Financial Development and Economic Growth in Pakistan Evidence from Gross Capital Formation and Trade Openness

Abstract

Economic growth plays a vital role in the development of a country as it directly influences the standard of living. Higher economic growth leads to increased employment opportunities, higher income levels, and improved overall well-being. This study focuses on examining the relationship between financial development and economic growth in Pakistan, a developing country where the financial sector plays a crucial role in economic progress. The study incorporates key factors such as investment and trade openness, which are important determinants of economic growth. Investment reflects the level of capital formation for future development, while trade openness indicates the degree of a country’s integration with the global economy. In Pakistan, financial sector development significantly supports small and medium enterprises (SMEs) by providing easier access to credit, thereby promoting job creation. Over time, financial institutions in Pakistan have undergone major reforms, including the introduction of digital banking, improved regulatory supervision, and expansion of modern financial services such as microfinance and mobile banking. These developments have strengthened the financial system and enhanced its capacity to support sustainable economic growth.

              This study adopts a quantitative research design using time series data from 2000 to 2024. Secondary data is collected from the World Bank and other reliable sources. The study employs a deductive approach, with Gross Domestic Product (GDP) as the dependent variable, Gross Capital Formation (GCF) as a proxy for financial development, and trade openness as a control variable. The Ordinary Least Squares (OLS) method is applied using EViews software, along with diagnostic tests to ensure model validity. The results indicate that financial development has a positive and significant impact on economic growth, while trade openness shows a weaker influence. Overall, the study concludes that strengthening the financial sector is essential for achieving sustainable economic growth in Pakistan.

KEYWORDS: Financial Development, Economic Growth, OLS estimation, Gross Capital Formation, Trade openness, Time series Data, Banking sector, Pakistan economy.

https://doi.org/10.5281/zenodo.22056364