“In its H1-FY24 State of Pakistan’s Economy Report, the State Bank of Pakistan acknowledged its lack of understanding regarding how the depreciation of the Pakistani Rupee (PKR) affects inflation in the country.
The SBP referenced a survey indicating that exchange rate depreciation has a greater impact on firms’ price-setting behavior than domestic demand strength, rising financing costs, or declining labor productivity. While the exchange rate significantly affects inflation, particularly in the short to medium term, previous studies have often found the pass-through of exchange rate depreciation to be either minimal or inadequately established, as explained by the regulator.
The SBP highlighted previous surveys indicating no significant relationship between exchange rate changes and domestic prices. Additionally, one study found no long-term correlation between the exchange rate and inflation from 1980 to 2009.
The SBP also observed instances where the pass-through effect of exchange rate depreciation on consumer price inflation was low, despite a stronger impact on the wholesale price index (WPI), particularly in fuel, lighting, and manufacturers’ baskets.
Furthermore, although there was a historical period where the SBP identified a pass-through effect on domestic prices from exchange rate depreciation, the magnitude of this effect was deemed statistically insignificant by the bank.
In examining the period from 1982 to 2001, the SBP noted that the Consumer Price Index exhibited nearly zero response to exchange rate shocks for up to 10 quarters. These findings challenge common perceptions, as exchange rate depreciation typically influences prices through both direct and indirect channels, encompassing the prices of imported finished goods and raw materials for domestic production.
