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This study examined the impact of banking sector credit on sectoral and subsectoral level of economic growth of Pakistan by using time series data from 1982 to 2017. The empirical aggregated analysis indicates that the magnitude of the private sector credit has positive sign, but insignificant influence on aggregate level of economic growth. On the other hand, sectoral analysis reveals that agriculture sector is not positively influenced by providing credit to agriculture sector. In contrast, industrial sector relies more on banking sector finance for its long-lasting projects. Moreover, sub-sectorl analysis shows that manufacturing sector is positively and statistically significant with manufacturing sector credit. Similarly, transport and communication, construction, wholesale and retail trade are positively influenced by their respective sectors credits. Furthermore, government spending showed positive sign and significant impact on all the sectors growth except in case of transport and communication. Similarly, investment also showed positive and significant impact in case of all analysis except in case of industrial and manufacturing sector growth which indicates that demand for funds is mainly focused on working capital not for fixed investment in these sectors. Hence, the results suggest that monetary authorities should design appropriate credit policies by considering the sectoral-specific characteristics. Moreover, banks should provide medium to long-term loans for agriculture and industrial sub-sectors and ensure that, their impact efficiently transmitted to real economic growth.
Jel Classification: E52, E51, Q14
Key Words: Monetary authorities, Private sector credit, Agriculture Credit.
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1Introduction
Since the concept of economic growth had been formulated by Schumpeter (1911), who stated that role of financial market is necessarily essential in the economic performance of any economy. Theoretical work by Greenwood and Jovanovic (1990) and Bencivenga and Smith (1991) also asserted the close links of financial progress and economic performance3 while, others like Robinson (1952) supported that financial market depends on growth performance. On the contrary, Lucas (1988) found no connection between the financial-growth hypotheses. The endogenous growth theories4, and Aghion and Howitt (1992) also claimed that the financial market promotes real economic growth. On the empirical side Levine (2005) postulated that financial institutions provide the main functions for economic growth, such as allocation of capital, minimized information costs, improve the risks of management and promote the innovation. According...