FOREIGN CAPITAL INFLOWS AND ITS IMPACT ON MACROECONOMIC VARIABLES IN PAKISTAN 1981-2010

Foreign capital inflows (FCI) help under-developing countries to cover the gap of twin deficits in current and capital accounts by increasing the size of their Gross Domestic Products (GDP), improving the quality and quantity of technological domestic means of production, creation of employment, transformation of industrial base for exports orientation and imports substitution to gain favorable Terms of Trade (TOT) and Balance of Payments (BOP) position by changing the composition of current and capital accounts. Pakistan has strong potential if the determinants involved in the transformation of the agrarian structure of the economy to mechanized industrialization improve to induce more foreign investors in capital intensive projects by creating financial co-relation with domestic investors as the country has low access in the international resource markets of invisible items. Foreign Inflows of portfolio investments direct enhances foreign exchange reserves. Aim of this study to explain various factors involved to have more FCI and its impact on macroeconomic indicators like, Growth, Domestic Investment, Inflation and Trade Balance. Trend and Regression Analysis applied to evaluate thirty years secondary data collected from various sources. This Study focused on two Determinants of FCI i.e. 'Foreign Direct Investment' (FDI) and 'Foreign Portfolio Investment' (FPI). For checking interdependency of variables in six separate models are specified taking different macro-economic variables. Before analyzing the Time-Series data, Augmented Ducky Fuller test (ADFT) used to check stationarity of the data of those variables in models. For checking Non-Stationary data by Unit-Root showed that all the variables are not stationary at level but stationary at the first difference. For the analysis of variation in variables and finding long-run relationship, "Johansen'sCo-integration-Test" applied. For detection of short-run impacts of FCI on the selected variables in models "Vector-Error-Correction-Model" (VECM) used. Moreover, for examination of the inter relationship in the FCI with economic growth, domestic investment, consumption and inflation; Granger Causality Test (GCT) applied. For deriving the results, SPSS and E-views utilized. Major findings of the study showed that GDP growth rate positively and significantly affects (0.147) FCI and negatively affected (-0.033) by the inflation rate in the country. FCI affected positively (0.195) by the interest rate. Exchange rate is positively related (0.027) to the FCI. Domestic investment affects positively (0.545) FCI. GDP growth rate positively affects (0.157) FDI. FDI negatively affected (-0.001) by the inflation rate of the country. FDI is affected positively (0.015) by the interest rate of the country. Exchange rate positively related (0.030) FDI. Domestic investment affects positively (0.295) FDI. Exports affect FCI positively (0.008). GDP growth rate positively affected (1.083) by FDI in the country. GDP growth rate positively affected (0.021) by the persistent rise in the general price level (inflation) of economy. Gross-Domestic-Product (GDP) growth rate affected negatively (-0.080) by the interest rate of the country. FDI positively affects (1.479) the domestic investment of the country. Domestic investment positively affected (0.284) by FCIs. Inflation rate is positively affected (0.157) by the foreign direct investment to the country. FCI affect the inflation rate positively (0.467). FCIs affect the balance of trade negatively (-0.127). The coefficient is significant at 5% levels of significance. Balance of trade positively affected (0.127) by the GDP growth rate of the country. The balance of trade affected positively (0.237) by the relative prices of imports. Balance of trade negatively affected (-0.132) by the relative prices of exports. Foreign exchange reserves and exchange rate affects the balance of trade negatively. Similarly, as the currency depreciates, the exports become less expensive and hence the demand for exports increases in the international markets. Increase in exports lead to improve balance of trade. Incentives should be given to domestic investors to boost GDP and exports. The study revealed that inflation rate; imports volume affects the FCI negatively and has insignificant impact. So the government should control inflation through monetary/fiscal policy and reduce the imports of un-necessary items through restrictions or imports substitution and export orientation.