Impact of High Oil Prices on Pakistan s Economic Growth

Transcription

1 pecentage Intenational Jounal of Business and Social Science Vol. 2 No Impact of High Oil Pices on Pakistan s Economic Gowth Adiqa Kiani, 1 Abstact This pape discussed the impact of highe oil pices on the Pakistan s econom duing 1990 to Pakistan is not oil poducing athe oil-impoting count. An incease in oil pice leads to inflation, incease budget deficit and puts downwad pessue on exchange ate which makes impots moe expensive. The ising oil pices ae the majo concen fo all the developing economies and Pakistan is suffeing fom it too. The incease in oil pice has futhe effect the dail consumption patten of households badl. This stud analzes that, how change in eal cude oil pice effects the eal GDP positivel and man othe factos diffeentl. Fo example, a lowe govenment spending, a highe eal stock pice and a lowe inteest ate would aise eal output fo Pakistan. Kewods: Expected inflation ate, Eneg consumption, Cude oil Jel Classification Codes: O13, Q43, Q47 Intoduction Oil pices ae alwas debatable and emain an impotant vaiable in detemining the economic activit of an count. The size of oil pices incease depends on the i)- shae of the cost of oil in oveall GDP, ii)- the degee of dependence on oil (total value of impot oil) and iii)- consumption of oil domesticall, and iv)- dependence on altenative souces of fuel. It was alead pojected and estimated globall that the oi demand is expected to incease ninet eight millions baels/ da in next fou ea (2015) and 118 millions baels / da duing next twent eas (in 2030). The time of cheap availabilit of all kinds of fuel has gone because of fast incease in population, which ultimatel incease the demand fo eneg domesticall and national and oveall woldwide. The pice of fuel has tendenc to incease futhe till the demand gowth is cubed and new technologies ae intoduced which educes dependenc on oil. In Pakistan, the justification fo this incease is given b Oil and Gas Regulato Authoit (OGRA) on vaious gounds. Huge ise in wold oil pice shifted the buden to the consumes as govenment is alead unning sevee losses and equall shifted this buden to households. Also consumption of keosene oil, diesel oil and petoleum poducts at household level also incease. OGRA also justifies to shift this buden to household to some extent which distub thei food budget also. Thee has been a continuous incease in the eneg consumption in Pakistan since The majo change in eneg mix has taken place in the shae of oil and gas consumption, the majo consumption out of all eneg souces ae gas and oil consumption. The shae of gas has inceased fom 29 % 41% duing to (Figue 1), and the shae of oil in total eneg consumption mix has declined fom 48 % in to 29 % to (Figue 2). 50% figue.1: Eneg Consumption b Souce 40% 30% 20% 10% 0% eas Oil LGP Gas Electicit Coal 1 The autho is the Associate Pofesso, School of Economic Sciences, FUUAST, Islamabad, Pakistan 209

2 oil pices($/bael) pecentage The Special Issue on Contempoa Issues in Business Studies Cente fo Pomoting Ideas, USA figue.2 Eneg Consumption B Souce 50% 40% 30% 20% 10% Oil LGP Gas Electicit Coal 0% eas As Figue.2 shows aound 41 % need of eneg is povided b the indigenous gas, 29 % met b domestic and also b oils impots. LPG is onl 2 %, nuclea and coal shae to eneg use is 16 % and 12% espectivel, while the petoleum poducts consumption is oveall lage exhibiting a declining tend, paticulal since , the consumption of gas, coal and electicit ae showing a ising tend. 1.2: Compaison of Cude Oil Pices Table1: Compaison of Cude Oil Pices Yeas Wold Cude Oil Pakistan Oil Pices U.S.A Oil Pices $/bael $/bael $/bael Pakistan Eneg Yeabook 2008 Figue.3: Cude Oil Pices Cude Oil Pices Wold Cude Oil $/bael Pakistan Oil Pices $/bael U.S.A Oil Pices $/bael Yeas 210

