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Differential Impact of Taxation on Food Items
Iffat Ara and Qazi Masood Ahmed
Published:Jan - June 2022
In Pakistan, essential food items are exempted from indirect taxes to avoid any
subsequent increase in their prices, with the goal of protecting the poor from a regressive
tax burden. Taxes on inputs such as on fuel and energy, however, are transferred to
consumer prices and, due to cascading effects, can exert a burden on households. This
study investigates the incidence of indirect taxes on essential and nonessential food
items across households in Pakistan. To do so, we follow an input‒output multiplier-
based approach that allows the measurement of the cascading effect of taxes. It employs
the latest available edition of the Household Integrated Economic Survey (HIES) 2018-
19 in order to observe household food expenditures. Our analysis establishes that there
is an effective tax even on items that are ostensibly tax-exempt, implying that households
pay taxes indirectly even on those items. The incidence of these indirect taxes on essential
food items is regressive across all household deciles and the incidence of indirect taxes
on nonessential items is progressive at high expenditure deciles but proportional in the
lower-ranking expenditure deciles.
KEYWORDS:
Tax Incidence,
Distribution of Tax Burden,
Tax Burden,
Indirect Taxes,
Pattern of Incidence,
Pakistan.
JEL: E31, H22, H23.
A Spatial Agglomeration Analysis of Firm Productivity: A Case of the Textile Sector of Pakistan
Muhammad Zeeshan Younas
Published:Jan - June 2022
The prime objective of this study is to examine how agglomeration affects the
productivity of firms by location. Using different spatial econometrics on geo-referenced
data of textile manufacturers in Pakistan, the study confirmed the presence of spatial
autocorrelation in firm productivity. Results show that highly productive textile firms
appear to be clustered in the regions of Lahore and Faisalabad, while low productivity
textile firms appear to be clustered in Karachi and the Federal areas of Pakistan.
Although the spread of clusters varies a bit with the use of different weight matrices,
similar hotspots and cold spot patterns are observable. Furthermore, spatial error and
spatial lag models find that younger textile firms tend to be more productive than older
ones and firm size, exports, quality assurance certifications, and R&D spending are the
key spatial correlates of textile firm productivity.
KEYWORDS:
Firm Productivity,
Agglomeration,
Spatial Analysis,
Textile,
Pakistan.
JEL: D22, D24, L25.
Forecasting the GDP Growth in Pakistan: The Role of Consumer Confidence
Syed Ateeb Akhter Shah, Fatima Kaneez and Arshad Riffat
Published:Jan - June 2022
This paper investigates whether consumer confidence improves the prediction
of GDP growth over what are popularly construed as fundamental economic variables.
We use monthly data concerning Consumer Confidence Index (CCI) and its sub-indices
to forecast GDP growth for Pakistan. Employing a set of univariate and multivariate
models and comparing their forecasting performance against the Naïve mean model, we
find that adding the consumer sentiments with fundamental economic variables
improves the forecast of GDP growth. Vector autoregressive model with current
economic conditions index and economic fundamentals, we find, performs the best. The
results have potential policy implications in terms of tackling unemployment and
inflation, for economic growth stimulation.
KEYWORDS:
Consumer Confidence Index,
Forecasting,
GDP growth,
AR,
ARMA,
VAR.
JEL: C53, E17, C32, D12.
Pre and Post Evaluation of Pakistan-Sri Lanka Free Trade Agreement
Mazhar Hussain and Syed Zulfiqar Ali Shah
Published:Jan - June 2022
The objective of this article is to evaluate the impact of Pakistan-Sri Lanka Free
Trade Agreement (FTA) on Pakistan's and Sri Lanka's macroeconomic structures. The
FTA is operational since June 2005. For this purpose, the Computable General
Equilibrium (CGE) Model has been used and simulations have been conducted by using
the Global Trade Analysis Project (GTAP) model, which measures the effect of FTA on
Pakistan. The GTAP is a General Equilibrium modeling structure of the multiple
economies. The finding of this study reflects that Pakistan has positive impact on real
GDP, trade and welfare, while Sri Lanka has negative impact on the same factors.
Moreover, the results of this study are coherent with the international trade theories.
This research assists the trade policy makers to adopt appropriate policies for future
FTAs with South Asian economies to obtain more gains for Pakistan.
KEYWORDS:
Pakistan,
Sri Lanka,
FTA,
General Equilibrium,
GTAP.
JEL: F15.
