The Impact of Foreign Capital Flows on the Competitiveness of Pakistan
Author: Shabana Kishwar

Attracting capital andforeign exchange flows is crucial for developing countries. Capital inflows are assumed to be distributed between tradable and the non-tradable sectors of the receiving economy. Yet, these flows might lead to real exchange rate (RIC/3) appreciation through raising the price of ncm—tradable as the real exchange rate is defined as the ratio of price of non-tradab/e to tradable. Appreciation of the RER therefore leads to the contraction of export and in turn loss of competitiveness. The objective of this study is to investigate changes in competitiveness of Pakistan ’s economy for the period, 1976-2009 by taking into account the effects of different types of ccmita/ flow-ts and some policy variables on the real effective exchange rate (REER), a revealed indicator of competitiveness. Most of the existing literature shows that capital _ flm-vs have positive impact on the real exchange rate. In this context, the size of the/lows relative to the size of the economy and their usage is critical. By using auto regn’essive distrilmted lag (ARDL) cointegration technique, this study established that increased remittances, official development assistance, im-estment income and other im’estment are the sources real appreciation while increased government expenditure caused real depreciation. Foreign direct itwe.stment, trade openness and terms of trade (T07) are found to be insignificant. Given the impact of capital inflows and other variables on the REER, it is expected that the study will benefit the policy makers in formulating different policies regarding exchange rate management, export promotion, demand management, etc. Supervisor:- Dr. Zafar Mahmood

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Supervisor: Zafar Mahmood

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