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Global oil surge may bring nasty appearance on Pakistan’s economy

Country may also face rising external financing needs

The surge in international oil price would leave a negative impact on our economy, as the anticipated price rise will increase the import bill and add pressure on foreign exchange reserves. This may push authorities to revise the electricity tariff upwards under fuel price adjustment.

The upward trend in oil price globally is all set to add its impact on the already widening twin deficits (trade and current account), as every $10 per barrel rise in international oil prices increases Pakistan’s import bill by $1.25 to $1.5 billion per year.

Oil prices are always debatable and remain an important variable in determining the economic activity of any country. The size of oil prices increase depends on the i) share of the cost of oil in overall GDP, ii) the degree of dependence on oil (total value of import oil) and iii) consumption of oil domestically, and iv) dependence on alternative sources of fuel.

It was already projected and estimated globally that the oil demand is expected to increase ninety eight million barrels/ day in next four year (2017) and 118 million barrels/day during next twenty years (in 2030). The time of cheap availability of all kinds of fuel has gone because of fast increase in population, which ultimately increase the demand for energy domestically and national and overall worldwide.

Economists foresaw that crude oil (Brent) price may rise to $60 per barrel by June and July this year. Prices had hit a record high of $147 per barrel just before the financial crisis gripped world economies in 2007-08 and touched the bottom of $32 per barrel earlier.

Macroeconomic concerns are paramount, but there are also microeconomic ones. Lower fuel subsidies in some oil-producing countries, aimed at plugging budget deficits, are encouraging car owners to drive less miles.

The government has two options to deal with the challenge emerging with rising oil prices. One is to reduce tax rates on petroleum products to keep prices at current levels in retail. Second is that it may pass the price increase on to end-consumers.

Economists said the surge in petroleum product prices would take prices of all other commodities up along with it. This will add inflationary pressure in the economy. They also said that Pakistan has missed the opportunity of reviving its ailing industries, as it did not pass on the impact of steep decline in international oil prices when they were hovering at sharply lower levels.

The price of fuel has tendency to increase further till the demand growth is curbed and new technologies are introduced which reduces dependency on oil.

In Pakistan, the justification for this increase is given by Oil and Gas Regulatory Authority (OGRA) on various grounds. Huge rise in world oil price shifted the burden to the consumers as government is already running severe losses and equally shifted this burden to households. Also consumption of kerosene oil, diesel oil and petroleum products at household level also increase. OGRA also justifies to shift this burden to household to some extent which disturb their food budget also.

Financial experts told PAGE that Pakistan is a net oil importer and meets about 75% of needs through imports. Oil imports carry the heaviest weight in total imports of the country. Oil payments – which had been declining for the eight consecutive quarters – reversed trend in the second quarter of FY17 and tacked onto an already elevated non-oil bill. Resultantly, the quarterly current account deficit rose to $2.2 billion in 2QFY17, bringing the cumulative deficit for first half to $3.5 billion. According to them, imports of all fuel oil products, particularly high-speed diesel and petrol, have shown significant growth this year, indicating a strong transport sector activity. This has come with a hefty increase in imports of buses and heavy commercial vehicles. Similarly, increase in power generation from furnace oil in 1HFY17 led to higher imports of the fuel.

As per data, the rise in imports is mainly driven by power generation machinery – a strong pick-up in fixed income loans by the power sector was also noted in 1HFY17. These trends support our view of higher infrastructure development-led economic growth and active energy management in the country.

According to the Pakistan Bureau of Statistics, Pakistan imported oil worth $6.68 billion in the first eight months of the current fiscal year, which was 20% of the total import bill. A sizable increase in import payments in the first half of FY17, alongside non-receipt of the Coalition Support Fund (reimbursement of the cost of war on terror) and a fall in exports and remittances led to a significant widening in the current account deficit.

The rise in overall import payments was mainly driven by higher purchases of fuel and capital equipment. This is understandable given that Pakistan is transitioning from a low-growth to higher growth phase, and is addressing supply-side bottlenecks in energy and infrastructure. This indicates a strong positive impact on broader economic activities, analysts said.

In case of exports, the recovery in international cotton prices has yet to translate into higher unit values for Pakistan’s high value-added textile exports. However, on an encouraging note, exports of high value-added textile products, like readymade garments and bed wear, have risen in the first half. This increase has been entirely driven by higher quantum, indicating that these Pakistani products are in demand in key export markets.

In the coming years, Pakistan will also face rising external financing needs — these cannot be met by the current inflow of dollars from exports and remittances.

According to IMF data, the country will require over $13 billion a year from 2017 to 2020. This estimate does not take into account the depletion of foreign currency reserves that could occur under the scenario highlighted above. Given this reality, one can expect that Pakistan will struggle to meet its external financing needs and could find itself back in the arms of the IMF.

The economic managers of the country would have to focus on adverse impact of raising oil prices and declining exports. If proper planning is made, negative impacts could be minimized.

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