EFFECTS OF MACROECONOMIC FACTORS ON RETAIL INDUSTRY OF PAKISTAN

Study from 1999/00-2012/13

Abstract

Services sector is largest and fastest growing sector in the world economy, accounting largest
share in total output and employment in most developed countries. The share of services sector
in total GDP is 47 percent in low income countries, 53 percent in middle income countries and
73 percent in high income countries. The sector accounts for a significant and rising share in
cross-border trade and foreign direct investment and gives more export opportunities for
services suppliers and lower costs for imported services. Pakistan has a very dis-organized
retailing system, but now the trend is going towards an organized one as in hypermarkets or
supermarkets almost all kinds of products are available under one roof in a well-organized way.
This study consists of annual data from 1999/00-2012/13 from World Bank, Economic survey of
Pakistan, State Bank of Pakistan and Trading Economics. Time Series Data is used. Dependent
variable is retail sector and independent are consumer spending, import to GDP, rate of
inflation, lending rate and population. Not much work has been done by researchers on this
topic and especially nothing like this exists in context to Pakistan. As Pakistan’s retail sector is
potentially very strong and growing day by day economic policies should be made to encourage
this sector in order to have a positive and greater impact on the economy of this country.

Keywords: Retail sector, consumer spending, import to GDP, rate of inflation, lending rate and time
series data.

1. INTRODUCTION

Services sector is largest and fastest growing sector in the world economy, accounting largest share
in total output and employment in most developed countries. The share of services sector in total
GDP is 47 percent in low income countries, 53 percent in middle income countries and 73 percent
in high income countries. The sector accounts for a significant and rising share in cross-border
trade and foreign direct investment and gives more export opportunities for services suppliers and
lower costs for imported services. It is expected that rising trend of services sector would continue,
to gain more and more importance through advancement in the area of knowledge based and skill
oriented activities. The rising consumer and business dema nd is steaming from service related
activities in manufacturing firms and enhancing role of IT. Starting with Clark (1941) Kuznuts (1957)
and Fuchs (1980) observe that shifting the population or structure changes from agriculture to
manufacturing and from manufacturing to services in the course of economic development.
Kongsamut, et al. (2001) estimates for 123 countries from 1970-80 that with increase in services
raises the per capita GDP of these economies. These economies move from agriculture sector to
more in services sector and less in industrial sector. Rath, et al. (2006) analyses that higher growth
in services sector leads to India’s economic growth. They argue that service sector not only
provides more job opportunities but also is widening the tax base and the buoyancy of taxes.
CLASSIFICATION OF SERVICES SECTOR

The services sector is not only the one sector at all rather it is highly diversified. Services sector
consists of four major sectors in Pakistan that is; distributive, producer, personal and social
services. These sectors are further distributed in different subsectors. According to the
classification of services sector in Pakistan at the distributive services are further distributed into
two subsectors i.e., transport , communications and trade sector. The distributive sector provides
the utility to consumer, household and profits for the traders. Producer services consist of financial
sector, which not only facilitates the consumers; it also provides the capital for industrialist and
business community. The personal services sector provides the public goods and shelters to the
citizens of the country. Lastly, the social services sector is distributed in two subsectors (i) public
administration and defense, and (ii) health and education facility. Other system of classifying
services developed by Browning and Singelemann (1978) provides market based classification
system that consists of public and private provision. Elfring (1988), building on this system,
regrouped the service activities from the (International Standard Industrial Classification) ISIC
under the four sub-sectors World Trade Organisation (WTO) has identifies 12 areas covering 161
sub-sector of the services. The main sectors are construction, computer and software
development, engineering services, professional services (marketing audit/accounts, taxation and
legal etc.), banking, insurance, communication, tourism and business services.

