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Pakistan’s Balance-of-Payments Crisis and Some Policy Options
Moazam Mahmood and Shamyla Chaudry
Published:July - Dec 2020
Neoclassical price theory, and its extension to IMF country advice, argues that balance-of-payments crises such as Pakistan’s are better resolved by depreciating the exchange rate, making exports cheaper and imports dearer. We argue that a partial equilibrium analysis of just the tradeable goods market on the current account side ignores the capital market on the capital account side, where an increase in outflows allows no equilibrium value for the exchange rate, through a phenomenon dubbed ‘depreciationary expectations’, akin to inflationary expectations. This phenomenon will not allow the exchange rate to settle at an equilibrium level, leading to a vicious downward cycle. In such a case, capital controls may well be needed to counter the downward cycle, allowing a return to growth.
KEYWORDS:
Balance of payments,
exchange rates,
equilibrium analysis,
Pakistan.
JEL:
D51,
F38.
Trade Agreements and Export Creation: An Empirical Analysis of Pakistan’s Exports at Industry Level
Tehseen Ahmed Qureshi and Anwar Shah
Published:July - Dec 2020
This paper examines patterns of export creation and diversion by analyzing Pakistan’s trade agreements at the two-digit industry level for all 88 export-oriented industries. We compare the net change in exports with nine free trade agreement (FTA) partners and the top 15 partners with most-favored nation (MFN) status. We find that 45 industries account for USD4.1 billion in export creation across all Pakistan’s FTA partners. Here, net exports increase after FTAs with both FTA and MFN partners. Conversely, export diversion worth USD137 million occurs in 10 industries with all FTA partners as net exports to FTA partners rise while net exports to MFN partners fall. In the same manner, we find that net exports in 33 industries declined by USD500 million with FTA and MFN partners. The total net exports addition after FTAs was USD3.5 billion or, on average, USD350 million annually, accounting for about 1.4 percent of Pakistan’s total annual goods exports. On average, Pakistan has successfully created exports in half its export-oriented industries, although highly subsidized industries exhibit either export diversion or a net decline with both MFN and FTA partners. A difference-in-difference analysis shows that exports to China and Mauritius rose significantly while the remaining seven FTA partners did not have a significant increase in exports after the FTAs were implemented. In view of these findings, we suggest revisiting the policy of export subsidies.
KEYWORDS:
Free trade agreements,
export creation,
export diversion,
industries.
JEL:
F14,
F1,
F68.
Unskilled Migration, Child labor and Human Capital Accumulation of Children in the Presence of Parental Absenteeism
Yumna Hasan and Waqar Wadho
Published:July - Dec 2020
Temporary unskilled migration and the remittances it generates have the potential to reduce child labor and improve educational outcomes in developing countries. However, recent literature points towards the adverse impact of the parental absenteeism on children left behind. We build a theoretical model to explore the joint impact of remittances and parental absenteeism on child labor and human capital formation of children left behind in the context of unskilled workers’ migration. We find threshold conditions for the relative wage of source to destination countries beyond which unskilled migration helps in reducing child labor and increasing human capital. Moreover, the threshold is endogenous and depends on the sensitivity of human capital formation to parental absenteeism relative to the child’s time spent on acquiring human capital. In a special case when the former is equal to the latter, the wages in the destination country should at least be twice as much as in the source country to have a detrimental (promoting) impact on child labor (human capital formation). Since the importance of parental absenteeism would depend on a variety of sociocultural factors such as marriage, presence of extended families, religious communities, and social networks, there will be heterogeneity in the impact of unskilled migration.
KEYWORDS:
Migration,
child labor,
parental absenteeism,
human capital.
JEL:
F24,
F22,
J24,
O15.
China’s Belt and Road Initiative and the Rise of Yuan – Evidence from Pakistan
Jamshed Y. Uppal and Syeda Rabab Mudakkar
Published:Jan - June 2020
The Chinese yuan is poised to become an international currency and play
a major role in global finance which will have significant consequences for
countries, like Pakistan, which have recently seen large inflows of the Chinese
capital. This paper presents empirical evidence of the evolving nature of the yuan,
as reflected in the statistical distribution of the exchange rate, with a particular
focus on the period after the initiation of Belt and Road Initiative (BRI) projects.
