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Outlook dim for remittances and inflation rate as oil rallies

Gov quarters and private sector must jointly find out a methodology for increasing the exports to control trade deficit: LCCI chief

With increasing oil prices in the international market, two of the major areas where the impact of rising oil prices will deeply be felt are remittances and inflation measured by the Consumer Price Index (CPI). Going by conventional wisdom, a surge in global oil prices will increase the rate of inflation in Pakistan that has remained subdued since October 2014.

Analysts are of the view that it was too early to say how much the rising oil prices will affect inflation and remittances growth. With oil prices increasing rapidly, it is hard not to wonder what has caused it and just what effect it might have on the rest of the economy. Let me begin by discussing the evolution of oil prices over time, they said. It is likely that both increases in demand and fears of supply disruptions have exerted upward pressure on oil prices. Global demand for oil has been increasing, outpacing any gains in oil production and excess capacity.

As far as the implications of higher oil prices, there are both microeconomic and macroeconomic answers to that question. As a consumer, you may already understand the microeconomic implications of higher oil prices. When observing higher oil prices, most of us are likely to think about the price of gasoline as well, since gasoline purchases are necessary for most households.

When gasoline prices increase, a larger share of households’ budgets is likely to be spent on it, which leaves less to spend on other goods and services, analysts said, adding: “Oil price increases can also stifle the growth of the economy through their effect on the supply and demand for goods other than oil. Increases in oil prices can depress the supply of other goods because they increase the costs of producing. In economics terminology, high oil prices can shift up the supply curve for the goods and services for which oil is an input.”

Studies find evidence that the link between oil prices and the macro-economy has indeed deteriorated over time.

Despite having bilateral and multilateral trade agreements with many countries, best merchandise and a lot of raw material for value addition, declining exports and swallowing trade deficit call for policy shift and a well-tailored strategy to tackle those factors that are contributing heavily to these economic ills, according to the Lahore Chamber of Commerce and Industry (LCCI) President while talking to this scribe.

As per available data, Pakistan’s exports remained lower during the financial year 2015-16 and showed 12.1 percent decline with $20.81 billion as compared to $23.66 billion in the previous year. Likewise, country’s trade deficit was $26.1 billion in November 2016 as compared to $23 billion a year ago.

 

CONSISTENT TRADE DEFICIT

According to the LCCI President, continuous decline in exports and widening trade deficit are big concerns at the moment and needed immediate attention of the policy makers. China, Saudi Arabia, United States, India, Kuwait, Malaysia, Japan, Afghanistan, European Union and United Arab Emirates are the mentionable trade partners of Pakistan, which shows poor efforts for finding out new markets for Pakistani merchandise.

He said that Pakistan has been running consistent trade deficit because of various reasons including dependence on a few countries and on a few products for exports, undue imports and lack of interest to find out new destinations for Pakistani merchandise. He suggested that the government quarters should join heads with the private sector for finding out a methodology for increasing the exports of the country that is a prerequisite to control trade deficit. Apart from cutting the cost of doing business in Pakistan, the government would have to evolve a long-term strategy to make its products attractive in the global market to increase its exports. He said that there is a dire need of diplomacy to get due share for Pakistani products in the international market.

Experts said the oil is one of the most important factors which affect the economy of the world that’s why any variation in the oil prices brings a rapid change in all others macro-economic variables. Increase in fuel prices has a serious impact on major economic variables like inflation rate, exchange rate, poverty, unemployment, they said.

A rapid increase in oil price enhances the earning of exporting country, which further increases the national income of the country. The increase in financial reserve helps maintain balance of payment. On the other hand importer countries face a direct effect of income loss by paying huge amount of oil. Importer countries transfer the burden of heavy amount to the general public in shape of increase in oil prices. In case of Pakistan, current account deficit would increase with increasing oil prices.

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