Classification of Services Sector in Pakistan

1.Distributive Services

2.Transport, Storage andCommunications  ¨ Railways

 ¨ Water Transport
 ¨ Air Transport
 ¨ Pipeline Transport
 ¨ Road Transport
 ¨ Mechanised
 ¨ Non- Mechanised
 ¨ Communications
 ¨ Storage
 ¨ Water Transport

3.Wholesale, Retail Trade and Hotels and  ¨ Wholesale and Retail Trade including
Restaurants  Imports
 ¨ Purchase and Sale Agents and
Brokers
 ¨ Auctioning
4.Producer Services
 5.Financial Institution  State Bank of Pakistan
 ¨ Commercial Bank
 ¨ Other Financial Intermediaries
 ¨ Insurance Corporations and Pension
Funds

6.Personal Services
7.Entertainment and Recreation Services
8.Ownership and Dwelling
9.Social Services
10.Public Administration and Defense

11.Social Community and Private Services  ¨ Education

 ¨ Medical and Health Services
 ¨ Other Household and Community
Services
Source: Annual Report of State Bank of Pakistan (Various Issues).

Wholesale and Retail Trade

Retailing is getting transformed with the passage of time. In cities, towns and villages of
Pakistan, salespersons used to sell all kinds of daily consumer goods and services either on
bicycles, tricycles, or on animal driven carts, even this is in practice in current times also. Then a
concept of Kiryana stores penetrated and became mature enough. Now-a-days people are more
inclined towards modern retailing stores (cash & carry) e.g. Metro, Hyperstar, Makro, Virsa,
Cosmo etc are working in Pakistan as modern retailers. In Pakistan, 7 million retailers are local
retailers whose livelihood is directly influenced by local retailing because it is the only source of
their income. Local retailing is the backbone of our economy as 70% population of Pakistan
belongs to rural areas where traditional retailing system is being practiced. Whereas, Increase in
urbanization is strengthening large retailing stores in Pakistan as they are located in the major
cities where the trend is setting now to buy grocery of all month in a single visit as life is much
buzier. The people who buy grocery or other items on monthly basis or who are salaried
persons are more inclined towards cash and carry stores than those who buy goods on daily
basis as they prefer kiryana stores nearby.

Retailing posted reasonably strong current value growth, strengthened by economic growth in
2012 which exceeded the previous year’s performance. While major issues such as the energy
crisis continued to be one of the country’s major challenges, inflationary pressures stopped
rising sharply and the interest rates witnessed a dip, leading to a better investment climate.
Retailing had a prominent year with many small new entrants and a noteworthy presence of
major players on television, radio and billboards which indicated a healthy competitive
environment. However, strikes at retailing outlets due to excessive electricity load shedding in
the summer and natural gas load shedding in the winter continued to be a hindrance and
curtailed retailing from reaching its true potential.

Pakistan has a very dis-organized retailing system, but now the trend is going towards an
organized one as in hypermarkets or supermarkets almost all kinds of products are available
under one roof in a well-organized way. They also have a vast range of Brands of same kind of
products contributing in good shopping experience of consumers as they have more than ten
choices for same kind of item and can easily compare them and can avail discount on bulk
purchasing. This factor saves time and creates convenience for the consumers in daily hustle
and bustle. In contrast, the local retailers do not offer such kind of variety and discount. So
people are more attracted towards modern way of retailing.

Modern retailing is not only influencing the traditional retailing system but also increasing day
by day and ultimately it will have an adverse effect on local retailers. In Europe the modern
retailing system is saturated enough and in Pakistan we are at initial stage now. If the modern
retailing prevails in Pakistan then obviously the consequences will be bitter towards the local
retailer. If we talk about the biggest company of the world in terms of revenue, then it is also a
retailing company named as Wallmart. So, Pakistan with retail potential of approximately $42
billion is a good prospect for foreign retailers, it will be a niche for them. Hence, they can
capture the market easily and enjoy revenue with full hands.

Indian local retail industry is also very strong and huge like Pakistan. Indian retail sector has also
attraction and good potential for foreign retailers. Political opposition has played a key role to
resist international supermarkets to invest in retail market of India. Hence, Indian government
has suspended its decision to allow international supermarkets i.e. Walmart, Tesco to invest in
India’s £300 billion retail market until more people were persuaded of its intrinsic worth.
Foreign retailers in India would put millions of shopkeepers across India out of business and
threaten the livelihood of farmers. Analysts said that this was due to political not ideological
factors as there are local elections coming up and no one wants to lose the good will of
commercial voters.

