Analyzing the Impact of Oil Price Shocks on the Exchange Rate Fluctuations in Pakistan

Abstract

An oil-importing country is anxious about large oil imports. Importing countries must pay enormous foreign exchanges, which can suffer from the balance of payments. The long-term economic stability of countries like Pakistan and a rise in oil prices may be impacted. With changes in oil prices, oil importers in Pakistan see their economic strength fluctuating in developing economies. Many industries are connected with oil, and they are directly linked because petroleum is a prime production source. This study found that shocks in oil prices affected by variations in demand and risk oil prices affected by variations in demand and risk significantly contribute to changes in exchange rates. In contrast, shocks in supplies have almost no impact. The link between oil pricing shocks and exchange rates has increased significantly following the global financial crisis. The results depict that oil price shocks do not explain the change in exchange rate volatility, but this study documents a significant exchange-rate volatility connection. This research investigates how oil price shock aggressively impacts exchange-rate variations in Pakistan’s economy. In this research, the method defined the connection between oil prices and currency rates. Data was collected from relevant websites from 1 January 2013 to 31 May 2021. Appropriate econometric techniques were used to achieve the research goal concerned. Finally, the research results helped the concerned stakeholders to adopt policies to balance oil shocks and changes in exchange rates in Pakistan. Subsidies on oil prices also affect the market and expenditure of the Government and tighten the deficit; therefore, oil prices must be marketed accordingly.