Dollar Strain and Domestic Pain: Why Pakistan’s Inflation Stays Stubborn
Despite a modest easing in headline inflation, the Pakistani economy remains locked in a price spiral, driven primarily by the continued strength of the US dollar against the rupee. In April 2025, inflation dipped slightly to 0.3% from March’s 0.7%, but essential commodities remain costly, making it difficult for both federal and provincial governments to control prices.
According to economists, exchange rate depreciation is the single most critical driver of inflation in Pakistan’s current macroeconomic environment.
A Weak Rupee Makes Everything Costlier
“The rupee’s weakness against the dollar raises the cost of all imports,” said economist Osama Siddiqui. Whether it’s medicines, industrial machinery, or agricultural inputs, the cost in local currency increases sharply when the rupee drops. In the past two years, the rupee has slid from around 175 to over 280 per US dollar, drastically raising landed import costs.
Pakistan’s dependence on dollar-priced commodities, especially petroleum, adds to the burden. With around 80% of oil needs being imported, every increase in the dollar rate leads to a direct hike in fuel prices at the pump.
Fuel Prices: The Inflation Multiplier
“Petroleum is the backbone of our economy,” said transport operator Riaz Hussain. A 20% hike in diesel prices leads to higher logistics costs, which ripple through the economy. “From tomatoes to toothpaste, everything gets transported. That cost is passed directly to consumers.”
Economists estimate that fuel and transportation make up 35% of Pakistan’s Consumer Price Index (CPI). This explains why high petroleum prices quickly inflate general price levels.
Global Supply Shocks Add Fuel to the Fire
International developments have only worsened the situation. Events like Red Sea shipping disruptions have forced carriers to reroute, doubling freight charges in many cases. “These are dollar-based costs,” Siddiqui added. “When international supply chains are disrupted, import costs skyrocket — and Pakistan feels the heat more than most.”
Even items Pakistan grows locally — like wheat or pulses — become expensive due to import dependency and transportation costs inflated by high oil prices.
Capital Flight and Geopolitical Anxiety
Adding to inflationary pressures is the global financial uncertainty. Conflicts in Ukraine, Gaza, and potential US-Iran tensions, coupled with Trump-era trade policies returning, have spooked investors.
“Capital tends to flee emerging markets like Pakistan during global uncertainty,” said financial analyst Saad Mahmood. “This strengthens the US dollar and puts further pressure on our rupee.”
When investors and citizens rush to convert rupees into dollars for security, local demand spikes, further depleting dollar reserves and pushing the exchange rate even higher.
Breaking the Cycle: What Needs to Change
Economists agree that reversing dollar-driven inflation requires fundamental structural reforms:
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Boost Exports: Sectors like textiles, IT services, and agriculture must be scaled to bring in sustainable foreign exchange.
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Reduce Import Dependency: Local production of essentials like edible oils, pulses, and industrial components can reduce the pressure on dollar demand.
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Attract FDI: Stable, investor-friendly policies are essential to bring in long-term foreign capital.
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Build Reserves: Strong reserves discourage speculative attacks on the rupee and create confidence in the local currency.
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Leverage AI and Innovation: “We must not miss the global AI train,” Siddiqui warned. “Remittances are not a long-term solution. Future growth depends on innovation.”