Financial Development, Digital Technology, and Economic Growth in Pakistan: The Mediating Role of Financial Inclusion and the Moderating Effect of Internet Penetration

Abstract

This study examined the nexus between financial development, digital technology, and economic growth in Pakistan over the period 1993–2024. Specifically, the study investigated the mediating role of financial inclusion in transmitting the growth effects of financial development and digital technology, while also exploring whether internet penetration moderated these relationships. Employing the Autoregressive Distributed Lag (ARDL) bounds testing approach alongside a range of time-series diagnostic procedures, the empirical analysis confirmed the presence of long-run cointegration among all key variables. Results indicated that financial development exerted a significant positive effect on economic growth both directly and indirectly through the mediation of financial inclusion. Similarly, digital technology positively influenced growth, and this effect was amplified when financial inclusion served as an intermediary channel. The moderation analysis demonstrated that rising internet penetration strengthened the impact of both financial development and digital technology on growth outcomes. The error correction term was negative and statistically significant, confirming a stable adjustment mechanism towards long-run equilibrium. Model diagnostic tests for autocorrelation, heteroscedasticity, and functional form misspecification returned favourable results, validating the robustness of the estimated model. These findings carry important policy implications for Pakistan, pointing to the need for coordinated investments in digital infrastructure, financial sector deepening, and inclusive service delivery to accelerate sustainable economic growth.