We observe that the currency’s empirical distribution exhibits tell-tale
characteristics of a managed currency. Over time, though the yuan’s statistical
properties have converged towards those of other hard currencies, they still
remain distinct. We find that there is a long-term trend of increasing correlations
over time as indicated by the Dynamic Conditional Correlations (DCC), which is
pronounced in the post BRI period. Furthermore, the yuan is increasingly being
influenced by other major currencies in the recent periods, indicating
increasingly integration of the currency in global foreign exchange markets. This
article discusses the implications of the rise of the yuan for the management of
Pakistan’s foreign currency reserves and exchange rate: it should be driven by
the yuan’s evolving convertibility, credibility and liquidity.
KEYWORDS:
International currency,
global finance,
Pakistan,
yuan.
JEL:
F31,
F39.
A Policy Move towards Sustainable Urban Transport in Pakistan: Measuring the Social, Environmental and Economic Impacts of Lahore BRT System
Irem Batool, Muhammad Irshad and Muhammad Abid
Published:Jan - June 2020
We examine the impacts of a sustainable urban transport initiative, the
first Bus Rapid Transit System launched in Lahore, Pakistan in year 2013. We
measure the socio-economic and environmental impacts of the BRT using a
questionnaire-based survey that collected information on customers’ travel
purpose, travel frequency, travel time, mode access, previous travel mode choices
(pre-BRT) and travel mode choices at present. We estimate that, on average, a
BRT passenger saves about 46 minutes per day on a single trip. However, the
modal shift from personal automobiles to the BRT system is found to be only 4
percent, i.e., significantly less than the shift found in other worldwide BRT
systems. Moreover, we estimate the reduction in the number of private vehicles
on roads, total distance travelled in km and associated travelling costs and,
subsequently, the reduction in the carbon emissions. We conclude that the Lahore
BRT transit system needs to be expanded to other parts of the city.
KEYWORDS:
Urban transport,
Bus Rapid Transit System,
travel time saving,
vehicle costs saving,
environmental emissions reduction,
Lahore,
Pakistan.
JEL:
R49.
Energy Consumption and Greening: Strategic Directions for Pakistan
Rajah Rasiah and Muhammad Shujaat Mubarik
Published:Jan - June 2020
We compare Pakistan's energy consumption structures to selected East
Asian economies with a view towards ensuring an adequate supply of power for
economic catch-up and, at the same time, meeting the greening goals envisioned by
the United Nations Framework Convention for Climate Change. The evidence
shows that Pakistan relies significantly less on non-renewable energy to meet its
energy demands compared to China, Japan, South Korea, Malaysia, and Thailand,
while its dependence on fossil fuels has been rising rapidly. Using data for Pakistan
from 1960 to 2015, we deployed panel co-integration and Granger causality tests
to analyse selected East and Southeast Asian countries before exploring what it
will take for Pakistan to develop its renewable energy (RE) sector. The evidence
shows that catching up economically with these countries through rapid GDP per
capita growth will exacerbate Pakistan’s current energy imbalance, thereby
aggravating greenhouse gas (GHG) and carbon dioxide (CO2) emissions. We argue
that Pakistan enjoys strong endowments to avert this problem, and hence, it should
strategically focus on the development of RE resources, especially solar and wind
energy, but only after taking account the relevant costs
KEYWORDS:
Renewable energy,
thermal energy,
economic growth,
hazardous emissions,
Pakistan.
JEL:
Q41,
Q49.
Are Agricultural Markets in the Punjab Technically Efficient?
Mahniya Zafar, Naved Hamid and Fatima Arshad
Published:Jan - June 2020
We test the technical efficiency, measured by the degree of integration, of agriculture markets for five crops in the Punjab province of Pakistan using daily wholesale market prices from the Agriculture Management Information System (AMIS). We find that potato, onion and mango markets are well integrated both horizontally and vertically, with the speed of price adjustment in most cases (mango is the exception) being very rapid. We also find that kinnow and basmati rice markets are both vertically fairly well integrated. Furthermore, we find that trends in cropping patterns over the period 2000 to 2014 are in line with the changing market demand and government price interventions. The reforms introduced by the Punjab Agriculture Marketing Regulatory Authority (PAMRA) Act 2020, aimed at increasing competition in agriculture markets, have the potential to significantly improve economic efficiency.
