Economic setback to the developing economies

Oct 18 - 24, 2004

The crude oil prices have shown a record rise in the last few months rendering the oil importing and developing countries to face the serious fall out and economic setbacks.

Crude oil prices have jumped about $20 a barrel, or 60 percent, so far this year. Oil prices closed at a record for the third straight session on news of a strike in Nigeria and concerns over low winter heating fuel supplies on Thursday, 7th of October. US light crude for November delivery briefly touched $53 a barrel in early trading, and then fell back to settle at $52.67 at the New York Mercantile Exchange, up 65 cents from Wednesday's record close.

This continuous rise in the price of crude oil is posing serious threats not only to the under developed countries but on a global level. The experts are busy these days to analyze the after effects of this massive oil price increase in their respective economies and are all finding that the effects are going to be long lasting. David Robinson, the Deputy Research Director at the International Monetary Fund, commented that tight oil supplies could leave the global economy vulnerable for years to come. One of the intermediate and visible effects of this price rise is that oil is taking money out of the pockets of consumers that could be spent elsewhere, increasing the cost of doing business and the amount of foreign exchange dollars that need to be funneled overseas. Taking advantage from the situation, the speculators are pushing prices up on fears about Iraq, Russia, Nigeria and the thing is, those fears never materialized.

Pakistan's economy like all other world economies has started to sense the effects of this upward ride of oil lately. First of all, a big rise in oil prices in the international markets has increased Pakistan's petroleum import bill for July-August 2004 by more than 35 per cent, making it the largest component of the country's overall import bill. Data released by the Federal Bureau of Statistics show that Pakistan had to pay around $639.2 million on imports of about 2.516 million tons of petroleum crude and petroleum products during July-August 2004. In the same period last year, the country had spent $472 million on import of about 2.267 million tons of petroleum crude and its by-products. So, whereas the oil import bill rose by more than 35 per cent, the increase in imported quantity was only 11 per cent. This indicates that record-high oil prices in July-August in the international market have started taking their toll on Pakistan's import bill.

On the other hand, the federal government is also estimated to suffer a loss of around $1 billion by the end of current fiscal due to rising world oil prices. This is mainly due to the fact that the federal government does not want to shift this increasing effect on the general public and is therefore absorbing $70 million to $80 million loss on a monthly basis. As a matter of fact, the total loss of absorbing international oil prices is higher than the actual income of the petroleum development levy; the government was receiving from oil imports. According to the experts, the shift of this oil price increase towards the general public will itself result in serious economic consequences and will disturb the key economic indicators in 2004-05. According to them it will build a path for general price rise resulting in an increase in inflation and further depreciation of the national currency. This will ultimately give rise to growing concern of the international bodies if inflation figure rise while the depreciation of rupee will make the imports costlier putting further pressure on country's balance of payments and put extra burden on the rupee-denominated foreign debt.

The government is already facing a rising trade deficit which has expanded further to $839 million in July-September 2004, as compared to deficit of $788 million in July-August this year. Only in September, the rupee has lost more than 1.9 per cent value against the dollar as the trade deficit totaled $839 million. Senior bankers say the gap between trade-related inflow and outflow of foreign exchange continues to widen during the current month, which suggests that the trade deficit for October will be even higher and the rupee will weaken further unless the SBP supports it. With oil prices going up and putting demand pressure in the inter-bank market, rupee will definitely depreciate which in turn would ultimately make overall imports expensive and widen the trade deficit beyond $4 billion in this fiscal.

The rupee which is already under tremendous pressure mainly because of increased oil prices as the importers are paying more in terms of their outstanding payments. Bankers said high international crude prices also affected the inter-bank market payments as oil companies had to pay around $7 to $8 per barrel more which has been one of the major reasons for rapid rupee fall in the inter-bank market these days. According to an expert opinion, the dollar-rupee parity could expand close to Rs 61 in case the government give up subsidy on the oil imports. The official has further pointed out that the foreign exchange reserves of the country would also remain under pressure mainly because of rising oil prices and import of wheat to meet the shortfall.

With respect to inflation figure, the SBP has a very clear stance; it does not want to put pressure on it while raising the domestic oil prices means rising general prices and thus the inflation. The SBP has signaled that it may act aggressively to check the rising inflation every time by taking certain measures. The State Bank signaled that it would not mind increasing the interest rates aggressively if inflation continued to rise at an undesirably high pace. The central bank did so by raising the weighted average yield on six-month treasury bills by 38 basis points to three per cent. The central bank increased the average yield on the six-month paper from 2.62 per cent to three per cent and managed to sell Rs1.1 billion worth of bills at this rate. The fact that this is the biggest rise in T-bills rate after a long time and that it has been made to give a direction to the market and not just to borrow funds makes it clear that the SBP is stepping up efforts to check inflation.