Does Country Risk Change the Financial Resource Curse Into a Blessing? Evidence From an Emerging Economy

ABSTRACT The quality of institutions is crucial for managing natural resource (NR) revenues in the economic and financial system. However, higher country risk (political, economic, and financial) plays a significant role in the resource‐blessing or resource‐curse paradox. This novel study expands the literature by examining the role of country risk in the NR revenue and financial institutions' development (FD) relationship in Pakistan using data from 1984 to 2020. The study applies several econometric techniques, including the Fourier ADF and GLS unit root, Bayer–Hanck cointegration, ARDL, and Single Fourier Frequency Toda Yamamoto causality tests. The study findings indicate that resource revenues have a positive impact on financial development in the economic and political risk demand models, validating the financial resource‐blessing hypothesis. A positive impact of political, economic, and financial risk on financial development is explored. Moreover, the study highlights that financial and political risk negatively moderate the resource–finance relationship. Finally, a unidirectional causality running from financial development towards political risk financial risk and resource rents is explored. Based on the empirical findings, it is suggested that country risk should be controlled while managing resource revenues in the financial system in order to ensure the resource‐blessing phenomenon in the economy.