Traditional retailers in Pakistan also need to be protected and recognize their potency as
competitive advantage and straighten their positioning for their survival. One solution of this
problem can be that kiryana store owners should unite for their survival. They can make
committee or union to formulate strategies for them. Further, two or three kiryana store owners
can invest together and open up a kind of mini-mart and further modern retailing store at
bigger level. This will be a tool to escape themselves from the giant stores.
In case of Pakistan, the shares of services are increasing in all sectors of economy over the
period. In fact, the growth rate of services sector is higher than the growth rate of agriculture
and industrial sector. Services sector accounts for 54 percent of GDP and little over one-third of
total employment. Services sector has strong linkages with other sectors of economy and other
sectors also have significant effect on the growth of service sector.It provides essential inputs to
agriculture sector and manufacturing sector.

The objective of this paper is to analyse the impact of some of the macro-economic factors on
the growth of service sector particularly on wholesale and retail sector of Pakistan .

Macro-economic factors affecting the growth of Wholesale and Retail Sector of Pakistan tested
in this study are,

• Consumer Spending
• Imports to GDP ratio
• Rate of Inflation
• Lending Rate
• Population

This study consists of 5 sections. After introduction section 2 is literature review, section 3 is
data methodology and model, section 4 is results and section 5 is conclusion.

2.LITERATURE REVIEW

Reference 1, J.Stanley Metcalfe (2006) has found that innovations in service sector are key to
further advance in standard of life. J.Stanley extended the work of Colin Clark in which he
suggested the importance of manufacturing industry in the economic growth. Same work was
extended by J.stanley in 2005 over the tertiary sector he took data from 1988-2004. Work of
J.stanley was focused on Great Britain, other European countries, US and Japan such a study on
Pakistan has not yet been done.

Reference 2, in this journal the transformation of Pakistan Retail sector is discussed in

comparison to other neighboring countries in south East Asia. The data from 1990 to 2004 was
incorporated in the study and the study concludes that potential of Pakistan’s retail sector is far
more form where it is now. It contributes more than 20% to GDP and has the potential to go far
beyond.

Reference 3, Imran Sadiq found that saturation of retail markets in developed countries and its
potential in Asian countries are enticing large retail giants to enter in Asian markets specially in
country like Pakistan who has the retail potential expected to be $42billion. It states that
contribution of retail sector is 66% in GDP. The study uses Growth opportunities, Market
potential, Market Size, and Growing GDP. Purchasing power parity, FDI,labour availability,
improved technological infrastructure as factors to study the impact of retail sector on
economic indicators. He concluded that countries like Pakistan has a potential to grow it’s retail
sector which will help stabilize the economy.

Reference 4 Marlow Andrew (2012) in his paper suggests that modern retailing is growing
swiftly and accounting for more consumers spending. In this paper it was identified that
Unilever Pakistan’s figures approximately $35 billion equal to 17% of total GDP of Pakistan. Total
of hyper markets and supermarkets is found to be $176 million turnover. According to figures
published by Planet Retail (a global resource on retail), per capita consumer spending in
Pakistan increased by 37% between 2006 and 2011.

Reference 5 Piyabah Kongsamut,Sergio Robelo and Danyang Xie (2000) studies the changing
dynamics in economic determinants and the idea to go further beyond the balanced growth. It
stated that the changing trends in US in 1970 where employment rate in agriculture was 40%
which falls to 4% from 1970s to 2000s where in service and retail sector from 2% to nearly
about 40% from 1970s to 2000s. He uses the model Mt+Kt+BKt+PaAt+PsSt=BmF in this model
St is service trade sector and he proves that this sector has a positive influence in economic
growth and a greater impact of retail sector has now been observed in modern economic
growth that is going beyond the balanced growth to keep the economy growing.