3 Intenational Jounal of Business and Social Science Vol. 2 No The above figue shows that the compaison of cude oil pices of Wold, USA and Pakistan fom 1990 to It is shown that fom ea 1990 to 1995, the oil pices of Pakistan and USA ae equivalent to wold oil pices. In 1995, Pakistan s oil pices ae equivalent to wold oil pices while USA s oil pices fall down. Then fom 1996 to 2001, thee is not much diffeence in oil pices but again in 2003, wold oil pices inceased as compaed to USA and Pakistan s oil pices and in 2002 to till now oil pices of all wolds got almost equivalent. Hence, the above gaph showed that in eas 1995 and 2002 a geat slump in cude oil pices of USA and wold espectivel and Pakistan s oil pices ae ising fequentl. Liteatue Review Ghani (2007) analzed that we poduced about 20 pecent of ou oil equiements. Due to shotcoming effots to fine new eseves and geate consumption, this pecentage will fall coming next eas which will esult in quantitative pessues. Ishaque (2007) studied that wold econom has been hit had b a sudden jump in oil pices ecentl. Abstact of oil pices, ae highl associated with stints of inflation and moving towads the economic instabilit fom the last 30 eas, have isen shapl and consistentl. Global oil demand, cuentl aound 85 million bael a da, is likel to touch 116 million baels a da b pices of oil and inflation ate ae diectl popotional and alwas change in the same diection, which oftenl offset the budget of the govenment and is made them deficit, which ultimatel buden to the tanspot use with an incease in the pices of all kinds of fuel. Highe oil pices touching $100 a bael will hit domestic econom had. It is not the question of oil impoting counties o low income counties but also the concen of high income and oil expoting counties. H-Kazim (2007) analzed that Pakistan s dail cude oil poduction has emained significantl low compaed to the demand. To facilitate development of altenative eneg souces, the develop counties ae ting to keep cude oil pices above $50 a bael. Howeve, the blame OPEC fo ising cude oil pices. Saleem (2007) eviewed that the govenment eviews fuel pices eve two weeks, but despite inceasing in global oil pices, fuel pices wee not heighten in the count duing the last 19 months to save the public fom additional financial buden. Accoding to caetake Finance Ministe D. Salman Shah, the fuel pices adjustment will not be done in one go. We will be inceasing pices gaduall. He said the fuel pices wee being adjusted accoding to budgeta tagets. We have to keep in mind man things- ou tagets, the state of the econom, and the inflationa impact. Fazal-e-Haide (2007) discussed that Balochistan is ich in gas and oil esouces. PPL (Pakistan petoleum limited), Pakistan s lagest poduction of petoleum and exploation compan, has also been leading the field of gas and oil exploation fo man eas in the povince. Husing, Yu (2007) evaluated the function given in an open econom using moneta polic, the stud found that it is not necessa that inceased pices of oil alwas educe GDP gowth/ output it ma o ma not educe the output, and this was poved fo Geman, and he obtained nonlinea elationship between the eal cude oil pice and eal output fo Geman econom. Ishaque (2008) suggested that thee ae thee tpes of economic impacts with an incease in the pice of oil fo Pakistan s econom. One, pd (Pice elasticit of demand) in the shot un fo petoleum elated poducts is ve low because of inceased cost of oil impot. Two, the intenational pices of oil have not been shifted to domestic consumes of oil and this led to futhe enhance the inflation. Thee, with these two effects, oveall GDP gowth effects oveall eithe b the diect change in the fuel pices o b the adjustment made due to incease in pices of oil o both. Basha (2008) quoted Mohammad Wasi Khan, Pesident $ CEO Bosico, said that thee ae some basic factos which usuall make the diffeence in oil pices intenationall and in the domestic maket. The majo facto detemining oil pices is of couse the suppl and demand. The D (demand) and S (suppl) is not a simple matte: one has to look into complexities of this facto. Anothe ovewhelming facto distibuting oil pices is the ate of exchange following weakening of the US dolla. Hence the majo facto fo oil pice hike is the weakening of the dolla against diffeent cuencies. H-Kazami (2008) said that Cude oil pice have touched its peak of moe than $145/bael has eceded to neal half. As the developed counties ae plunging into deepe into financial poblems it is feaed that pice ma go below $50/baeel. Neithe the OPEC no the US is inteested in letting the pices slip below $75/baeel. 211

