DECLINE IN OIL PRIES EASING INFLATIONARY PRESSURES

INTEREST RATES TOO TO COME DOWN

AMANULLAH BASHAR
Dec 29 - Jan 04, 2009

Sensitive Price Index (SPI), the leading price indicator, which had peaked at 34% at one point of time during 2008, has dipped to the 25% level last month signaling a sharp decline in headline inflation in months to come, which is of course a good sign for the inflation hit people from average income groups.
It is interesting to note that the inflationary pressure is defusing because of the reduction of retail oil prices. Nonetheless that despite 70 percent drop in international oil pries government has reduced retail petroleum product prices by only 19% and 31% only. Further cut in retail oil prices is bound to have an extremely positive impact on providing relief to the people from the mounting inflationary pressures and erosion in buying powers of the rupee.
In fact what the reduction in oil prices has done could not have been achieved by the State Bank by increasing the interest rate as an effective tool to control the inflationary pressures for the last one and half year.
Informed sources disclosed the members of the committee constituted by the government for revival of the economy have strongly suggested for a cut in interest rate to further ease the inflationary pressures as did in other countries in the region. The basic Idea to reduce interest rates is to ignite a spark in the almost stagnant economic activity in the country due to higher cost of financing which is feared to hit the export oriented industries to meet the export target of $22 billion this year.
Sources further indicated about the possibility of further reduction in retail petroleum product prices soon, which currently incorporate 40-60% government taxes. This can further reduce inflationary pressure, they said with confidence.
Alongside the oil price decline by 70% from its peak the external account features are changing rapidly with steep decline in crude oil prices suggesting that the current account deficit could shrink to US$8.42billion compared to US$14. bn recorded in the financial year 2008.
The analysts were of the view that commodity price meltdown coupled with US$7.6 billion IMF standby facility will shield Pakistan from internal financial squeeze and recession in coming months.
However, Tanvir Ahmed Sheikh, President FPCCI while commenting on the overall economic situation especially the export trends during 2008 has said, “We cannot afford to be less competitive than that of our competitors like India and China. Pakistan shares borders with Afghanistan, China, India and Iran which have big potential markets and need to be tapped for further enhancing exports from Pakistan. He strongly urged the government continuation of R&D incentives for the textile industry with a view to boost exports. It may be noted that R&D allowance facility was expired on June 30, 2008.
Expressing his concerns over shortage of energy and its price determination mechanism, Tanvir remarked that both of these factors ultimately increase the cost of locally manufactured products. This higher cost of production is affecting the competitiveness of Pakistan products in the international as well as local markets.
He said that FPCCI strongly recommends for focusing on wind and solar resources for energy production which are capital intensive and depend on foreign technology and skilled labor. The foreign investors have shown readiness to provide supplier credit for the plant and equipment as well as foreign equity and debut. Nevertheless we should prefer use of indigenous resources such as Thar coal and generation of Hydel electricity which is cheaper as compared to solar one. The load shedding of electricity and gas has adversely affected not only the production but the quality of products. In fact the unannounced electricity load shedding spoils the quality of the work in process. The situation has affected the capability of the industries to repay the long term loans.

AGRICULTURE

Pakistan is predominantly agriculture based economy. Unfortunately, least attention has been paid for the development of potentially rich agriculture sector and for setting up agro-based industries. Consequently today Pakistan has to import wheat, oil seeds, vegetables and even live stock. It is a matter of concern that this highly labor intensive sector is being ignored and billions of rupees are spent on import of foodstuff. With global trend of commodity prices and given the country’s rich and diverse landscape, Pakistan has good potential to serve the Middle East countries and exploit export potential of its agro-based sector. Renewed efforts are needed to improve yield of major crops by intensifying research and extending application of right type of seed and other inputs and mechanization of farming.

INDUSTRY

First and foremost is the law and order situation in the country. Due to bad law and order situation and strife between super powers and the wave of terrorism across the globe has severally affected the both developed and developing economies. This is a serious issue and need to be tackled as a first priority as without stable environment neither local nor foreign investment can be attracted and convinced to investment in new projects.

MARKUP RATE

As done by other countries including neighboring India, Pakistan will have to reduce cost of doing business by reducing mark up rate. The recent turmoil in the international financial market has forced the countries whether developed or developing to reduce rate of interest. At odd central bank in Pakistan has increased it without having a look at the slowing down economic activity due to high cost of financing.

OUTLOOK

Pakistan has strong economic growth potential given the country’s inherent dynamics. Restoration of macroeconomic sustainability should be on the top of the government economic agenda. Domestic resource mobilization, improved debt management and attractive investment incentives, a check on deteriorating law and order situation are the areas where sincere efforts are needed for improvement. People were attaching great hopes with the democratic government for a relief yet it seems that bureaucratic style continues to prevail as the benefit of 70 percent decline in international oil prices has not been passed on so far despite the fact that our energy prices are linked with international prices.