DECLINING OIL PRICES: OPPORTUNITY TO MANAGE BOP

KANWAL SALEEM
Oct 27 - Nov 02, 2008

After sharp decline in oil prices in the international market, economic managers in Pakistan has shown a sigh of relief but increasing trade deficit, high import bill, depleting foreign exchange reserves, depleting foreign exchange reserves, aggravating load shedding crises and tumbling state of economy are posing manifold challenges asking for immediate remedial measures to stabilise the national economy.

Prevailing international economic turmoil will also have an impact on Pakistan economy as well but at the same time there are positive signs for Pakistan with reduction in oil prices that according to international experts are likely to stabilise somewhere in $70 per barrel. The declining oil prices as well as remittances could help Pakistan manage its balance of payments to some extent.

World oil prices fell sharply on Tuesday on profit taking, after recent gains made in the expectation that the OPEC crude producers' cartel will cut output later this week. London's Brent North Sea crude for December delivery fell $2.62 to $69.41 a barrel. New York's main contract, light sweet crude for delivery in November, tumbled $2.75 to $71.50 per barrel. The contract was to expire at the close.

"Oil futures were lower, coming off after Monday's gains on some profit-taking and amid persistent concerns over slowing demand for energy due to the cooling global economy, especially with waning demand in the US and China," said Sucden analyst. "However, these losses were limited as market participants widely expect OPEC to reduce its output quota later on this week".

With a view to bolstering the country's foreign exchange reserves, the government has already decided to keep reserves of petroleum products for 10 days instead of 21 to reduce the outflow of dollars. Although it was mandatory to maintain oil reserves for 21 days, the decision was taken to help the government save dollars and channel them into foreign exchange reserves, sources told PAGE.

According to these sources, the government, in its bid to discourage the outflow of dollars, has also rejected a proposal of oil marketing companies to allow them to import oil on their own. The government has already withdrawn subsidy given on petroleum products. Before the decline in crude prices, the government was paying a subsidy of Rs8.21 per litre on kerosene, Rs7.41 on light diesel oil and Rs6.42 per litre on high-speed diesel.

According to the ministry of petroleum, the government has to pay over Rs40 billion to oil marketing companies and refineries on account of price differential claims (subsidy). The outstanding amount could only be paid through earnings in the wake of decline in crude oil prices in the international market. The ministry has suggested to the ECC to empower Ogra to start monitoring the prices of furnace oil. Ogra has also shown interest in regulating the prices of furnace oil, but so far it is dependent on the flow in open market, the sources said.

While the response from Saudi Arabia for an oil credit facility is still awaited, "Friends of Pakistan" and IFIs, except the Asian Development Bank, have made no concrete commitments for disbursements so far. On the other hand, Pakistan is engaged in the process of talks with the IMF and other donors for over a $10-$15 billion package for avoiding a balance of payment crisis and stabilising its economy. Pakistan has also requested Iran to provide crude oil on deferred payment to ease the current account position of the country. The only saving grace is a substantial decline in international oil prices that would reduce the import bill and provide some relief to the economy, however, other factors of the Pak economy continue to be distressing.

According to the latest data released by the Federal Bureau of Statistics (FBS), Pakistan's trade deficit during July-September, 2008, has swelled to a record level of 5.549 billion dollars, registering a huge increase of 52.65 percent from 3.635 billion dollars during the corresponding period last year. The deterioration resulted from a much larger increase in imports than exports. While imports climbed by 34.29 percent from 8.056 billion dollars to 10.818 billion dollars, exports grew by 19.10 percent from 4.42 billion dollars to 5.269 billion dollars during the first quarter of 2008-09.

The trend during the latest month was particularly alarming. At 2.027 billion dollars, trade deficit in September 2008 was higher by 62.13 percent than 1.25 billion dollars in the same period last year. Pakistan's imports during the month stood at 3.80 billion dollars as against the exports of merely 1.77 billion dollars. The ballooning of the trade deficit to an unprecedented level during the first quarter of the current year, needless to say, is highly disturbing and should be a warning signal for the economic managers of the country to do something urgently to correct the course in the external sector. At the present rate, the all time high trade deficit of 20 billion dollars recorded in the previous year would easily be surpassed during 2008-09, posing enormous difficulties for the management of the economy.

Already, the foreign exchange reserves of the country are down to a level enough to finance only a few weeks of imports and the rupee is at a record low in the exchange market. With rumours of a default circulating in the market, businessmen and ordinary people are almost panic stricken and investors are losing confidence despite repeated assurances of the State Bank and the Government about the resilience and solvency of the economy.

The government had imposed additional customs duty on more than 370 items and LC margins were raised to 100 percent to curtail the flow of imports in a bid to reduce the trade deficit, but its impact is yet to be seen.

Clearly, the government needs to do much more to contain the trade deficit within manageable limits by adopting highly restrictive policies because the country cannot afford to continue with the existing level of imports which are more than double value of its exports.

Keeping in view the critical position of the balance of payments, authorities need to make efforts to attract foreign flows from different sources. Although, the government has said it would seek the IMF money only as a last resort if it cannot secure some US$5 billion it needs from governments or multilateral agencies it appears that only the donor agencies will come forward to help the country's economy.

Many analysts believe Pakistan is facing soaring inflation, a plunging currency and chronic power outages, hence it needs to take appropriate steps to check flow of foreign remittances through illegal channels to get optimum benefits of the expats hard earned money with annual inflow of more than $9 billion.

They described "Hundi and Hawala system" as a major hurdle in foreign remittances through legal banking channel and said Pakistan can get annually US$9 billion provided it takes measures to break the illegal channel, which has been causing enormous damage to foreign exchange reserves. The legal transmission of foreign remittances by overseas Pakistanis could be a ray of hope for economy in the prevailing economic situation, they believe.