Impact of Foreign Direct Investment on Financial Stability of Pakistan

Abstract

The main goal of this article is to investigate the influence of net financial markets on private sector credit as a percentage of GDP and on excessive credit growth, both of which threaten financial stability in emerging nations. The impact of Inflows on the development of Pakistan's financial sector, social fabric, and economy has been thoroughly documented. The theoretical model predicts that foreign direct investment (FDI) inflows will promote wage gap by stimulating economic growth but will decrease inequality by triggering creative destruction. Due to the difficulty in estimating the longterm distributional impact of FDI inflows, we focus on the four decades (1980-2020) of available data. has the potential to threaten the long-term health of these economies by fueling rapid expansion in the supply of credit. Based on the findings, the long-term effects of direct and diversified investments on lending to the government industry are negligible, whereas the long-term effects of other investments1 are potentially favorable. Bound testing, PP testing, ARDL, and ADF are used to investigate 1980-2021-time series data. Conclusions imply that foreign aid does not appear to be pro-poor, despite its central role in understanding the dynamics of Pakistan's inequality. Results also show that microfinance, FDI, and financial growth all help to reduce income inequality. This suggests that the poor have the opportunity to engage in income-generating activities if they have lending through microcredit or a bank-based financial system. Growth in GDP per capita and public spending both appear to be pro-poor, according to the available empirical evidence. Reasonable relationship has been occurred among these factors and increased income inequality: high birth rates, high inflation, FDI, and trade openness. The policy ramifications of these findings are substantial for both countries. In order to reduce economic disparities, it is essential to strengthen social safety nets, advocate for more fair taxes, and improve the distributional efficiency of fiscal policies.