Cost Stickiness, Firm’s Dividend Payouts, and Family Ownership
Ali Amin, Rizwan Ali and Ramiz ur Rehman
Published:Jan - June 2022
Our study enriches the growing literature on cost stickiness in the context of an
emerging economy. The study examines the relationship between cost stickiness and
dividend payout behavior in Pakistan, and the possibility of their being a moderating role of
family ownership. Empirically, we employed 4,567 firm-year observations of non-financial
firms listed on the Pakistan Stock Exchange, over the period 2006-2021, and used ordinary
least squares regression method to test our hypotheses. Additionally, we used generalized
method of moments techniques (GMM) to test the robustness of our results. Using the lens
of agency theory, we find that cost stickiness is associated with higher dividend payouts.
Further, family ownership moderates the relationship between cost stickiness and dividend
payout. Overall, our results support cost stickiness in our sample of firms and a positive
correlation of family ownership with dividend payout.
KEYWORDS:
Cost stickiness,
dividend payout,
agency theory.
JEL: G32.
The Impact of Economic Policy Uncertainty on Consumer Confidence in Pakistan
Syed Ateeb Akhter Shah, Fatima Kaneez and Riffat Arshad
Published:July - Dec 2021
This study examines the impact of Economic Policy Uncertainty (EPU) on the consumer
confidence index (CCI) in Pakistan. Using a sample from the start of 2012 up to February
2020, a vector error-correction model is used to gauge the impact of EPU on CCI. Our
results show that a shock to EPU in Pakistan affects CCI negatively and significantly.
The shock persists for a span of more than 20 forecast horizons, informing economic
policy makers in Pakistan that sudden changes in the stance without proper
communication can deteriorate consumer confidence. This is important as consumer
confidence in Pakistan accounts for not only the current economic situation, but expected
changes in key macroeconomic variables which is usually a key consideration when
forward-looking policies are devised. Our results remain robust to alternate Choleski
specifications and lag lengths in the model.
KEYWORDS:
Economic Policy,
Pakistan,
uncertainty,
consumer confidence,
VECM,
IRFs,
VDCs.
JEL: E32, H00, H31.
Remittances and Output Volatility: The Role of Financial Development
Aisha Tauqir and Muhammad Tariq Majeed
Published:July - Dec 2021
This paper examines the impact of remittances on output volatility through the channel
of financial development using data for 158 countries from 1971 to 2017. We estimate the
role of financial development by looking at multiple features of financial institutions,
such as depth, access and efficiency. We used multiple indicators as a proxy of financial
development in the remittance-output volatility nexus and employed System
Generalized Method of Moments (GMM) and Fixed Effects Instrumental Variable (FEIV) models. Our findings are robust across specifications. We find a significant positive
impact of all indicators of financial development on the remittance-output volatility
relationship. The findings suggest that multifaceted financial development is needed for
the effective management of output volatility through remittance inflows.
KEYWORDS:
Output volatility,
remittances,
financial developmen,
remittance-output volatility nexus.
JEL: C33, F24.
How Information and Communication Technologies Affect Intensive and Extensive Margins of Firm Exports: Evidence with Micro Data of South Asian Manufacturing Firms
Muhammad Luqman, Ghulam Murtaza, Rabia Nazir
Published:July-Dec, 2021
International trade plays a pivotal role in growth and development. The use of ICT is
profoundly changing the landscape for international trade and expands opportunities
especially for developing countries. The key objective of this study is to investigate the effects
of different ICT capacities on the extensive and intensive margins of firm-level exports using
micro-data of manufacturing firms operating in selected South Asian countries. We employ
the Probit and fractional response models as estimation techniques. Findings of the study
reveal that different ICT capacities are positively associated with both the extensive and
intensive margins of firm-level exports, and our results are robust to the alternative empirical
specifications. These results have important implications for designing the export promotion
policies in selected South Asian countries. Hence, policy practitioners in these countries
should encourage firms to invest in ICT capacities to boost their export performance.
KEYWORDS:
Regional economic integration,
ICT,
Intensive Margin,
Extensive Margin,
Manufacturing Firms,
South Asia.
JEL: F14, F23, D22.
Predicting Stock Indices Trends using Neuro-fuzzy Systems in COVID-19
Muhammad Zubair Mumtaz
Published:July - Dec 2021
Predicting the ebb and flow of stock markets is a complex and challenging exercise
owing to the disruptive and uncertain behavior of stock prices. The COVID-19 pandemic
is an example of an event that, had a drastic impact on global stock markets, due to
business activities and trading being severely affected. It is important, therefore, to be
able to predict how stock markets behave in a crisis period. We find that stock markets
obtain the worst returns in countries where there are higher reported positive cases of
coronavirus. This study employs adaptive neuro-fuzzy inference systems (ANFIS),
comprising of a controller and the stock market process, to predict the behavior of
selected stock indices. After training ANFIS and evaluating the resultant data, we
estimate statistical errors and found that 100 training epochs provide marginally better
results. To test the accuracy of our results, we used hit rate success and report that the
neuro-fuzzy system predicts stock market trends with an average accuracy of 65.84%, an
improvement over earlier techniques reported in the literature. Finally, we compute the
rate of return using a buy-and-hold strategy and a neuro-fuzzy system, and identify that
market indices outperform by employing the proposed method.
