Impact of Oil Price Shocks on Pakistan’s Trade Balance

Abstract

This paper examines the effect of international oil price shocks on Pakistan's trade balance for the time period 1995–2024. The price volatility of petroleum products and oil prices generally is a big hurdle in the external sector stability of Pakistan which is heavily relying on petroleum products imports. The study utilizes annual time series data from the World Bank, the International Monetary Fund, the State Bank of Pakistan and the U.S. Energy Information Administration, to test both short-run and long-run relationships through the bounds testing specification; the autoregressive distributed lag (ARDL) model. The findings reveal the existence of a stable long-run cointegrating relationship among the variables. International oil price shocks exert a significant negative effect on Pakistan's trade balance in both the short and long run. Exchange rate depreciation further deteriorates the trade balance, while higher foreign exchange reserves help mitigate external vulnerabilities. The study recommends energy diversification, export expansion, prudent reserve management, and policies aimed at reducing dependence on imported oil to enhance Pakistan's external sector resilience.