KEYWORDS:
price transmission,
Agricultural prices,
market integration,
market efficiency,
agriculture marketing.
JEL:
Q110,
Q111,
Q113,
C110.
Estimation of Supply and Demand Elasticities for Major Crops Produced in Pakistan
Saima Rani, David Vanzetti, Elizabeth Petersen, and Muhammad Qasim
Published:Jan - June 2020
This article studies the supply and demand of major Pakistani crops. We estimate supply elasticities using a Nerlovian partial adjustment process and demand elasticities using the Deaton and Muellbauer Almost Ideal Demand Systems (AIDS). We use secondary data from various Household Integrated Economic Surveys and Agricultural Statistics of Pakistan. Our estimated supply elasticities with respect to price lie between 0.1 and 0.5 for all crops. Pulses tend to have higher elasticities than traditional crops such as wheat and rice. Demand elasticities with respect to price tend to be inelastic, with the exception of poultry and fruit which appear to be luxury items. Pulses are income inelastic, implying that consumption may not rise significantly as per capita incomes and that the introduction of yield enhancing varieties will lead to lower prices
KEYWORDS:
Supply,
demand,
major crops,
elasticity,
Pakistan.
JEL:
Q11,
Q19.
Foreign Aid, Political Institutions and Economic Freedom: Empirical Evidence from Selected Developing Countries
Miraj ul Haq, Nuzhat Shamim and Muhammad Luqman
Published:Jan - June 2020
This article empirically examines the effects of foreign aid on economic freedom while considering the mediating role of political institutions. We contribute to the literature in two ways. First, we provide an empirical analysis of how different types of foreign aid affect the economic freedom of the receiving country. Second, we provide evidence regarding how political institutions mediate the foreign aid/economic freedom relationship. We use IV and GMM techniques to test a model using data from 40 developing countries covering the time period 1985 to 2016. Our analysis yields three main findings. First, democratic and politically stable countries enjoy more economic freedom. Second, foreign aid’s net effect is to reduce economic freedom, whether we consider official development assistance (ODA) or net official assistance (NOA). Finally, economic freedom increases with both types of foreign aid if the receiving country’s political institutions are more democratic and/or durable.
KEYWORDS:
Balance of payments,
panel data,
economic freedom,
Foreign aid,
political institutions.
JEL:
F35,
P48,
Do2,
C23.
Fan Chart Approach to Debt Sustainability in Pakistan
Mehak Ejaz and Kalim Hyder
Published:July - Dec 2019
Pakistan’s economy has experienced relatively high growth of above 4.5
percent during FY2014-18. Meanwhile external liabilities and domestic debt have
increased by almost 50 percent over the same period. This substantial increase in the
external and domestic debt is a major issue for policymakers concerned about debt
sustainability in Pakistan. With the objective of analyzing debt sustainability in
Pakistan, this study applies a probabilistic approach to project the debt path from
FY2019 to FY2025. In this approach, projections of the primary balance are derived
from the estimated fiscal reaction function while the density forecast of external debt
is derived from various statistical and structural models. The forecasts of the primary
balance and the external debt along with the shocks of real GDP growth, real
exchange rate and real interest are incorporated in the debt accumulation identity.
This procedure provides a fan chart of the total debt-to-GDP ratio, which represents
the appropriate uncertainty associated with the projections. The key finding of the
paper is that external debt is reasonably sustained; however, the situation of the total
debt is alarming. External debt may witness a declining trajectory in FY2019-20
and then remain stable within the range of 20-30 percent of GDP. However, the total
debt-to-GDP ratio is rising throughout the projection period, which starts from
around 100 to 175 percent of GDP in FY2020 and FY2025 and is higher than any
sustainable threshold level. Therefore, policy makers need to contain fiscal deficits by
domestic resource mobilization and the adoption of austerity in spending on a
priority basis.
KEYWORDS:
Pakistan,
public debt,
external liabilities,
debt sustainability,
probabilistic approach.
JEL:
F34,
F47,
H63,
H68.