Foreign Direct Investment in the Power and Energy Sector, Energy Consumption, and Economic Growth: Empirical Evidence from Pakistan

Abstract

Pakistan significantly contributes to the overall economy of South Asia, but, for many years, it has been facing a severe energy crisis. Despite the robust economic growth and a sharp increase in energy demand, no deliberate efforts have been made to meet the energy demand of the country. Similar to other developing countries, foreign direct investment (FDI) plays a key role in the economic development of this country. Pakistan receives FDI from many countries in various sectors of the economy. This paper aims to highlight the present situation of the power and energy sector of Pakistan (PESP), and empirically analyze the causality among the FDI in the power and energy sector, the energy consumption, and the economic growth of Pakistan for the period 1990–2017. The Johansen co-integration and Granger causality tests were employed to find the causal relationships among the variables of interest in the short-run and the long-run. The sector-wise flow of FDI reveals that the power and energy sector of Pakistan (PESP) has comparatively received a higher amount of FDI than other sectors of the economy in recent years. Furthermore, trends of energy production and energy usage reveal a substantial gap in previous years. The results confirm a positive bi-directional short-run causal relationship between economic growth and energy consumption. The results also reveal the presence of long-run causality in the equation of energy consumption. Considering the current situation of PESP, policy-makers should formulate policies to attain the minimum debt level and discourage loan-based investment. Such policies would be helpful to control the severe energy crisis and increase economic growth.