Capturing the Climatic Effects of El Nino and La Nina on the Economy of Pakistan

Abstract

El Niño and La Niña cause changes in the sea surface temperatures in the Pacific Ocean. These temperature changes in turn cause weather anomalies globally, which once triggered, can last up to a year or more and leave significant economic implications on developing countries. El Niño Southern Oscillation (ENSO) has brought some of the greatest human disasters in the world in the form of droughts and floods. It has been estimated that ENSO accounts for about 10 to 20 percent variation in world GDP growth and consumer price indices. While previous studies have not focused on Pakistan, the current study attempts to capture the climatic effects of ENSO Index (called SOI) on Consumer Price Index (CPI) and GDP Growth rate of Pakistan for 54 years between 1961 and 2015, using graphs, correlation and Granger Causality approach. The results establish a positive relationship between SOI and CPI which mean that La Niña (rainy) episode tends to cause a general rise in commodity prices in Pakistan, primarily because of cost-push inflation. The results further depict a weak negative relationship between SOI and GDP growth rate, which means that the La Niña (rainy) episode causes a negative effect on the GDP of Pakistan. The changes in CPI and GDP are caused due to contraction in aggregate supply due to La Niña (rainy) episode. The results call for the inclusion of ENSO as a variable in planning phase leading to climatically compatible policies. Pakistan has not been able to take advantage of favorable rainy La Niña episodes because of incompatible agricultural policy and infrastructure. Based on the results, we can, to some extent, forecast and mitigate the economic effects of climatic fluctuations in Pakistan by including ENSO index as a variable in the policy framework.