ABSTRACT

Pakistan has a major energy shortage. Oil and gas reserves in the country are low, and the economy is heavily reliant on oil imports the cost of the country’s oil imports has been negatively affecting the balance of payments and placing a significant strain on the economy. The country is becoming more and more dependent on fossil fuels, and the future of its energy depends on the precarious import oil supply, which is prone to disruptions and price volatility. In Pakistan, 28 percent of all commercial energy consumption is accounted for by the transportation industry. This study investigates the impact on Pakistan’s economic growth of the trade deficit (generated by reducing the import of oil and export of ethanol by 10%), using the annual frequency of time series data (1990 to 2020) by applying a co-integration analysis and VECM (Vector Error Correction Model). The empirical evidence indicates that applying the trade deficit and trade gain (at the same price of oil) have a negative effect on economic growth while trade gains with increment in oil prices by 10%, 15%, and 20% have affected economic growth  positively. However, in the short-run trade deficit and economic growth has no relationship. These results interpreted evidence that if Pakistan starts using ethanol (E-10) in oil it will reduce the burden on fossil fuels and trade balance but this is not conducted properly and treated  solidly and fairly, which offers alternative insights into Pakistan’s ethanol policies for promoting economic growth.