Determinants of energy inflation in Pakistan: An empirical analysis

Abstract

This paper aims to identify the key determinants of energy inflation in Pakistan. The motivation of this study arises due to the on-going issues related to energy crisis and its price setting behaviour. The empirical analysis based on OLS, GLS and GMM reveal that international oil prices, money supply, bilateral exchange rate of Pak-rupee with US-dollar, tax revenue collection as ratio of manufacturing sector value added, energy import-gap ratio and adaptive expectations are critical determinants, which positively contribute to the energy inflation. The behaviour of monetary and fiscal authorities seems to be pro-cyclical in response to energy supply side bottlenecks. This pro-cyclical behaviour along with any international oil price shock put upward pressure on energy inflation. Be that as it may, the role of governance and effective long term planning to meet energy demand will be crucial in order to maintain energy inflation within a single digit level. Such stance from the government is highly desirable for the overall welfare of our country, especially for the poor segment in our society.