. The data sources are the World Bank's World Development Indicators for Pakistan (1990-2024) where the key financial variables are taken from WDI/IMF International Financial Statistics and national accounts files. The dependent variable is domestic credit of banks to the private sector as a share of GDP, and the primary sovereign exposure variable is banks' claims on central government (and other public entities) as a share of GDP. The empirical work features estimators of first-difference & dynamic annual specifications, Stata-oriented descriptive, correlation, unit-root, diagnostic, baseline, robustness & interaction tables, and provides reproducible Stata code. However, it is found that results do not warrant the assumption of a simple, unconditional, annual crowding-out coefficient for the entire period. Rather, GDP growth and money-deepening for the broad money components are more stable in the baseline models than changes in the government claims. Equally, a negative interaction after 2008 is statistically significant and indicates that the crowding-out rule might have tightened up following the massive fiscal adjustment required and the multiple macro-economic shocks.