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Effect of the Energy Crisis on Pakistan’s Economy



Energy crisis is defined as price rise of the energy resources or a great shortfall in the supply of the resources of energy. Usually it is referred to shortage of electricity, oil, natural gas, and other natural resources. Where the globalization has changed the world entirely, it emerged many issues but energy received significant attention from researchers. The demand for energy is increasing rapidly in this globalizing world with respect to supply; resultantly crisis for energy has emerged. Most of the countries are facing shortage of energy and consequently it is severely affecting the economic growth and social transformation. There are numerous views and ideas that potentially make linkage between energy and economic growth. Energy is considered as a backbone of any economy and plays an important role in the socio-economic development of a country. If there is not sufficient energy, industrialization will not take place, it is crucial for running industries and output units, for residual and commercial use and for transportation, etc. As expansion in energy is expected to result higher growth similarly its shortage may hold back the growth process. In short, economy is vital for running all the resources and energy crisis directly influence all the sectors of economy such as agriculture sector, industrial sector, unemployment, poverty, lower GDP and higher inflation. Unfortunately, Pakistan is facing worst energy crisis in its history. Like other developing countries Pakistan is also an energy intensive growing economy, and as in most other non-oil producing countries its energy needs are met by large quantities of imports. Pakistan energy’s infrastructure is not well developed and said to be managed poorly. Despite of population growth, economic growth and increased demand during the past decades, no serious efforts were made for the generation of energy. Moreover electricity theft and transmission losses due to outdated infrastructure have worsened the situation.


The main objective of the study is to find out the extent of energy crisis impact on economic growth of Pakistan.

Literature Review:

Global Perspective:

Article 1: For India and Indonesia, unidirectional Granger causality is found in the short run, while for Thailand and Philippines there is bidirectional causality that runs from energy to income. Energy, income and prices were mutually casual for Thailand and Philippines. (Asafu-Adjaye, 2000).

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Article 2: There is positive impact on economic growth by electricity consumption and bidirectional causality is found between electricity consumption and economic growth. It shows that greater electricity consumption leads to higher economic growth and similarly higher economic growth raise electricity consumption (Bayar, 2014).

Article 3: Using error correction model and Granger non-causality tests, empirical results shows that in Pakistan case there runs unidirectional Grangers causality from coal to GDP, GDP to total energy consumption & GDP to electricity consumption. In case of Bangladesh and Sri lanka, unidirectional causality runs from GDP to electricity consumption, there is causal direction from petroleum to GDP in case of Nepal. While no causality was found in case of India (Asghar, 2008).

Article 4: Using integration tests on the panel data for ten Latin American countries, results show that for all the countries taken in sample, bidirectional causality exist between energy consumption and GDP. For further studies human capital, physical capital and labor can be included in variables as these are also important factors (Campo & Sarmiento, 2013).

Article 5: Applying various tests on panel data of Pakistan, India, Sri lanka, Bangladesh and Nepal, in short-run there is unidirectional causality that runs from GDP per capita to energy consumption per capita, while in long-run, there is negative relationship between these two (Noor & Siddiqi, 2010).

Article 6: There is causality found from energy consumption to GDP and GDP to energy consumption but it is found more extensively in developed OECD countries in compare to the developing non-OECD countries. It shows that impact of electricity consumption on GDP for developed countries is greater than developing countries of the world (Chontanawat, Hunt, & Pierse, 2006).

Article 7: Analysis indicates that energy consumption and GDP co integrate with each other. Scarcity of energy is a big constraint for the growth of an economy but when there is plentiful energy then it effects on economy is lessen (Stern D. I., 2010).

Article 8: In short-run, energy consumption and GDP, and energy consumption and exports are co-integrated with each other. It shows that any crisis in energy will result in trade reduction which in turn will affect the GDP growth (Shakeel, Iqbal, & Majeed, 2013).

Article 9: Applying test on over 90 countries divided into 4 income groups, Ganger causality run from GDP to energy consumption in long run for high and low income groups, while bidirectional Gangers causality between GDP and energy consumption for lower middle and upper middle groups. While consistently there is a strong relationship for the sample countries between energy consumption and economic growth (Farhani & Rejeb, 2012).

