PKR Depreciation & Inflation
Depreciation of PKR can lead to domestic price inflation (in the absence of price relief policies) even without changes in the dollar price of commodities in the global market.
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Since 2021, both exchange rate fluctuations and the global rise in commodity prices have had a much smaller impact on the domestic prices of four commodities in Pakistan (wheat, fuel, edible oil, and sugar), while price controls/relief policies have played a major role.
A recent report by the World Bank has revealed how there was a rapid rise in global commodity prices of a few commodities like wheat, fuel, edible oil, and sugar since mid-2021, while the domestic price inflation fell below the global price inflation for the same goods, despite the sizable depreciation of the local currencies since late 2021 in the South Asian region and Pakistan in particular where the exchange rate has been more volatile compared to other countries.
The falling domestic food and fuel inflation was a consequence of price relief policies. The subsequent removal of those measures in May-June raised domestic price inflation as global inflation was moderating. However, the report suggested that subsidies only dampen the impact of global price fluctuations on domestic markets for a short period of time, while they also distort local prices and lead to an increased burden on the government.
According to the report, cash transfers or income support that direct resources toward vulnerable households may be a more efficient policy choice for a country like Pakistan.
GRAPHICS OF THE DAY
The domestic price inflation (in LCU - Local Currency Unit) was higher than the inflation in the global market (in USD), before mid-2020 for edible oil and before 2021 for diesel (fuel) and sugar. That coincided with a period of depreciation of the PKR against the USD, which contributed to higher domestic inflation. The same relationship between the domestic and global price inflation for wheat was visible during 2019-2020, but not pre-2019, likely due to price controls on domestic wheat prices in the earlier period.
Exchange rate movements and pass-through of global commodity prices in Pakistan
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Remittances September 2022 — www.instagram.com
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