Oil Prices and Balance of Payments: A Quarterly Data Analysis of Pakistan

Abstract

Aim of the Study: The import of oil is a major component of the trade balance. Therefore, an increase in crude oil prices deteriorates the current account balance. The objective of this study is to analyze the impact of oil price on balance of payment in case of Pakistan.

Methodology: Secondary data on quarterly basis is collected covering the period from 2000Q1-2021Q4. The balance of payment is taken as the dependent variable, while explanatory variable is oil prices controlling with gross domestic product, inflation, and exchange rate. Autoregressive distributive lag model (ARDL) model is applied for empirical examination.

Findings: The empirical evidence provided the negative and significant relationship between oil prices and balance of payment in Pakistan. The study investigated that a rise in crude oil prices is responsible for deterioration in the balance of payment due to the high dependency on the imports of oil, which increases the import bill and negatively affects the trade balance.

Conclusion:  Increasing oil prices deteriorates the balance of payments in short run as well as in the long run in Pakistan. To minimize import dependency, it is essential to strengthen the balance of payment components through value-added exports and import substitution industries. The valuable insights for policymakers are suggested on managing the economic implications of oil prices on the balance of payment of Pakistan.