CSS Pakistan Affairs | Depreciating Pakistani Rupee and Imported Inflation
The following question of CSS Pakistan Affairs is solved by Hunza Arshad under the supervision of Howfiv’s Pakistan Affairs and Current Affairs Coaches: Miss Iqra Ali and Sir Ammar Hashmir. She learnt how to attempt 20 marks question and essay writing from Sir Syed Kazim Ali, Pakistan’s best CSS and PMS English essay and precis teacher with the highest success rate of his students. This solved question is attempted on the pattern taught by Sir to his students, scoring the highest marks in compulsory and optional subjects for years.
Outline
1- Introduction
2- Depreciating Pakistani Rupee Contribution to imported inflation
- Global Dollar value in local invoice: Depreciation of PKR leads to appreciation of inflation
- The Exchange Rate Pass-Through Mechanism: The high value of ERPT leads to inflation at the local level
- Energy Shock: weakness of PKR led to the spike in oil landing costs
- Food Shock: depreciation of PKR drives up wholesale pricing at the port
- Cascading Logistics and Transport Costs: Rising petroleum landing costs inflate domestic shipping rates
- Exacerbation of Government Fiscal Pressure: Cut in subsidy due to the IMF’s condition
3- Critical Analysis
4- Conclusion
Answer to the Question
Introduction
In an increasingly globalized economy, the stability of a nation’s currency serves as the primary anchor for its macroeconomic equilibrium. Pakistan, which is an import-dependent economy, faces a severe hit when its currency depreciates against the US Dollar (USD). This depreciation of the Pakistani Rupee causes inflation in imported petroleum and edible oils. The primary factors that inflated imported goods due to depreciation of PKR are the bill in local invoice, the ERPT mechanism, the weakening of PKR, and expenses on agricultural goods. The secondary and tertiary factors involving the inflation of imported products transportation, which further increased the value of imported products at the local level.
Depreciating Pakistani Rupee Contribution to imported inflation
- Global Dollar value in local invoice: Depreciation of PKR leads to appreciation of inflation
When the prices of petroleum and edible oils increase or remain stagnant on a global level, and the depreciation of the local economy occurs, it automatically raises the price of the imported products in local markets. It is known that International Crude Oil and Palm Oil contractors strictly deal in USD, which instantly opens the Letter of Credit(LC) to deal with the local economy of a country. For example, Pakistan imports $1000 per metric ton of edible oil at a depreciated rate of 285USD, which costs 285000PKR, compared to just 200000PKR when the rate was lower, forcing an immediate upward price adjustment at the port of entry. Thus, the depreciation of PKR is directly affected by the foreign contractors and causes inflation of petroleum and edible oil.
- The Exchange Rate Pass-Through Mechanism: The high value of ERPT leads to inflation at the local level
The exchange rate press through mechanism is a system through which currency translation from the international to the national level is controlled. However, in Pakistan, the ERPT coefficient value is exceptionally high for critical imports already, so when PKR is devalued, the domestic price index (ERPT) absorbs the shock with a minimal time lag but creates immediate cost-push inflationary pressure at the entry level of the economy. This response of the ERPT mechanism leads to high inflation of imported oils at the domestic level, and thus inflation prevails.
- Energy Shock: weakness of PKR led to the spike in oil landing costs
Pakistan imports 70% hydrocarbons for domestic and industrial use. However, when the value of currency drops, the ex-refinery landing cost of crude oil spikes. In response, the regulatory authorities, Oil and Gas Regulatory Authority (OGRA), to protect national foreign exchange reserves and prevent massive state-backed balance of payment losses, directly pass higher costs to consumers at the fuel pump. This direct encounter with international price labels its inflation at the national level.
- Food Shock: depreciation of PKR drives up wholesale pricing at the port
Pakistan is one of the leading importers of Palm oil from Malaysia and Indonesia, which also deals in the dollar currency. So when the PKR depreciates, it automatically means the USD appreciates, and the imported goods inflate, which creates an immediate and unavoidable price spike at the port. The lack of domestic substitutes for imported essential agricultural goods forces the local market to purchase it beyond its inflationary rate.
- Cascading Logistics and Transport Costs: Rising petroleum landing costs inflate domestic shipping rates
The secondary factor of inflation of imported petroleum or edible oil due to depreciating PKR is the transmission of the fuel stock into broader distribution and freight networks. Commercial shipping, truck fleets, and freight transport depend entirely on high-speed diesel for transporting imported goods from port to local market, so when the price shoots high at the global level, the transportation route from Karachi to the inland market automatically becomes costly, which inflates the imported petroleum and edible oil price.
- Exacerbation of Government Fiscal Pressure: Cut in subsidy due to the IMF’s condition
Pakistan’s economy has been running on IMF bailouts for the last decade, which has pressured Pakistan to follow its strict conditions. In history, Pakistan subsidized fuel and essential commodities to shield the public from severe currency shock. However, under a strict fiscal consolidation agreement like the IMF’s Extended Fund Facility, the state has eliminated these buffers. This policy shift forces domestic retail prices to immediately spike to reflect full market realities.
Critical Analysis
The biggest problem is that this isn’t just a simple money issue; it’s a deep structural trap because Pakistan cannot survive without importing fuel and cooking oil, and we don’t have local alternatives to replace them. When the State Bank raises interest rates to fix this, it doesn’t actually lower global oil prices; it just makes loans expensive and hurts local businesses. At the same time, following IMF conditions means the government has to cut subsidies and let the Rupee free-fall, which instantly makes everyday items unaffordable for the common man. Because the Rupee keeps losing value, shopkeepers and wholesalers proactively raise prices before their new stock even arrives, which creates a never-ending cycle of inflation. In the end, we can’t keep relying on temporary foreign loans to fix this; the only real solution is to start growing our own oil seeds and shifting toward local solar and hydro energy.
Conclusion
In short, a falling Rupee means we are basically importing inflation directly from the global market into our everyday kitchens and fuel tanks. Until we stop relying so heavily on expensive foreign imports and fix our structural economic problems, the common man will keep paying the price every time the Dollar goes up.
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