Examining the Link between Economic Growth and Financial Indicators: Evidence from Pakistan (1980–2024)

Abstract

This study examines the relationship between Pakistan’s GDP growth and selected financial indicators for the period from 1980 to 2024. The selected financial indicators are gross capital formation, market capitalization, financial development, foreign direct investment, remittances, foreign trade, government expenditure and debt service. With a larger data set for 45 years, this research addresses a vital gap in understanding the interplay of financial indicators in a developing economy. The Autoregressive Distributed Lag (ARDL) model along with a bounds test for cointegration is used to analyze the long-run and short-run relationship among the variables. The results indicated a significance relationship among GDP growth rate and remittances, foreign direct investment and government consumption expenditures. The critical contribution of this study lies in providing evidence-based insights for policymakers to examine Pakistan’s economic issues with an emphasis on contributing novel perspectives on sustainable growth strategies. The recommendations emphasize enhancing investment and foreign inflows, optimizing remittance utilization, and refining government spending policies which can contribute to sustainable economic development. This study recommends the development of friendly regulations to encourage the inflows of foreign direct investments and remittances for enhancing economic growth.