Article 10: Taking 23 countries into sample and applying dynamic panel data GMM-system, there is unidirectional causality that runs from GDP per capita to energy consumption (Nayan, Kadir, Ahmad, & Abdullah, 2013).

Article 11: Co-integration for the real output, energy, capital and labor is found using bound test. The results prove causality from energy consumption to GDP for all the countries in both short-term & long-run. This means economy of each country is dependent on energy and energy crisis will definitely result in reduction of economic growth (Muhammad Arshad Khan, 2007).

From Developed Countries Perspective:

Article 12: Granger causality test and co-integration analysis shows that energy consumption is strongly linked with economic activities as well as economic growth. Energy required to produce a GNP unit can be reduced by shifting to high quality of energy (Stern D. I., 2003).

Article 13: Taking GDP and energy consumption as variables for France and applying VEC along geo-statistical methods, there is long-run unidirectional causality flow from energy consumption to economic growth (Amiri & Zibaei, 2012).

Article 14: Positive relationship between energy consumption and economic growth was found for Turkey from 1960-2008. This relationship over the past few years has strengthened which means economy dependency on energy (especially oil) has increased (Saatci & Dumrul, 2013).

Article 15: For Turkey, there is bidirectional causality between energy production and economic growth, which means increase in energy production will increase economic growth and same way around. Also bidirectional relationship between energy import and economic growth exists which means increase of energy amount to be imported will increase the economic activity and growth (Ozkan, Özkan, & Kuyuk, 2012).

Article 16: Johansen-Juselius co-integration methodology and Vector Error Correction Modeling results indicate a unidirectional causality that run from energy consumption to GDP. Thus any kind of possible short-fall in energy may affect the process of economic growth of Turkey (Soytas, Sari, & Ozdemir, 2001).

From Developing Countries Perspective:

Article 17: For Malaysia, taking energy consumption as dependent variable and GDP, financial development, population as independent variables, results shows that economic growth and financial development influence energy consumption in short-run as well as long-run. Energy consumption is also influenced by population in long-run (Islam, Shahbaz, Ahmed, & Alam, 2013).

Article 18: Time series data from 1954 to 1997 for Taiwan, bidirectional causality is found between total energy consumption (coal, oil, natural gas and electricity) and economic growth (YangU, 2000).

Article 19: For China, no co-integration was found between GDP and energy consumption by Johansen co-integration test while using Hsiao’s Granger causality there is bidirectional relationship between energy consumption and economic growth (Hou, 2009).

Article 20: Studying the relationship between electricity consumption and economic growth for Tunisia during 1971-2007, bivariate vector auto-regression structure show existence of unidirectional causality is found from electricity consumption to economic growth (Chouaibi & Abdasalem, 2009).

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Article 21: When examined with VECM and Johansen co-integration estimation, results shows unidirectional causality that runs from energy consumption to GDP while in long-run, feedback relationship exists between them. So for Tunisia, energy limits the economic growth. So any shocks to energy supply will badly effect the economic growth (Belloumi, 2009).

Article 22: The analysis shows that real GDP is significantly impacted by the present as well as past changes in the supply of electricity. For every 1MWh increase in supply of electricity there is an extra output of Rs.88000-137000 (Morimoto & Hope, 2001).

From Under-developing Countries Perspective:

Article 23: In the economy of Nigeria, there is a positive and strong relationship between national income and energy use. Ganger causality results bidirectional relationship between manufacturing capacity utilization energy consumption (Kabir, Zaku, A.A.Tukur, & J.G, 2013).

Article 24: For the period under study, results support that the Vietnam’s economic growth is not limited by the energy consumption. With increase in economic growth demand for energy use increases but not vice versa (Binh, 2011).

From Pakistan Perspective:

Article 25: In Pakistan, increase in energy supply will increase the economic growth while any crisis in energy supply will lead to barrier in economic growth. The impact of petroleum products and electricity is significantly high (Siddiqui, 2004).

