Abstract:
This paper explores the impact of financial development and foreign inflows on
economic growth in the following SAARC nations: Bangladesh, Bhutan, India,
Maldives, Nepal, Pakistan, and Sri Lanka from 2006 to 2019. The econometric tool
used is the Autoregressive Distributed Lag Model (ARDL) in panel settings and
Pedroni cointegration test to observe the connection between financial
development, foreign influx, and economic growth. The financial advancement
indicator used in the study includes the ratio of domestic credit, broad money, and
gross savings, whereas the net foreign inflows as a percent of GDP are used as the
proxy for FDI. The preliminary investigation of the macroeconomic variables has
revealed substantial variation among the sample countries. Findings from the
Pedroni panel cointegration test show that the variables are cointegrated in the long
run. PMG estimates suggest that Broad money positively affects economic growth,
while gross savings have an undesirable influence on economic growth. Similarly, the
influence of domestic credit is negative but insignificant. The influence of external
influx on output growth is found to be adverse. The findings suggest that the
economic policies of these countries should be defined by considering the financial
sector of these countries. Further, these countries are attracting larger external
investment, but the influence of external funds on economic growth is negative.
Therefore, the focus of policymakers should be to utilize FDI for productive purposes
and provide a good business climate, refining the financial infrastructure and
enlarging the financial inclusion to realize sophisticated economic growth while
designing financial policies.