4 The Special Issue on Contempoa Issues in Business Studies 212 Cente fo Pomoting Ideas, USA Asgha (2008) viewed and named winte fuel suppl cunch fo the ea 2008, fo such a huge pice of $100 a bael in eal 2008, athe continuous incease in the pice of oil and making new ecods eve next da, obsessed b a spawling dolla, political instabilit. A slithe in the dolla was one facto behind the convention in oil pices. Some patons bought oil in lage quantit to potect themselves against the continuousl weakening dolla. The continuous boom in pice of oil ceated woies fo oil impoting counties as the have to bea the high economic cost. Ishaque (2008) suggested that Oil pices affect the whole econom due to vaious factos including cost of poduction, income effects, eallocation of esouces, tems of tade and b uncetainties. In Pakistan, falling foeign exchange eseves have ceated immediate poblem of oil impot. Pima causes of sudden fall in oil pices deepl concens with eneg demand that was shinking because of a US-led global economic slowdown. As a matte of fact among all majo developing counties, Pakistan duing 2008 had the wost levels of foeign deficit and inflation of GDP of about 8.5 % and 17% espectivel; it was the weakest and most vulneable situation fo Pakistan s econom. Basha (2008) citicized on statement of Khan, fo the unusual incease in the intenational oil pices and shap decline in pices suddenl,viewed that thee wee some fundamentals as well as some sentimental which plaed a ole in pushing up the oil pices. The pima easons fo pice hike wee the incease in demand globall as well as advance puchases anticipating futue demand. The geo political conditions in diffeent egions also aggavated the situation. Howeve, the pima eason of ising oil pices was depeciation of diffeent cuencies including dolla and exchange ate. Malik, (2008) studied the possible outcomes and confonts pesented of incease in oil pices in Pakistan. The continuous incease in the intenational oil pices had affected negativel the BOP (balance of pament) and the budgeta position of Pakistan and added inflationa pessues on the econom. In less developed counties like Pakistan, most of the fuel is used b tanspotes, fames and heav machines and indiectl consumes have to pa, which effects thei households budget though the incease in the food pices. The Model The macoeconomic model [Rome (2000, 2006), Talo (1993, 1999, and 2001)], in ode to see the impact of oil pice incease in Pakistan can be expessed as: s s(,, g, t, ps, ee, po) (1) * (,, ee, w ) (2) e ( ). ee. po (3) Whee = eal GDP, = the eal inteest ate, g = eal govenment spending, t = eal govenment evenues, ps = the eal stock pice, ee = the eal effective exchange ate, po = the eal cude oil pices, = the inflation ate, = the taget inflation ate, = potential output, = the taget eal effective exchange ate, * w = the eal wold inteest ate, e = the expected inflation ate, and,, = positive paametes. Note that equation (1) is an open econom IS function, equation (2) is a moneta polic function, and equation (3) is an augmented Phillips cuve.

