ANALYZING THE IMPACT OF TEXTILE EXPORT PERFORMANCE ON PAKISTAN'S ECONOMIC GROWTH: A TIME SERIES APPROACH

Abstract

This study examines the relationship between textile exports and economic growth in Pakistan over the period 1994–2024 by incorporating key macroeconomic determinants, including exchange rate, foreign direct investment (FDI), and inflation. The analysis is grounded in the Export-Led Growth (ELG) hypothesis and complemented by theories of international trade and macroeconomic stability. Annual time series data obtained from the World Bank, State Bank of Pakistan (SBP), and Pakistan Bureau of Statistics (PBS) are analyzed using Augmented Dickey-Fuller (ADF) unit root testing, Johansen cointegration techniques, Vector Error Correction Model (VECM), and Granger causality analysis.

The empirical findings confirm that the variables are integrated of mixed order, I(0) and I(1), and exhibit a stable long-run equilibrium relationship. The Johansen cointegration results indicate the existence of a long-run association among GDP growth, textile exports, exchange rate, FDI, and inflation. However, the long-run coefficients of textile exports and FDI are positive but statistically insignificant, while exchange rate depreciation and inflation show negative but insignificant effects on economic growth. This suggests that although the direction of relationships aligns with economic theory, their magnitude is constrained by structural inefficiencies, macroeconomic instability, and limited absorptive capacity in the economy. In the short run, the Vector Error Correction Model reveals a significant and negative error correction term, confirming adjustment toward long-run equilibrium. Exchange rate depreciation exerts a strong negative impact on GDP growth, reflecting the high import content of production in Pakistan’s textile sector. Inflation and FDI show mixed and relatively weak short-run effects, while textile exports exhibit limited short-run influence on growth. Granger causality results further indicate that the exchange rate plays a dominant role in influencing both GDP growth and textile exports, while causality from GDP growth to FDI suggests a demand-pull effect for foreign investment. Overall, the study concludes that while Pakistan’s textile exports contribute to long-run growth dynamics, macroeconomic stability—particularly exchange rate and inflation management—plays a more immediate and significant role in shaping economic performance. The findings highlight the need for structural reforms, improved export competitiveness, and enhanced investment conditions to fully realize the potential of export-led growth in Pakistan.