Election cycles in public credit: Credit provision and default rates in Pakistan

Abstract

In theory, government ownership of banks can spur economic development by channeling money to strategic industries or underserved communities. In practice, however, the empirical literature largely supports theories warning of the potential politicization of resources. Election cycles in public credit may affect both the provision of public credit and the likelihood of the debt defaulting. Due to data limitations, existing studies focus almost exclusively on the former, while the later effects are essentially unstudied. Using unique loan-level data on the universe of formal corporate loans in Pakistan between 2006 and 2015, we examine and compare the magnitude of these effects. We find that the increase in public credit is smaller than the losses arising from increased default rates ($1.3 and $1.6 billion USD, respectively). This suggests that the literature underestimates the size of election cycles.