Abstract
This research investigates the long-term cointegration of electricity price with sectoral production and equity market in Pakistan. Fourteen major industrial sectors and the KSE100 index is taken into consideration to determine the relationship. Literature in this regard is available but this research is distinct from previous literature for it tests the sectoral production and equity market relationship with electricity price change in Pakistan. Monthly data from 1st Jan 2011 till 31st Dec 2019 is taken for fourteen sectors from the sources of Quantum Index Pakistan Bureau of Statistics (PBS) and for KSE100 index from (www.investing.com). An Auto Regressive Distributed Lag (ARDL) model and bound test for multiple structural breaks has been applied. It is found that almost the production of all industrial sectors and KSE100 index stock prices are adversely affected by the electricity price shocks both in long-term and short-term. The study suggests that management should implement a moderate monitory policy that is neither more expansionary nor contractionary. The government should provide incentives to those who successfully control energy wastage. A mixed kind of energy policy is recommended with higher weightage to the development of renewable energies to reduce foreign exchange outflow with imported furnace oil. This study is limited to the sectoral production and equity market of Pakistan. A cross-sectional research is encouraged to compare the connection between major energy costs and macroeconomic variables in different countries.
Highlights
The World Bank Enterprise Survey 2015 states that 45.3% of the total firms in Pakistan have identified electricity as the top obstacle for the business sector in Pakistan (Bank, 2015)
This research utilized Auto Regressive Distributed Lag (ARDL) model to investigate the impact of electricity prices on sectoral production in Pakistan (Akadiri et al, 2019; Shin & Smith, 2001)
In comparison to Vector Auto Regressive (VAR) the ARDL model has some additional benefits i.e., ARDL can be used for small sample size, if the variables are stationary at level or at first order difference or a mix of both while Johansen cointegration the variables must be in similar order difference (Mohammad Hashem Pesaran & Pesaran, 1997; Shin & Smith, 2001)
Summary
The World Bank Enterprise Survey 2015 states that 45.3% of the total firms in Pakistan have identified electricity as the top obstacle for the business sector in Pakistan (Bank, 2015). Electricity sector reform should be the top priority for the government of Pakistan to quickly yield major economic gains which will directly increase the firm’s productivity and reliability. It reduces the cost of production and CO2 emissions (Grim et al, 2020). The cost push factors of inflation in the energy sectors are petrol, gas and electricity It has risen up the consumer price index and increased the cost of production (SBP, 2019). This research objective is to expand the understanding by investigating the short-run and long-run connection between electricity price change and production growth in different industrial sectors of Pakistan. The paper consists of: Section-2 Review of Literature, Section-3 on Data Collection and Methodology, Section-4 as Empirical findings and discussion, Section-5 on Main findings lastly, Section-6 as Conclusion
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