Charter of the Economy Imports today constitute 17 percent of the GDP. There have been times when they were above 20 percent of the GDP. Pakistan imports many basic food items like spices, tea, palm oil, pulses, and milk food. Now we are also importing large quantities of wheat and sugar. Other consumer goods include medicine, plastic products and paper and stationery. There are some intermediate and raw materials which also impact on the domestic price level. This includes crude oil, petroleum products, fertilizer, cotton, synthetic textiles, iron and steel, etc. Therefore, it is not surprising that there is a strong link between the rise in import prices and the domestic price level in Pakistan. This is shown visually in Table 1.9. The much higher rate of inflation between 2007-08 and 2011-12 is clearly due to much bigger rate of increase in import prices compared to the more recent period, when cumulatively there was no change in import prices, especially due to lower international price of oil. Table 1.9: The Average Rate of Inflation and Rate of Change in Determinants of Inflation (%) Period Rate of Inflation Rate of Change in Import Prices Rate of Monetary Expansion* Growth Rate of GDP 2007-08 to 2011-12 12.8 20.1 14.5 3.1 2011-12 to 2018-19 5.4 0.0 13.1 4.1 Difference 7.4 20.1 1.4 1.1 Source : SBP What explains the faster rate of increase in import prices? This is examined in Table 1.10. The faster rise is due to faster rise in international prices in the first period and a somewhat more rapid rate of devaluation of the rupee. In fact, the rupee remained almost nominally stable between 2013-14 and 2017-18. Also, international price of oil fell sharply in 2015-16. Table 1.10: Rate of Change in Import Prices due to Rise in International Prices and the Fall in the Value of the Rupee(%) Period Rate of Change in US$ Dollar Prices Rate of Devaluation of Rupee Rate of Change in Import Prices 2007-08 to 2011-12 5.0 7.8 12.8 2011-12 to 2018-19-0.5 5.9 5.4 Source : SBP Econometric analysis has been undertaken from 1990-91 onwards to determine the contribution of different factors to inflation in Pakistan. The results are shown in Chart 1.1. 14