An Analysis of the role of Independent Power Producers in the Gross Domestic Product and demand for energy in Pakistan (1990-2015)

Pakistan is a country having more than 207.77 million people, where almost 61 percent of population is living in rural areas (Planning & Development Division, Federal Bureau of Statistics, 2015). In both urban and rural areas, energy is considered as important element to run daily economic activities. The energy crisis remained one of the main obstacles in the way of development since independence. The situation of electricity is worsening day by day, and worsened in the rural areas as compared to urban areas. Pakistan has made no considerable progress for overs of decades to overcome this problem due to an effective planning and proper implementation of energy policies and lack of infrastructure. The focus of the study is to find-out the impact of Independent Power Producers (IPPs) on Gross Domestic Product (GDP) and demand for energy in Pakistan. For this purpose data was collected from Economic Surveys of Pakistan (2015), Pakistan Bureau of Statistic, IPPs yearly books and World Development Indicator, for the period of 1990 to 2015. The study aimed to find-out the determinants of energy demand and supply in Pakistan and to examine the impact of IPPs on economic growth of Pakistan. The study employed Autoregressive Distribution Lag (ARDL) model to build up the relationship between various explanatory variables and dependent variable. The impact of different variables was observed on energy demand, energy supply and Gross Domestic Product of Pakistan in the context of IPPs. The first model of the study was constructed to find out the impact of oil prices and energy supply on energy consumption. The results show that energy supply and oil prices affect positive and significant impact on demand of energy both in the short run and long run. It was found that 1 percent increase in energy supply and prices, increases energy consumption by 0.34 and 0.54 percent respectively in the long run. The second model was constructed to analyze the impact of certain variables like Gross Fix Capital (GFC) formation, Foreign Direct Investment (FDI), labor participation, oil prices and energy balance on energy supply in Pakistan. It was 7 concluded that except oil prices, all the variables has significant and positive effect on energy supply except oil prices, which has a negative impact on energy supply both in the long and short run. The most important objective of the study is to examine the role of IPPs in Gross Domestic Product (GDP). It was observed that IPPs are playing positive role in increasing economic growth of the country, even though they are producing below their capacity still their impact is positive. The same variables were used for GDP as were chosen for energy supply. Where labor participation and oil prices showed negative results. It was found that labor participation in IPPs and increase in oil prices decreases economic growth by 0.08 and 0.01 percent respectively, while capital formation increased GDP by 0.30 percent in the short run and 0.88 percent in the long run. The effect of FDI was surprising, in the short run it has a negative associated with on GDP but in the long run it showed positive association with GDP. The study determined that IPPs are the asset for Pakistan, not only to fill the gap of electricity but also to increase GDP of the country. It is suggested that to increase supply of electricity, government should utilize its resources to install new power plants and encourage more IPPs by relaxing agreement in an area where there is more issue of energy, so that supply of energy can be increased in the country. Government of Pakistan should allow foreign investors to operate their plant wherever they want according to the feasible requirement of the area. All kind of restrictions should be removed while preparing operational policies for IPPs.