THE SOCIO-ECONOMIC PULSE: DECODING PAKISTAN'S FINANCIAL STABILITY THROUGH TIME

Abstract

Financial stability and socio-economic factors are closely interconnected in contemporary times. The purpose of this paper is to examine the impact of socioeconomic factors on financial stability in Pakistan from 2003-2023. The analysis is based on the theoretical background of socio- economic variables and financial stability and analyzing secondary data from the World Development Indicators for Pakistan. The independent variables include gross domestic product, inflation, health expenditures and secondary school enrolment, while the dependent variable is financial stability, using a composite index of domestic credits to the private sector as a proxy for financial stability. The study employs descriptive statistics, correlation matrix, unit root test and ARDL regression analysis to analyze the time series data. The analysis reveals moderate financial stability with varying volatility among independent variables. Weak or negligible correlations are observed between financial stability and GDP, health expenditure, inflation, and school enrollment, although GDP is significantly influenced by inflation and education. Unit root tests confirm that most variables become stationary after differencing. The ARDL model shows that GDP positively affects financial stability in both the short and long term, while inflation negatively impacts it. Health expenditure and school enrollment do not have significant long-term effects. The findings underscore the importance of economic growth and inflation control for financial stability, with limited immediate impact from health and education investments. Sustainable economic policies are essential to enhance financial resilience in Pakistan.