ANALYZING THE IMPACT OF THE WORLD OIL PRICE ON INFLATION AND GROWTH IN PAKISTAN

Abstract

This research investigates the dynamic relationship between the global oil prices with other macroeconomic factors including GDP growth, inflation rates, exchange rates, and stock market returns in Pakistan. The research analyses the impacts of oil price shocks with quarterly data ranging from 2000Q1 to 2023Q4, and the Structural Vector Autoregressive (SVAR) model is used. This contribution establishes that an expansion in the price of oil poses a major challenge to GDP growth due to increased cost of production and consequently decreased output. The inflationary pressure further expands because of cost pull factors while fluctuation in the foreign exchange expands the pressure due to high import cost. Variance decomposition also explains the importance of exchange rate volatility for GDP and inflation. The study confirms Pakistan’s position as a net oil importer, a situation that makes consumption prices vulnerable to changes in prices in the international market for economic shocks. Measures under policy recommendations include diversification in energy sources, a strong and stable control of the exchange rates and sound monetary as well as fiscal policies which will help to cushion for the shocks in oil prices and therefore foster development in sustainable economic growth.

Key Words: Macroeconomics, GDP growth, Inflation, Exchange rate, Stock price, Oil price