Article 26: Applying co-integration and Hsiao’s version of Granger causality on time series data from 1956 to 1996, results shows higher electricity consumption leads to economic growth while there is no feedback relationship. Increase and decrease in petroleum consumption does not affect economic growth but economic growth causes petroleum use. And there is no co-integration between gas consumption and economic growth (Aqeel & butt, 2001).

Article 27: In industries, cost of production may increase due to any shocks in the energy supply but investment in capital stock is not affected by these energy shocks (Mahmud, 2000).

Article 28: With model of non-linear relationship, real output is negative affected by the change in prices of crude oil no matter these changes or less or more than the critical price of crude oil. Subsidies on electricity should be provided by the government (Kiani, 2011).

Article 29: Electricity consumption and economic growth are in a long-run equilibrium relationship, electricity consumption do not leads to economic growth but economic growth leads to electricity consumption, as analyzed by Granger causality test with ARDL bounds testing approach (Shahbaz & Feridun, 2011).

Article 30: For GDP and oil consumption, and electricity and GDP there is a unidirectional relationship while in case of gas and GDP neutrality relationship is proved. Demand for oil consumption will increase by any future growth in agriculture sector (Mushtaq, Abbas, Abedullah, & Ghafoor, 2007).

Article 31: From 2007 to 2009 (post energy crisis period) performance is declined by the industries of textile, cement and engineering while during the same period the industries of sugar and chemical remain consistent. To save the industries, government of Pakistan should focus on energy sector (Khurshid & Anwar, 2013).

Article 32: A long-run relationship exists between electricity consumption and GDP. There is a unidirectional causality that runs from electricity use to economic growth; this means that any possible energy crisis may retard the process of economic growth in Pakistan. Government needs to invest in energy infrastructure in order to support economic growth (Yasmin, Javid, & Ashraf, 2013).

Article 33: Horizontal analysis of the major ratios of textile industry results that as compared to pre energy crisis period, the performance of textile industry is badly affected in post energy crisis period (Shah, Essrani, Shah, & Rahat, 2013).

Article 34: Analysis through multiple linear regression analysis of independent variables; electricity use and interest rate, shows that there is negative relationship between output of textile industry and energy use, and also out of textile industry and interest rate. Government should take serious actions for the survival of industries (Afzal, 2012).

Article 35: From GDP to energy consumption there is one way causality resulted from Granger causality test while positive relationship also exists between them while tested by ordinary least squares method. GDP increases by 1.23% for 1% increase in energy consumption (Ahmad, Hayat, Hamad, & Luqman, 2012).

Article 36: Johansen co-integration test and VECM confirms that there is positive relationship between energy consumption and industrial output, bidirectional causality for oil consumption, unidirectional causality from electricity use to industrial output and from industrial output to coal consumption, while for gas consumption no causality exist (Qazi, Ahmed, & Mudassar, 2012).

Article 37: Using tools as Ganger causality tests, statistical analysis, correlation analysis, shows that GDP of Pakistan depend on energy consumption which include all forms i.e. electricity, oil, gas, coal. For trade there is unidirectional causality found from GDP to trade openness which means growth in GDP promotes trade openness (Chaudhry, Safdar, & Farooq, 2012).

Article 38: Any rise in prices of energy will affect the economic growth. As prices rises, manufacturers will either improve the quality standards or cut off the labor in order to survive in the market (Rashid, Azeem, & Ramzan, 2012).

Article 39: Bound testing approach to co-integration and Ganger causality test results bidirectional causality between economic growth and energy consumption in short-run, while unidirectional causality from economic growth to energy consumption in long-run. Frequent changes in energy price also impact economic growth (Adnan & Riaz, 2008).

Article 40: By applying Structural Vector Auto-regression, results reveal that economic growth increases the demand for labor force, capital stock and energy consumption. Pakistan government needs to supply energy at affordable prices to facilitate growth in economic activities (Zeshan & Vaqar, 2013).

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