Economics Is Nothing Without the Impact of Macroeconomic Determinants on Economy of Pakistan

Abstract

This research aims to find the impact of Macroeconomic Variables on Economic Growth of Pakistan. The study helps to understand the implications of Personal Remittances, Inflation Deflator, Electric Consumption, Foreign Direct Investment, Imports, Mineral Resources, GDP Per Capita, Gross Capital Formation, Domestic Credit to Private Investment, Real Effective Exchange Rate, and Broad Money on the Gross Domestic Product of Pakistan. The 51 years of time series data is taken from 1971 to 2021 which is collected from the website of State Bank of Pakistan, International Financial Statistics and from World Development Bank Indicators for the years 2021-2022. The model is tested by using Ordinary least square. All the variables are significant. R2 is 0.98 which shows that selected independent variables are explaining the variation in dependent variable with the highest percentage. F-Statistics confirms the overall goodness of fit of the model. Stationarity level of the data is analyzed by Augmented Dickey-Fuller (ADF) test. Durbin Watson is 2.0, which is an indication of no autocorrelation. Descriptive Statistics are calculated to see the probability of Jarque Berra. To check the Normality Histogram is drawn. Stability of the model, serial correlation, heteroscedasticity, Normality and Structural Stability diagnostic tests have been applied on the data. LM Test, Ramsey Reset Test, Breusch-Pagan-Godfrey test, Correlation, Covariance Matrix, Correlogram, forecast model, CUSUM and CUSUM SQ and recursive stability graph has been tested to fulfill the conditions of time series analysis. Co-integration test has shown that there is long run association between variants.Another test to see the short run association between change ables show that there is neither one way nor two way causality among them..The findings are that macroeconomic variables Broad Money, Gross Capital Formation in $, Minerals and GDPPC$ have positive significant relationship with is significant relationship with GDP and their respective t-values are 3.6808, 10.99676, 3.55973, 3.0824338 and 2.7287. Imports, Foreign Direct Investment, Electric Consumption and Direct Credit on Private Investment have significant negative relationship with Economic Growth of Pakistan. Their respective t – values are -3.10085, -2.72875, -2.61744 and -6.15435. Personal Remittances, Exchange Rate and Inflation Deflator have insignificant relationship with GDP and their respective t-values 0.809843, 1.062302 and -0.10167.Government should ensure peaceful environment for foreigners to invest in Pakistan. The law-and-order situation, political unrest, high rate of unemployment, increase in prices, devaluation of currency and widening energy crisis needs to be handled from individual level to aggregate level. Keywords: Remittances, Foreign Direct Investment, Gross Domestic Product, Exchange Rate, ADF, ARD.