Impact of Oil Prices Changes on Inflation, GDP Growth Rate and Exchange Rate in Pakistan

Abstract

The current document is going to explain that how oil prices fluctuations affect the macroeconomic variables in Pakistan. As Pakistan is oil importing country and its energy consumption is based on oil products, so there is high exposure to oil prices changes. Pakistan is unable to meet its energy consumption requirement and import almost 85% of crude oil. Due to increase in oil prices inflation rises, input costs increase, deficit in budget increases, tax revenue decreases, unemployment increases GDP growth declines and domestic production lowers down, whereas decrease in oil prices results in a lot of economic harmony within the country. It’s a longitudinal study in which recorded past data from 1982 to 2011was used and analyzed to find the how fluctuations in price of oil affects these macroeconomic variables. The data was analyzed using statistical tools like Augmented Dickey Fuller test and Vector auto regression model. Test conclude that increase in oil prices has positive relation with the exchange rate of oil exporting country and negative relation with the oil importing country like Pakistan. Increase in oil prices results in decrease in economic growth followed by less purchasing power, lower consumption and overall decrease in output.