5 Intenational Jounal of Business and Social Science Vol. 2 No Let 0 s 0, 1, s 0, 0, s ee g 0), s 0, s 0, s 0,. 0, 0, ps po ee o 0,,0, po 0. Note that the sign s po is not clea fo Pakistan because of possible eduction in the quantit of oil impoting o consumption due to highe oil pice and eneg-saving measues. Solving fo the thee endogenous vaiables of eal output, the eal inteest ate, and the inflation ate, we have the equilibium eal GDP. * ( p, g, t, ps, ee, w, e ;,,,,, ). (4) o The Jacobian fo the endogenous vaiables has a positive sign: J ( 1 s ) s 0). (5) With incease in eal cude oil pice ises, aggegate govenment expenditues is not necessail deceasing it ma o ma not fall. p o ( s s ) / J o 0. (6) po Govenment deficit is expected to enhance eal output in the shot un: ( sg st ) / J 0. (7) g t ps s / J 0. ps (8) Real exchange ate appeciation ma o ma not incease eal output, depending upon whethe the negative impact of the appeciation would be moe o less than the positive impact of a lowe eal inteest ate caused b a lowe inflation ate due to exchange ate appeciation: ( see s s ee) / J o 0. ee (9) Bahmani and Miteza (2003) also not defined the clea effect of devaluation of cuenc, depending testing, and all othe elated factos. The model fo a nonlinea elationship between eal output and the eal oil pice ma be a quadatic function fo an empiical wok. If the coefficient of the quadatic tem is negative but significant, eal output and the eal oil pice exhibit a Inveted U-shaped elationship. It indicates when the eal oil pice is less that the citical value thee is a positive elationship and a negative elationship when that eal oil pice is geate than the citical value. Estimated Model (i). Model 1 The estimated fom of the IS Model is as follow: = (z 1, z 2, z 3, z 4, z 5, z 6 ) ln =ζ 0 + ζ 1 lnz 1 + ζ 2 lnz 2 + ζ 3 lnz 3 + ζ 4 lnz 4 + ζ 5 lnz 5 + ζ 6 lnz 6 (11) Explanation of Vaiables: = Real GDP in millions, z 1 = The eal inteest ate in pecentage, z 2 = CPI in pecentage z 3 = the eal govenment spending in pecentage, 213

6 The Special Issue on Contempoa Issues in Business Studies 214 z 4 = The eal govenment evenues in pecentage, z 5 = The eal stock pice in pecentage, z 6 = The eal cude oil pices $/bael. ζ 0 = constant Table 2: Dependent Vaiable: Y Vaiables Coefficient S.E. t-statistics Constant z * z *** z ** z z * z ** R-squaed 0.95 Mean dependent va 4.53 Adjusted R-squaed 0.93 S.D. dependent va 0.05 S.E. of egession 0.07 Akaike info citeion Sum squaed esid 0 Schwaz citeion Log likelihood F-statistic Dubin-Watson 1.91 Pob(F-statistic) 0 statistic * Significant at 5%, ** Significant at 10%, *** Significant at 1% = z z z z z z 6 (-2.31) (18.81) (1.48) (0.47) (2.18) (4.77) Cente fo Pomoting Ideas, USA We have estimated the macoeconomic model given in equation (4), incopoating the data fo Pakistan duing twent nine eas ( ). Real GDP is taken as dependent vaiable while explanato vaiables include the eal inteest ate, consume pice index (CPI), the eal govenment spending, the eal govenment evenues, the eal stock pices and the eal cude oil pices. The model is estimated in double-log fom as mentioned in equation (11). Regession Results ae shown in Table 6 most of the explanato vaiables ae shown significant and positive impact on eal GDP Gowth ate. Pices of cude oil shows highl significant impact on eal GDP gowth, estimated coefficient of cude oil is 0.10 which shown the elasticit of eal GDP with espect to cude oil pice. It indicates that 1 pecent change in oil pice will change the eal GDP b less than 1 pecent (0.08) i.e. less elastic pice esponse of cude oil. Inflation is also incopoate hee inteim, of cost of pice index (CPI) z 2 which is 0.52 less elastic but has highl significant impact on eal GDP Gowth. It futhe explains that 1 pecent incease in inflation (CPI) will incease eal GDP b half (0.52). The elasticit of govenment evenues and the govenment expenditues ae less than unit. Also, govenment expenditue shows gowth i.e. 1 pecent incease in govenment expenditue will incease the eal GDP Gowth b 0.16 pecent onl., while the govenment evenues ae nominal even less than govenment expenditues and also insignificant. Stock pices also plaed nominal ole in enhancing eal GDP but has significant impact in t-statistic is Oveall, model is best fit and explains 95 pecent vaiation. (ii): Model 2 The estimated fom of the IS Model is given below: = (z 1, z3, z 4, z 5, z 6 ) Ln = (lnz 1, lnz 3, lnz 4, lnz 5, lnz 6 ) Lnz = η 0 + η 1 lnz 1 + η 3 lnz 3 + η 4 lnz 4 + η 5 lnz 5 + η 6 lnz 6 (12) Explanation of Vaiables: = Real GDP in millions, z 1 = The eal inteest ate in pecentage, z3 = The eal govenment spending in pecentage, z4 = The eal govenment evenues in pecentage, 5 = The eal stock pice in pecentage, z 6 = The eal cude oil pices $/bael. η 0 = eo tem