KEYWORDS:
Stock market index,
COVID-19,
Neuro-fuzzy,
forecasting.
JEL: C53, E17, G11, G12.
Mergers and Acquisitions in the Indian Sub-Continent: 2010-2019
Ali Metwalli, Jim P. DeMello
Published:July-Dec, 2021
With rising growth rates and per capita income levels on the Indian subcontinent, foreign
direct investment in the region, especially through mergers and acquisitions, has increased
over the past decade. Using transaction data regarding the industry affiliation of the target
and acquiring firms, deal size, deal structure, and deal completion rates from a worldwide
M&A database compiled by Thomson Reuters’ Financial Services, this article aims to provide
contemporary and comparative information on merger and acquisition (M&A) activity in
India, Pakistan, Bangladesh, and Sri Lanka over the last decade, 2010-2019. The largest
numbers and values of mergers occurred in India. Surprisingly, Sri Lanka had the second
largest number of M&A deals, followed by Pakistan and Bangladesh. Pakistan accounted for
the second highest transaction value, followed by Bangladesh and Sri Lanka. The Sri Lankan
M&A market had a high ratio (60 percent) of Sri Lankan firms acquiring other Sri Lankan
firms, while in Bangladesh, non-Bangladeshi companies accounted for ninety-three percent
of the value of all large M&A deals. Future trends, important caveats, policy issues, and
implications for managers planning M&A deals in the region are presented.
KEYWORDS:
Pakistan,
Mergers and Acquisitions,
transaction data.
JEL: G34.
Estimation and Forecasting of Industrial Production Index
Muhammad Ejaz and Javed Iqbal
Published:Jan - June 2021
It is essential that policymakers consider cyclical changes in output. Monthly industrial production is one of the most important and commonly used macroeconomic indicators for this purpose. However, monthly estimates of industrial production are not available for Pakistan. Instead, policymakers rely on a large-scale manufacturing (LSM) index that accounts for only 10 percent of GDP. Another limitation of this index is that it accounts primarily for private sector industry, leaving out the direct public sector presence in industrial production. Economic policymakers rely heavily on the LSM index to gauge economic activity in Pakistan. In this study, we compute a new industrial production index (IPI) that extends to the whole industrial sector in Pakistan, incorporating additional information that the LSM index misses. Post-estimation, we build seven econometric models reflecting conditions in the real, financial, and external sectors to estimate year-on-year changes in the new IPI. Our results show that the root mean square error of the ARDL model reflecting financial conditions is lowest of the models tested, which included AR, VAR, and BVAR, across all horizons.
KEYWORDS:
Economic indicator,
industry studies,
econometric forecasting,
Pakistan.
JEL: L600, C80, C530.
Published:Jan - June 2021
Expanding home-ownership poses a fundament financial challenge arising out of the long-term nature of the asset, which calls for the development of institutions and markets to facilitate the flow of long-term funds. Development of the secondary mortgage market would alleviate classical maturity mismatch and liquidity issues. The public sector can provide an enabling environment with sound macroeconomic policies, corporate governance, rule of law, and enforceability of contracts. This study draws policy implications using the empirical evidence on the determinants of mortgage depth and penetration across countries. A large part of the variation in these two dimensions across countries is explained by the level of their financial development. Development of long-term sources of funds intermediated through specialized institutions seems particularly important, as we find that the development of pension funds, which are a source of long-term funding, is strongly associated with mortgage market development. Monetary and macro-economic stability, as indicated by a low and stable rate of inflation, appears to be a strong predictor of mortgage market development. We also detect a positive relationship between the degree of competition in the financial sector and mortgage market development.
KEYWORDS:
House financing,
mortgage markets,
securitization,
affordable housing,
Pakistan.
JEL: G21, G28, G50.
The Impact of Fiscal Policy on Income Inequality: A Case Study of Pakistan
Suhrab Khan and Ihtsham ul Haq Padda
Published:Jan - June 2021
This study investigates the impact of various fiscal policy instruments on the income inequality of Pakistan using an Auto Regressive Distributed Lag (ARDL) model on annual data. We find that direct taxes reduce income inequality, measured using the Gini index, while indirect taxes increase disparities. As the major portion of tax revenues are indirect taxes, the current tax regime of Pakistan does not achieve income redistribution. Similarly, development expenditures have significantly reduced income inequality, likely through the creation of employment opportunities. On the other hand, the overall fiscal deficit increases income inequality, due to a rising public debt financed by (regressive) indirect taxes. This study suggests that in the case of Pakistan, where direct taxes are low, a large shadow economy exists, and weak tax administration prevails, an increase in development expenditures and broadening of the tax base of direct taxes should be the main fiscal policy tools for income redistribution. Moreover, persistent high fiscal deficits in the long run should be avoided. Finally, governments should reduce educational inequalities and promote democratic values in the country in order to promote greater fairness in distribution of income.