Reference 6 Ayaz Ahmed and Henna Ahsan (2011) wrote that “the services sector has provided
steady support to Pakistan’s economic growth. It share in GDP now stands a more than 50
percent. The paper analyses its continuation in the growth of the economy in general and the
development of trade and generation of employment in particular. The study identifies the
bottlenecks in its growth and suggests measures to remove them. A set of policy reforms has
been suggested to make the sector more effective in the growth of the national economy”.

1. DATA, MODEL and HYPOTHESIS

This study consists of annual data from 1999/00-2012/13 from World Bank, Economic survey of
Pakistan, State Bank of Pakistan and Trading Economics. Time Series Data is used.

MODEL:

RS(Y) = βo+ β1Cs+ β2IMP/GDP+ β3INFL+ β4LR+ β5POP+ ε

DEPENDENT VARIABLES

Retail Sector (Y) (in millions)

INDEPENDENT VARIABLES

Consumer Spending (Cs)

Imports to GDP (IMP/GDP)
Rate of Inflation (INFL)
Lending Rates (LR)
Population (POP)

HYPOTHESIS

 Β1 Consumer Spending >0 (Positive Relationship)

 Β2 Imports >0 (Positive Relationship)
 B3 Rate of inflation >0 (Positive Relationship)
 Β4 Lending Rates <0 (Negative Relationship)
 Β5 Population >0 (Positive Relationship)

4.RESULTS

RS CS IMPTOGDP INFL LEN POP

Mean 1264372 4425000 18.01143 0.100664 11.285 149.2597

Median 1567577 3785000 16.55 0.095 12.435 160.075

Maximum 1790423 8100000 23.88 0.228 14.32 178.91

Minimum 621842 2700000 14.63 0.032 5.05 12.94

Std. Dev. 503119.1 1988079 3.17327 0.055613 2.827676 41.39185

Skewness -0.27948 1.152403 0.650871 0.692484 -0.81849 -2.76033

Kurtosis 1.172985 2.691311 2.026768 2.891812 2.65248 9.8053

Jarque-Bera 2.129409 3.154328 1.540998 1.12574 1.633615 44.79406

Probability 0.34483 0.20656 0.462782 0.569572 0.44184 0

DESCRIPTIVE STATITICS
The data of RS ranges from 621842 points to 1790423 points and its mean is 1264372 and
deviation of data from the mean is 503119.1. For CS, it ranges from 2700000 to 8100000 with
mean of 4425000 and standard deviation of 198807. Data is not normally distributed for
independent variables as well for dependent variable as probabilities of jarque-bera are very far
from 1.
CORRELATION MATRIX

RS CS IMPTOGDP INFL LEN POP

RS 1 0.707436 0.62317 0.796284 0.368222 0.627944

CS 0.707436 1 -0.02583 0.4886 0.244959 0.495751

IMPTOGDP 0.62317 -0.02583 1 0.549768 0.34884 0.221181

INFL 0.796284 0.4886 0.549768 1 0.417625 0.506918

LEN 0.368222 0.244959 0.34884 0.417625 1 -0.04263

POP 0.627944 0.495751 0.221181 0.506918 -0.04263 1

The results obtained from Correlation are in favor of the expected hypothesis i.e. RS is positively
related with CS, IMPtoGDP, INFL and POP. But our hypothesis in which RS has negative
relationship with LEN is rejected because correlation is showing positive relation. So on the
bases of correlation results, hypotheses are accepted except one.

REGRESSION MODEL

Dependent Variable: RS

Method: Least Squares

Sample: 2000 2013

Included observations: 14

Variable Coefficient Std. Error t-Statistic Prob.

C -1249237 346093.2 -3.60954 0.0069

CS 0.145224 0.02861 5.075927 0.001

IMPTOGDP 82852.51 17620.62 4.702019 0.0015

INFL 1462289 1193126 1.225595 0.2552

LEN -2838.6 17832.37 -0.159182 0.8775

POP 1765.598 1334.949 1.322595 0.2225

R-squared 0.945662 Mean dependent var 1264372

Adjusted R-squared 0.9117 S.D. dependent var 503119.1

Log likelihood -182.759 F-statistic 27.84511

Durbin-Watson stat 2.536376 Prob(F-statistic) 0.000074

Regression results are in favor of hypothesis no.1 and no. 2 because it is showing positive
significance relation between RS and CS and between RS and IMPtoGDP. Whereas sign of beta
values of other independent variables i.e. INFL, LEN and POP are also in favor of our hypothesis
but they are insignificant because they are greater than 5%. The adjusted value of R square is
91% which shows our model best explains the phenomenon.

