Graph theoretic approach to expose the energy-induced crisis in Pakistan

Pakistan is an energy-deficient country and relies heavily on imported fossil fuels despite significant potential for it to instead develop renewable energy resources. This paper employs a newly developed causality determination scheme known as the Graph Theoretic Approach (GTA), which is based on the modified Peter and Clark algorithm. In this study the energy-inflation causal nexus has been investigated using real time-series data covering the past 30 years (1990–2019) based on nine key variables of the economy, i.e., inflation rate, oil prices, interest rate, money supply, GDP, exchange rate, unit value of import, unit value of export and output shortfalls. Results show that causality runs from energy prices and interest rate to inflation, suggesting that energy prices and interest rate are positively associated with inflation. Moreover, both energy prices and monetary policy have cost-side effects on inflation; however, the latter becomes counterproductive whenever a high interest rate is used to curtail energy-push-inflation. It is concluded that, an increased dependence on imported fossil fuels causes energy-push-inflation. Therefore, policymakers need to incorporate much more renewable energy resources in the fuel mix so that heavy energy import bills can be avoided in the long-run, thereby controlling the cost-side channel of inflation.