An Attempt to Develop a Suitable Model for Forecasting Bank Credit in Pakistan

Abstract

An attempt has been made in this study to develop a suitable time series econometric model for forecasting the credit structure in Pakistan. The relevant data has been obtained from the website of State Bank of Pakistan (SBP) regarding the amount of credit given to the private sector for the sake of economic activity and its development. The data thus obtained was of time series type in months starting from July 1990 to June 2010. Keeping in mind, the influence of months’ effect, eleven dummy variables have also been introduced in analysis to address this issue. In order to develop a suitable forecast model for credit to private sector, first of all Augmented Dickey-Fuller (ADF) test has been applied to check the level of integration as the data contains a secular trend. It has been observed through ADF test that the credit to private sector data has two unit roots (i.e., it is integrated of order 2). By applying various models like ARIMA, ARCH, and GARCH, decision has been in favor of GARCH (1,1) model as it contains some significant AR and MA terms of specific order along with influential months of the year that describe the possible patterns in the credit to private sector data. Moreover it has been observed that the months of January, February, April, May, June and July are the significant months explaining the variation in the credit data along with AR term of order 12 and MA terms of order 1 being significant.

Keywords: Banking Sector, Credit, Central Bank, Monetary Policy, GARCH Model, Investment, Time Series Model

JEL Classification: E52, E51, E62, C32, E58