Oil Rents, Macroeconomic Determinants and Economic Growth in Pakistan: An Autoregressive Distributed Lag (ARDL) Analysis

Abstract

The purpose of the research study is to examine the impact of Oil Rents and some Macroeconomic Determinants on Economic Growth in Pakistan using the Autoregressive Distributed Lag (ARDL) modelling approach. The study investigates the dynamic relationship between Economic Growth (GDP) and other Macroeconomic indicators such as Oil Rents (OIL), Consumer Price Index (CPI), Foreign Direct Investment (FDI), Gross Capital Formation (GCF), and Unemployment (UNEMP) for the period 1971–2021. The unit root test of Augmented Dickey–Fuller (ADF) was used to check the stationarity characteristics of the variables. The findings indicate that the variables are co-integrated at mixed orders, with CPI, GCF, and OIL being stationary at level I(0), and the remaining variables FDI and UNEMP being stationary at level I(1). The results confirm the appropriateness of the ARDL approach for analyzing short-run and long-run relationships because none of the variables are integrated at order I(2). The optimal lag structure ARDL (1,1,0,1,1,0) was determined by the Akaike Information Criterion (AIC), and the ARDL model was estimated using this structure. The empirical results show that the explanatory variables together have an impact on Economic Growth as supported by the statistically significant F-statistics. The ARDL bounds testing approach confirms the existence of a strong long-run cointegration relationship between GDP, Oil Rents, and Selected Macroeconomic Determinants as the calculated F-statistics is greater than the upper critical bounds at all conventional significance levels. The long-run estimation results show that Gross Capital Formation has a positive and highly significant impact on Economic Growth, which indicates that investment and capital accumulation play a vital role in improving the economic performance of Pakistan. Likewise, the long-run effect of Oil Rents is positive and statistically significant, indicating that the use of oil-related economic activities is a positive contributor to growth if used properly. Although Inflation and Foreign Direct Investment (FDI) are found to have a negative effect on GDP in the long run, the size of this negative effect is small. Meanwhile, Unemployment does not have a statistically meaningful impact on GDP. The short-run ARDL Error Correction Model (ECM) results also support the existence of a stable adjustment mechanism towards the long-run equilibrium. The Error Correction coefficient is negative and highly significant, which suggests that deviations from equilibrium are corrected quickly over time. The short-run determinants are found to be Gross Capital Formation, which is the most important positive determinant of Economic Growth, while short-run changes in Inflation and Oil Rents do not show statistically significant effects. The Model Diagnostic tests, such as the Breusch–Godfrey Serial Correlation Test, Breusch–Pagan–Godfrey Heteroskedasticity Test, Jarque–Bera Normality Test, Ramsey RESET Test, and CUSUM Test, confirm that the estimated model is statistically sound, correctly specified, and has no major econometric issues.