ACTUAL FITTED GRAPH

2000000

1600000

1200000
300000
200000 800000

100000
400000
0
-100000
-200000
-300000
00 01 02 03 04 05 06 07 08 09 10 11 12 13

Residual Actual Fitted

5. CONCLUSION

In a research paper titled ‘Retail evolution: positioning for modern trade growth’, MVI (a
WPP research firm specialising in retail insight) explains that a country’s retail trade generally
modernise in one of three ways: the entry of foreign owned players in the market; the
acceleration of modern trade growth by local players or via a hybrid approach, where by both
global and local players grow in parallel lines. In the last few years, Pakistan’s retail sector has
become a compelling case study of the hybrid approach.
Although every type of business, from food to clothing to books, has evolved at the retail level,
the change has been swiftest and most apparent in terms of supermarkets/kiryana stores. On
the one hand, modern trade is on the ascendant with global chains such as Carrefour, Metro
and Makro either expanding or consolidating. In tandem with these international giants, locally
owned supermarkets and retail chains are growing in size and influence. However, at the lower
end of the spectrum, the kiryana trade, which is the backbone ofPakistan’s grocery retail trade,
is also flourishing and some sources suggest that the number of kiryana stores is growing by
two to three percent annually. Thus it is safe to say that the retail trade is finally coming of age
in Pakistan.
The study suggested that retail sector is one of the most significant sector for the growth of the
economy and certain macroeconomic variables are needed to be controlled by policy makers in
order to create a boom in wholesale and retail sector causing an automatic rise to the economy
of the country. Our results prove that rise in consumer spending causes a growth in retail sector
and hence in the economic structure of the country. Consumer spending, rate of inflation,
imports to GDP ratio and population all have positive relationship with the increase in growth of
the retail and wholesale sector. Increase in retail sector will help to eradicate unemployment
and will support the other sectors like manufacturing and agriculture providing them the
required finances and taking their products for sale to the final consumers. There exists positive
relationship between all the macro-economic factors considered, except for lending rates with
which a negative relation exists with growth of retail sector of Pakistan. Lending Rates are part
of monetary policy hence they can be used to create an impact on the growth of retail sector
keeping lending rates low will cause growth to the retail as our study suggests. Not much work
has been done by researchers on this topic and especially nothing like this exists in context to
Pakistan. As Pakistan’s retail sector is potentially very strong and growing day by day economic
policies should be made to encourage this sector in order to have a positive and greater impact
on the economy of this country. New researchers may consider a lot more economical factors
especially like power resources, govt. investments, govt. loans, institutions, exchange rate,
literacy rate, urbanization etc. which may have an impact on the retail sector and help
government and beurocrats creating such policies which will help in growth of such an
important sector. As one common thing in nearly all the developed nations is their powerful and
extremely high retail sector and policies made by them in order to flourish this sector.

REFERENCES

1. J.Stanley Metcalfe, Innovations and conditions of economic progress published in September

2006.
2. Consolidation in Retail.published in Asian journal of management sciences in 2005.
3. Imran Sadiq, Economic Impact of Retailing in Pakistan, School of business and Economics,
Proceedings of 2nd International Conference on Business Management.
4. Marlow Andrew, Supersizing of modern retail AURORA publishers (DAWN) January 2012.
5. Piyabah Kongsamut,Sergio Robelo and Danyang Xie, Beyond Balanced Growth published in
December 2000.
6. Ayaz Ahmed and Henna Ahsan, “Contribution of Services Sector in the Economy of Pakistan”,
Pakistan Institute of Development Economics, Working Papers 2011: 79.