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Research Papers On Gdp Of Pakistan For Last 10

Impact of Major Economic Variables on

Economic Growth of Pakistan

Muhammad Waqas Chughtai1, Muhammad Waqas Malik2, Rashid Aftab3

Abstract:The aim of this paper is to examine the impact of major economic variables includes inflation rate, interest rate and exchange rate on economic growth of Pakistan. The secondary data has been taken for the years from 1981 to 2013. The results from multiple linear regression model describe that both inflation rate and interest rate spread negative impact on Pakistan’s economic growth while exchange rate is found positively significant on the economy. Therefore, all selected variables having less impact on economic growth of the country as compare to other factors that put a serious impact on Pakistan’s economy conditions.

Keywords: economic growth; exchange rate volatility; interest rate; inflation; Pakistan

JEL Classification: A10; E430; O19

1. Introduction

Economic growth refers to an ability of an economy to increase its productive capacity through which it becomes more capable of producing additional units of goods and services. This economic growth is also seen as holly grain for economic policies. The growth or development of a country can be measured through various economic indicators such as Human Development Index (HDI), Total Factor Productivity (TFP) and Gross Domestic Product Growth Rate (GD) etc (Smyth, 1995). Over a long period of time, the unsustainable and low level of economic growth in developing countries is producing difficulties for policy makers, professionals and Government. The main causes of unsustainable growth includes (i) high inflation, (ii) rising foreign debt, (iii) currency exchange rate volatility (iv) consume more & save less (v) poor governance & policy implications, (vi) trade imbalancement , (vii) spend more earn less, (viii) energy & water shortages and (ix) political instability etc. Continuous increase in the rate of economic growth with the low level of inflation rate is one of the main objectives for policy makers to perform efficient role in economic policies formulation. The relationship between major macroeconomic variables such as GDP, CPI, PPI, Consumer Confidence Survey, Current Employment Statistics, Inflation, the Labor Market, currency exchange rate, and interest rate with GDP growth rate depends on the state of the economic development. High rate of growth rate without increase in the inflation is beneficial for good economic health of a country.

2. Effects of Major Economic Variables on Global Economy

It was anticipated earlier in the World Economic Repot from last few years that world economy would be weakened considerably in the years 2012-2013. The impact of economic woes in developed economies are falling over the developing economies which becomes a cause of lower demand for their exports, heightened volatility in capital flows and high prices of commodities. The overall world economy faced many ups and downs in growth for last few decades. Many developed economies have experienced financial crisis and continuously struggling to overcome the effects of such crises. According to the report economic growth has recorded 2.1 percent while the target for the growth was 2.4 percent. A growing developed economies especially in Europe countries experienced double-dip recession in 2012. (De Gregorio & Guidotti, 1995). Most of the developed economies are caught high unemployment, increase public debt, and continuous fluctuation in the rate of inflation.


Figure 1. World GDP Growth Rate (1981-2013)

On the other side a large number of developing economies also suffer home-grown economic problems; however including China facing weak investment demand due to financing constraints. Most of the low income countries are facing adverse spillover impacts due to slowdown of both developed and middle-income countries (Galbis, 1995). Other aspects that are changing the case of world economic scenario are (i) high unemployment, (ii) inflation fadeout worldwide but still a concern in some developing countries, (iii) sharp slowdown of world trade, (iv) oil prices soften but risk premium remains, (v) rising food prices, (vi) continues exchange rate volatility and increase (vii) globalization. The nature and extent of impact for above factors varies country to country regarding to the economic environment while the economic obstacles for developed country are different from developing country (Hooper et al., 1989).

3. Effects of Major Economic Variables on South Asian Economy

The economy of South Asia in 1990s had grown at the level of 5.6%, which was faster than low income countries but slower than East Asian countries. The wide range of economic and political reforms have changed the economic scenario of South Asian countries while these economic reforms include (i) since 1991 political consensus has survived government changes in India, shift of power in Pakistan, Bangladesh, and Sri Lanka. (ii) Overall improvements have been seen in efficiency of resource allocation and utilization. But still most of South Asian countries are bearing obstacles towards their economic growth such as low growth in tax revenues, high expenditures on energy and security concerns, additional burden of food and limited fertilizer subsidies are the major problems that are affecting the economies of South Asian countries (Malik & Chaodhry, 2001). In the past two years economy of India which is almost three quarter of the South Asian region’s growth was recorded as 9 percent in 2010 and 5.5 percent in 2012 slowest pace in 10 years due to large fiscal deficit, high inflation and political instability. In South Asian context India has an average inflation rate of 5 percent and Sri Lanka has higher inflation rate as compare to India which is 6 percent during the period of 2000-2013.

Political instability and security threats have considered stymie parts of South Asian economies. In Pakistan, causes of consumer price inflation include increase in oil prices and rise in demand of food commodities. Inflation rate declines after continuous increase from 6.3% in 2004 to 5.7% in 2007 and 5.5% 2008 due to strong improvement in macroeconomic fundamentals.

Table 1. Inflation Rate of Asian Countries (2000-2013) (Annual % Change in CPI)

Sl.

Country

Year

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

South Asia

6.1

3.8

3.5

5.0

6.3

5.3

5.9

5.7

5.5

11.2

11.6

10.3

9.1

8.0

1

Afghanistan

-

-

5.1

24.1

13.2

12.3

5.1

7.0

8.0

-8.3

.9

10.2

7.2

7.6

2

Bangladesh

2.8

1.9

2.8

4.4

5.8

6.5

7.2

7.2

8.0

5.4

8.1

10.7

6.2

7.5

3

Bhutan

-

3.4

2.9

2.1

3.6

4.8

4.9

5.2

5.0

4.4

7.0

8.8

10.9

7.0

4

India

7.1

3.7

3.4

5.4

6.4

4.4

5.4

5.0

5.0

10.9

12.0

8.5

7.7

6.9

5

Maldives

-1.2

0.7

0.9

-2.9

6.4

3.3

3.5

7.0

6.0

4.0

6.6

12.8

12.1

2.3

6

Nepal

3.5

2.4

2.9

4.8

4.0

4.5

8.0

6.4

5.0

11.1

9.3

9.3

9.5

9.0

7

Pakistan

3.6

4.4

3.5

3.1

4.6

9.3

7.9

7.8

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