KEYWORDS:
Fiscal policy,
Gini index,
taxes,
development expenditures,
ARDL,
Pakistan.
JEL: E62, D63, H27.
Do Underlying Risk Preferences explain Individuals’ Cognitive Ability?⁕ Evidence from a Sample of Pakistani Students
Mariam Raheem and Ain ul Momina
Published:Jan - June 2021
Emerging research in empirical economics posits a question on the relation
between underlying risk preferences and reflective cognitive ability. In an
experimental setting, a preliminary sample of 260 participants undergo a series of
incentivized choice experiments to elicit risk preferences and a Cognitive Reflection
Test (CRT) to obtain estimates of their reflective ability. We sidestep potential
biases by using a Fechner error specification along with a contextualized version
of the utility function. Individuals who are more likely to avoid risky outcomes
have significantly lower scores on the CRT. The analysis validates a prominent
relationship spanning the economics and psychology literature and suggests a
potential direction of causal inference for future research.
KEYWORDS:
Risk,
cognitive reflective ability,
behavioral economics,
Pakistan.
JEL: C36, C91, D81.
Analysis of Pomegranate Value Chain in Kandahar Province of Afghanistan: Issues and Prospects
Muhammad Hasham Daqiq
Published:Jan - June 2021
Pomegranates are one of the most important fruits in the Kandahar province of Afghanistan, which is famous for its pomegranates around the world. Pomegranates play a vital role in the socio-economic life of those who grow them. This study empirically analyzed the value chain of pomegranate production in Kandahar using primary and secondary data. Primary data was collected from 200 pomegranate growers in the Dand, Panjwai, and Daman districts of Kandahar province. These growers were selected using a random sampling method and the data was collected using a structured, pre-tested questionnaire. The secondary data was collected from traders, local collectors, and exporters of pomegranates involving 30 pomegranate selling companies. The value chain analysis shows that from the main four chains of pomegranate production (farmer, collector, trader, and exporter), the main actors are the exporters who process pomegranate and add the greatest value by investing in marketing, shipment, and warehousing and receive highest profit margin among the stakeholders. Exporters of pomegranates to Europe earn an average of 66 Afghani per kg. The next greatest beneficiaries are the growers or farmers who earn an average of 23 AFN on each kg. Local collectors who buy pomegranates from farmers earn the least, at an average of 13 AFN per kg over the costs of processing and transportation.
KEYWORDS:
Production,
labor,
cost,
profit margin,
farmers,
Afghanistan.
JEL: D4, D46.
An Analysis of the Cost Structure of Food Industries in Pakistan: An Application of the Translog Cost Function
Sajid Hussain, Uzma Nisar and Waseem Akram
Published:July - Dec 2020
Given the importance of food industries in Pakistan, this study analyzes their cost structure by estimating the transcendental logarithmic cost function. The study also considers elasticity of substitution along with own-price elasticity and cross-price elasticity. Four factor inputs, i.e., labor, capital, energy, and materials, are used to estimate the cost function. The results indicate that materials account for the highest share of the cost. The elasticity of substitution of materials for capital and energy is also weak. The own-price elasticities indicate that the demand for materials is least responsive to a change in its own price while the demand for other inputs varies with price. The cross-price elasticities show that labor, capital and energy are substitutes for each other. The output elasticity of cost demonstrates the presence of economies of scale.
KEYWORDS:
Translog cost function,
elasticity of substitution,
cross-price elasticity,
Allen’s partial elasticity.
JEL: D24, Q11.
Regional Economic Integration and Productivity Convergence: Empirical Evidence from East Asia
Maryam Ishaq
Published:July - Dec 2020
The study attempts to seek evidence on regional economic integration in driving labor productivity convergence in low- and middle-income East Asian states towards Japan, the country assumed to be the regional technology leader. The labor productivity convergence of low- and middle-income East Asian countries towards their rich neighbor is modelled against their national levels of innovation, technology spill-overs from the regional economic leader and their productivity differential with the frontier country. The hypothesized relationship is empirically verified for seven East Asian states, using a robust econometric approach. The time-series test estimates under Error Correction Representation yield absolute support in favor of valid productivity convergence occurring between Japan and its low-and middle income neighbors. However, panel data estimates generated with better statistical power outperform the time-series test findings and these results reject the significance of Japan as the regional productivity growth driver for its regional developing states.
KEYWORDS:
Regional economic integration,
productivity convergence,
growth spill-over,
time-series error correction model,
panel cointegration estimators.
JEL: E24, F15.
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.
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.