Credit Conditions in Pakistan: Supply Constraints or Demand Deficiencies?. (June 2016)

• Record Type: Journal Article
• Authors: Ahmed, Jameel
• Is Part Of: Developing economies. Volume 54:Number 2(2016:Jun.)
• Page Start: 139
• Page End: 161
• Publication Date: 2016-06
• Subjects: Private sector credit -- Demand and supply factors -- Equilibrium models -- Disequilibrium models; Developing countries -- Economic conditions -- Periodicals; 338.90091724
• DOI: 10.1111/deve.12106
• Languages: English
• ISSNs: 0012-1533

Abstract

Abstract : This paper attempts to pin down the key drivers of demand for and supply of real private sector credit in Pakistan. I use both the equilibrium and disequilibrium econometric frameworks, specifically tackling the issue of lack of consistency and/or efficiency of joint estimators in the former via the three‐stage least squares technique. On the demand side, I find that higher economic activity provides stimulus to credit whereas inflation dampens it. The stock market seems to play a dual role: as a source of alternative financing, a bullish market negatively impacts credit while, as an indicator of economic expectations, it provides a positive impetus. On the supply side, banks' lending capacity is found to be the major driver of credit while government borrowing has a crowding‐out effect. Pakistan currently faces supply constraints, which might put an additional check on capacity utilization by firms, thus damaging growth prospects. The results have important policy implications.