7 Intenational Jounal of Business and Social Science Vol. 2 No Table3: Dependent Vaiable: Y Vaiable Coefficient Std. Eo t-statistic C z z z z z (-1) R-squaed Mean dependent va Adjusted R-squaed S.D. dependent va S.E. of egession Akaike info citeion Sum squaed esid 0 Schwaz citeion Log likelihood F-statistic Dubin-Watson stat Pob(F-statistic) 0 * Significant at 5%, ** Significant at 10%, *** Significant at 1% We have estimated the macoeconomic model given in equation (4), incopoating the data fo Pakistan duing twent seven eas ( ). Real GDP is taken as dependent vaiable while independent vaiables compising, the eal inteest ate, the eal govenment spending, the eal govenment evenues, the eal stock pices and the eal cude oil pices. The model is estimated in double-log fom as mentioned in equation (12). Regession Results ae pesented in Table7 most of the independent vaiables pesented positive impact on eal GDP Gowth ate. Pices of cude oil pesents highl significant impact on eal GDP gowth, estimated coefficient of cude oil is which pesent the elasticit of eal GDP with espect to cude oil pice. It point outs that 1 pecent change in oil pice will change the eal GDP b less than 1 pecent (0.051) i.e. less elastic pice esponse of cude oil. The govenment evenues which ae 0.13 less elastic, has highl significant impact on eal GDP Gowth. Moeove, it also explains that 1 pecent incease in govenment will incease eal GDP b 0.13 pecent onl. The elasticit of govenment spending is less than unit and is nominal even less than govenment evenues. Also, the govenment spending pesents insignificant effect on eal GDP pecent incease in govenment spending will incease the eal GDP gowth b 0.05 pecent onl. Stock pices also plaed nominal ole in enhancing eal GDP and has insignificant impact in t-statistic is Oveall, model is best fit and explains 99 pecent vaiation. Desciption of the Vaiables In this chapte data collection and vaiable desciption is discussed. The famewok of suve is of 27 eas ( ) and data was collected fom IFS, Pakistan Economic Suve and Eneg Yea Book. We will analze some of the vaiables to analze the situation of eal cude oil pices in ou sample. The data is collected fom Intenational Financial Statistics (IFS), the Pakistan Economic Suve and Eneg Yea Book. Real GDP is measued in millions. The eal cude oil pice is taken in dolla pe bael. The eal govenment spending and evenues is measued in pecentage. The eal stock pice is measued b the nominal shae pice divided b the consume pice index. The inflation ate is deived fom the consume pice index. Table 2 and table 3 show the estimated egession and elated statistics. The Odina Least Squae (OLS) technique is used. Except fo the eal govenment evenues, the coefficient of othe vaiables ae significant at all thee levels 1 %, 5% o 10%. Real GDP is positivel elated with the eal cude oil pice, the eal stock pice and the eal govenment evenues and negativel affected b the eal govenment spending, and the inflation ate. The data taken fom 1990 to 2009, have been tested fo stationait using Augmented Dicke-Fulle (ADF) unit oot test with citical values of 3.54, -2.99, and at the 1%, 5% and 10% levels, espectivel. All vaiables ae stationa at fist diffeence at the 5% level. Using Johansen test, the null hpothesis that these vaiables have cointegation elationship, cannot be ejected at the 5% level, also the tace statistic showing the value of is geate than the citical value of Conclusion The pape tied to exploe the elationship of shap ise in the pices of oi with GP gowth of Pakistan fo te peiod of 20 eas ( ). A macoeconomic model is analzed fo the pupose. Seveal esults can be dawn. 215

