When oil prices rise, Pakistan’s trade deficit increases. It creates a negative domino effect where high oil prices translate to higher fuel prices, resulting in inflation that results in a higher monetary policy rate, which depresses domestic production and, hence, exports, further exacerbating the trade deficit.
However, oil prices are not the only culprit. Pakistan’s excessive consumerism, combined with a depreciating rupee, puts upward pressure on the import bill.
Electronics and vehicles push the import bill up, but so does the increase in domestic production in terms of imported inputs, machinery, and other capital goods. This is why, in the initial stages of the China-Pakistan Economic Corridor, the import bill shot up due to imports for investments in infrastructure.
In Pakistan’s case, the negative domino effect depreciates the rupee. Since Pakistan does not have the quantum of exports to counterbalance the sharp rise in the import bill when oil prices rise, the rupee depreciates, further making imports more expensive in terms of domestic currency.
The volatility of oil prices, despite the world moving increasingly towards renewable energy and electric mobility, impacts all countries.
But Pakistan is like a cancer patient with weak immunity. All forms of external shocks, of which oil prices are among the most common, exacerbate underlying issues.
Published in Dawn, The Business and Finance Weekly, May 6th, 2024
