Research Title: “The Impact of Foreign Capital Inflows on the Competitiveness of

Pakistan’s Economy”

Student: Shabana Kishwar

Supervisor/Co-supervisor: Dr. Zafar Mahmood

Abstract: Attracting capital and foreign exchange flows is crucial for developing countries.

Capital inflows are assumed to be distributed between tradable and non-tradable sectors of the

receiving economy. Yet, these flows might lead t real exchange rate (RER) appreciation through

raising the price of non-tradable as the real exchange rate is defined as the ratio of price of non-

tradable to tradable. Appreciation of RER therefore leads to the contraction of exports 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 c=account the effect of different

types of capital flows and some policy variables on the real effective exchange rate (REER),

revealed indicator of competitiveness. Most of the existing literature shows that capital inflows

have positive impact on the real exchange rate. In this context, the size of the flows relative to

the size of the economy and their usage is critical. By using auto regressive distributed log(

ARDL) co-integration technique, this study established that increased remittances, official

development assistance, investment income and other investment are the sources real

appreciation while increased government expenditure caused real depreciation. Foreign direct

investment, trade openness and terms of trade (TOT) 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.