8 The Special Issue on Contempoa Issues in Business Studies Cente fo Pomoting Ideas, USA A shap ise in the pices of cude oil (CO) affects the output negativel, no matte the pice of CO is less than o moe than the citical value (Yu Hsing 2007). Theefoe, though we have negative impact of CO pice with the eal output and also same elationship of eal govenment expenditues to CO pice is examined but it ma suggest that onl fiscal polic is not effective to incease GDP gowth athe a sound maket pice is expected to aise the govenment spending and eal output because of wealth effect fo the household and effect of balance sheet fo the fims ((Mishkin, 1995). Futhemoe, the ole of fiscal and moneta polic is biefl highlighted and moneta polic will be moe effective indiect effect athe than fiscal polic. Intenationall and locall the tend of oil pice s on incease and same is the case in Pakistan. Its negative and significant effect on eal output needs to be highlighted that shap incease in the pices of cude oil effects the GDP gowth of Pakistan s econom negativel, which is not good sign fo the development of an count. It is eall need of hou to decease the inflation and have the lowe commodit pices of dail use; govenment should povide the subsidies to the fames fo electicit consumption and diesel use in villages, and also some suppot to tanspotes fo fuel in cities. This ma lessen the oveall pices of all commodities of dail use, and help the poo people to balance thei famil budgets. Refeences Asgha, Aooj (2008), Oil Pices- Intenational Scenaio, Pakistan and Gulf Economist, 27 Oct-2 Nov, Bao, R.J.(1989), The Ricadian Appoach to Budget Deficit, Jounal of Economic Pespective, 3(2), Ghani, Shamsul (2007), Dolla Hunded A Bael- The Challenges Ahhead; Suvival Hinges on a Majo Beak Though on the Font of Altenative Eneg Souces Pakistan and Gulf Economist, Dec 3-9, Basha, Amanullah (2008), Inteview: Muhammad Wasi Khan Pesident and CEO Bosica Pakistan LTD; Weaking of Us Dolla is the Majo Facto fo Oil Pice Hike Pakistan and Gulf Economist, Dec3-9, Basha, Amanullah (2008), Inteview: Muhammad Wasi Khan Pesident and CEO Bosica Pakistan LTD; Huge Cuence Developing Hut Magins of Refining Sectoal Govenment Should Reduce Taxes to Check Pice Inflation, 27 Oct-2 Nov, Fazal-e-Haide Sed (2007), Impoving Secuit fo Oil and Gas Exploation, Pakistan and Gulf Economist, Dec3-9, H-Kazim, Shabbi (2007), Baluchistan s Long Standing Claims ove PPL, Pakistan and Gulf Economist, Dec3-9, H-Kazami (2008), Count Needs Uninteupted Supplies of Eneg Poducts, Use f Indigenous Fuel Should be Encouaged to Contain of Eosion of Foeign Exchange Reseves, Pakistan and Gulf Economist, Dec3-9, Husing, Yu (2007), Impact of Highe Cude Oil Pices and Challenges Macoeconomic Conditions on Output Gowth in Geman Intenational Reseach Jounal of Finance and Economics, Ishaque, Fozia (2008), Oil Pices Hike; Pakistan Facing the Music Pakistan and Gulf Economist, Dec3-9, Ishaque, Fozia (2007), Sk ocking Oil Pices; A Challenge fo Economic Manages, Pakistan and Gulf Economist, Dec 3-9, Ishaque, Fozia (2008), Oil Pice Tumbling, Pakistan and Gulf Economist,, 27 Oct-2 Nov, Malik, Afia (2008), How Pakistan Is Coping with the Challenges of High Oil Pices, Pakistan Institute of Development Economics, 2008 Mishkin, F.S. (1995), Smposium on the Moneta Tansmission Mechanism, Jounal of Economic Pespectives, 9(4), Rome, David (2000), Kenesian Macoeconomics without LM Cuve, Jounal of Economic Pespective, 14(2), Rome, David (2006),Advance Macoeconomics, 3 d Edition, Boston, McGaw Hill/Iwin. Saleem, Kanwal (2007), Fuel Pices to Push Inflation; Hit Economic Gowth, Pakistan and Gulf Economist, Dec3-9, Talo, J.B (1993), Discetion Vs Polic Rules in Pactice, Confeence on Seies on Public Polic, 59(0), Talo, J.B. (1999), Moneta Polic Rules: Intoduction, in Moneta polic ules, dd. Jhon B Talo Pp1-14, NBE Confeence Repot Seies Chicago and London, Chicago Univesit Pess. Talo, J.B.(2000), Reassessing Discetiona Fiscal Polic, Jounal of Economic Pespective, 14(3), Talo, J.B.( 2001), The Role of Exchange in the Moneta Polic Ameican Economic Review, Papes and Poceedings of 113 th Ameican Economic Association, 91(12),