Energy prices and economic growth in Pakistan: A macro-econometric analysis

The paper empirically examines the impact of energy prices on economic growth in Pakistan using various channel variables. For this purpose, a macroeconometric model is estimated using GMM estimation technique using quarterly data for the period 1991-2011. The results indicate that the overall effect of energy prices on growth is negative, confirming results from existing empirical literature for Pakistan. However, our methodology allows us to go beyond previous research and describe what drives this overall result. We find evidence that high energy price decreases real interest rate, investment and stock prices. It also decreases the real value of local currency. High energy price puts pressure on government expenditures and increases unemployment in the country. The results reveal that energy price positively affects output growth through its impact on real interest rate and government consumption, while it negatively affects output growth through investment, stock prices, real exchange rate and unemployment. The results show that most of the effect of energy price on economic growth is captured by stock prices, real exchange rate, government consumption and unemployment. In turn, real interest rate and investment captures a small effect of energy price on economic growth. The study highlights that to improve economic growth policy makers in Pakistan should design appropriate policies to control energy prices and to plan energy conservative policies that will motivate to explore alternative energy sources to meet high energy demand in Pakistan.