DETERMINING FACTORS OF PRIVATE INVESTMENT; EMPIRICAL STUDY OF

PAKISTAN

ATIF SALMAN

ZAKI RASHIDI

INTRODUCTION

• Investment raises the productivity capacity.• Promotes technological progress.• Fluctuation of GDP over the business cycle.• Public Investment in infrastructure & basic industry is necessary.• Public investment in developing countries is nearly half of total

investments, whereas the same is around one fifth for industrial countries.

• Successful economies promoted Private Investment.• Deregulation & liberalization attracts foreign investment and

introduces foreign capital, new technologies and managerial skills.

INTRODUCTION

• Private Investment leads to capital formation, more job opportunities & higher tax revenue for government.

• Promotes competition and discipline.• Promotes innovation and research.• Private Investors make profits efficiently, & reinvest &

contribute to GDP.• Public Investment is marred with corruption.• Loss making State Owned Enterprises turned around.• Private Investment reduces poverty.

15 16 17 18 19 20 21 22 23 24 25 26 27 28 293

3.5

4

4.5

5

5.5

6

6.5

7

7.5

8

Investment and Growth

India

IranBangladesh

Indonesia

Malaysia

China

Pakistan

IsraelBrazil

Av

erag

e G

DP

gro

wth

, p

erce

nt

Average share of investment in GDP, percent

Source: IMF (2010)

Countries with high and stable private investment are in general more prosperous than those countries that have low and volatile investment.

RESEARCH PROBLEM

“This study aims to find the determinants of Private Investment in Pakistan and to explain Private Investment with the help of these factors”.

RESEARCH OBJECTIVES

• Objective of this study is the identification of important determinants of Private Investment in Pakistan.

• To develop the plausible model to explain Private Investment in Pakistan by examining the contribution of the above factors.

BENEFITS & LIMITATIONS OF THE STUDY

• This study would provide the different levels of importance of the determinants of private investment in Pakistan empirically which can be very useful information for a policy maker.

• The study was limited by the availability of data as we could only include those independent variables whose data was easily available.

CONCEPTUAL FRAMEWORK

FY84

FY85

FY86

FY87

FY88

FY89

FY90

FY91

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

0

1

2

3

4

5

6

7

8

9

10

-20

-15

-10

-5

0

5

10

15

20

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GD

P G

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per

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Pvt.

inve

stm

ent

Gro

wth

, per

cent

Private investment and GDP growth: The case of Pakistan

Source: Economic Survey

82-85 86-90 91-95 96-00 00-05 .06-100

2

4

6

8

10

12

Average Growth Rate of Private Investment

Source: Handbook of Statistic on Pak Economy 2010, SBP

14

4

25

2218

3

16

5

11

Agriculture Mining and Quarrying

Manufacturing Construction

Electricity and Gas Transport and communication

Wholesale and retail trade Ownership of Dwellings

Finance and Insurance Services

Average Composition of Private Investment during FY03-FY10

Source: Handbook of Statistic on Pak Economy 2010, SBP

DATA COLLECTION

-Annual nominal data of all variables from 1980 to 2009 is from Handbook of Statistics on Pakistan Economy 2010 available on website of State Bank of Pakistan (SBP).

-Data of external debt servicing is obtained from Economic Affairs Division. SBP is primary data source for interest rate, exchange rate and remittances.

TIME-SERIES DATA ANALYSIS

The research uses ordinary least square (OLS) regression method using econometric software EViews to investigate determinants of private investment.

TIME-SERIES DATA ANALYSIS

-Following ‘General to Specific’ approach of econometric model selection, I estimate several specifications of linear investment function and gradually drop statistically insignificant variables.

-Remittances (t-stat=1.08; p-value=0.6)and Ratio of Debt Servicing to Exports (t-stat=-0.98; p-value=0.75) have theoretically correct signs but small t-stat values indicating their insignificance. So I drop these variables.

-Private sector credit (t-stat=-1.01; p-value=0.65) has theoretically wrong sign that is statistically insignificant as well.

TIME-SERIES DATA ANALYSIS

Final specified model is given as:

RESULTS OF ESTIMATION.• P-value for lagged interest rate and exchange rate is 0.10 indicating that these

variables are significant at 10% level of significance (LOS),

• P-value for inflation is 0.14 implying that the variable is statistically significant at 15% LOS.

• Lags of GDP and public investment are significant at 5% LOS.

• F-statistic is 1000.32 with a p-value of 0.00. This shows that my model significantly explains variations in private investment.

• Durbin Watson (DW) statistic is 1.98 which is fairly close to 2. Therefore I can safely assume that there is no autocorrelation problem with our estimation. Adjusted R-squared is 0.994 showing that about 99% of deviations in private investment from its mean value are explained by my model.

KEY FINDINGS

• According to results obtained from estimation, the research finds that relationships of private sector credit, debt servicing to exports ratio and workers’ remittances respectively are rejected as these variables appear to be statistically insignificant.

• Interest Rate, GDP, Exchange Rate, Inflation and Public Investment are not rejected as these variables are significant according to 15% LOS criteria.

CONCLUSION

Impact of interest rate on private investment

Coefficient of interest rate is -2.59 which shows that holding all other explanatory variables constant, 1 percent increase causes 2.59 percent decrease in private investment.

Impact of GDP on private investment

Coefficient of lagged GDP is 1.12. This shows that holding other explanatory variables constant, one percent increase in GDP causes 1.12 percent increase in private investment in next period. Hence our study confirms presence of investment accelerator process.

CONCLUSION

Impact of public investment on private investment

Coefficient of public investment is 0.44. This shows that private investment is expected to grow by 0.44 percent corresponding to 1 percent increase in public investment.

Impact of domestic macro stability on private investment

The research used domestic inflation as a proxy variable for domestic macroeconomic stability. Coefficient of inflation is -0.98 showing that 1 percent increase in inflation is expected to reduce private investment by 0.98 percent if all other explanatory variables are held constant

CONCLUSION

Impact of exchange rate on private investment

Coefficient of exchange rate is -0.52. This shows that one percent increase in exchange rate will reduce private investment by 0.52 percent; holding other independent variables constant. This shows that private investment in Pakistan is vulnerable to exchange rate movements.

RECOMMENDATIONS.

• My study documents that a high interest rate has negative consequences for private investment

• Government while tightening fiscal policy, should ensure that only non-development expenditures are cut and flow of public investment should remain intact

• Keeping in view negative impact of exchange rate movement, policy makers should provide incentives for establishing industries of capital goods in the country so that the economy could get rid of dependence on imported capital.

REFERENCES

• Handbook of Statistics on Pakistan Economy 2010, URL: http://www.sbp.org.pk/departments/stats/PakEconomy_HandBook/index.htm

• Oshikoya, T, W, 1994, 'Macroeconomic Determinants of Domestic Private Investment in Africa: An Empirical Analysis', Chicago Journals, Volume 42, No 3, pp. 573-596

• Serven, L, 2003, 'Real-Exchange-Rate Uncertainity and Private Investment in LDCS, The Review of Economics and Statistics', Volume 85, No 1, pp. 212-218.

• Saeed, A, K, 1995, Economy of Pakistan, Salam Publications, Lahore.• Skidelsky, R, 2009, Keynes The Return Of The Master, Public Affairs, New York.• Akkina, K, R, 2002, 'The Determinants of Private Fixed Investment and the

Relationship between Public and Private Capital Accumulation in Turkey', The Pakistan Development Review, Part II, Autumn 2002, pp 41:3. 243-254