FOZIA ISHAQUE (fozia.ishaque@hotmail.com)
Oct 27 - Nov 02, 2008

Oil price shocks affect the economy through the supply side due to higher production costs, reallocation of resources and also through the demand side by income effects, uncertainties and the terms of trade. World oil prices have stooped under $88 per barrel after touching record highs and leaving its ruthless impact on the economic scene. The price dived from record heights struck earlier this year amid fears of a global slowdown in energy demand. The oil prices in the world market have dropped from 147 dollars to 88 dollars per barrel showing an overall decrease of 39%.

In Pakistan the falling foreign exchange reserves have created immediate problem of oil import. The State Bank has issued latest figure of foreign exchange reserves which fell to $7.32 billion, including $4.036 billion of the State Bank. Despite fall of oil prices which reached $86 per barrel from $147 per barrel just six months before, oil import bill is unbearable for the State Bank which pays dollars for oil imports. Over 60% foreign exchange reserves of the country have evaporated in just one year, while outflows still continue, creating desperation among the businessmen, worried at the economic future of Pakistan. The government has approached International Monetary Fund to avoid default. The default is disastrous for both the country and the economy. Default would destroy image of the country and Pakistanis would not be able to trade with the world. If the government defaults, banks will not open L/Cs of Pakistani importers and even exporters, which will eventually cripple economy.

Pakistan's oil import bill is likely to squeeze by over 2 billion dollars in financial year 2008-09 because of a sharp drop in international oil prices in this fiscal year. In fiscal year 2007-08, the average OPEC crude oil prices remained at 108 dollars per barrel while the prices have now declined to 86 dollars/barrel, showing 20% relief in prices. It is expected that if the OPEC crude oil prices remain pegged to the range of 85 dollars per barrel in 2008-09 it would cut back the oil import by over 2 billion dollars. In 2007-08 the fuel oil import bill mounted to 11 billion dollars record high mark. But on account of stooping oil prices in 2008-09 the fuel oil import bill is estimated to remain below 9 billion dollars. Economic experts are projecting that sharp plunge in international oil prices would also improve the fiscal outlook of the country, dipping down the size of the current account and trade deficits which grew to 2.572 billion dollars and 3.522 billion dollars respectively, showing 47% increase during July-August 2008. In addition Pakistan's oil import bill rose to 1.406 billion dollars during August 2008 from 586.6 million dollars in the corresponding month of last year, witnessing surge in oil import prices both in Arabian Light Crude and frequently hike in crude oil prices in western countries during the period under review.

As a matter of fact if the current drift in international oil prices persists in the medium run, Pakistan can be better off by trimming the imports bill and shrinking the trade deficit in the current financial year by around 2 billion dollars.

Economic experts are of the view that due to slowdown in global oil and food prices growing cost-driven inflation can be scaled down by the second quarter of the current financial year. The CPI during August 2008 showed a record increase of 25.33% over the same month of previous year. The international oil prices hit the highest benchmark of 144.37 (OPEC crude) and 147 dollars per barrel for crude oil in western countries but then nosedived to around 87 dollars per barrel. This healthy decline in crude oil is likely to alleviate the quantum of the import bill this year. In an attempt to match plunge in OPEC oil import prices, the domestic petroleum products prices (petrol) have come down by Rs 5 to Rs 81.75 paisas and diesel hiked by Rs 3.50 to Rs 68. Government has also vowed that it would not announce any further increase in the prices of petroleum products if the oil prices in the international market would not go up. The government has abolished almost all the subsidies on petroleum products including diesel oil prices likely to cut down further by the next few days.

Despite probable reduction in current account and trade deficit on account of shrunk import bill, the overall economic condition of the country is dwindling badly as the risk of default is hovering around. The government's attempt to get oil facility from Saudi Arabia and Iran seems to have failed which finally forced it to contact the IMF as the lender of the last resort. IMF will give bitter pills but still gives chance to survive and revive. It is pertinent to relate that by now Pakistan entered into 9 different agreements with the IMF during the period 1988-2000. However except for the last stand-by arrangement (SBA), most other arrangements were not fully implemented and consequently almost half of the agreed amount remained unmet. However, last SBA in early days of Musharraf government bitterly hit economic growth with a good result of lowering of inflation and budgetary deficit.


Primary causes of sudden fall in oil price include deep concerns that energy demand was shrinking because of a US-led global economic slowdown. Oil prices fell sharply as fears over the macroeconomic impact from the ongoing financial turmoil continued to dominate market sentiment. The market was also dragged down by a surprise jump in crude inventories in the United States, which pointed towards weakening demand. Growth fears are likely to cap gains in oil prices of OPEC countries until they start seeing a pick up in winter demand with some accelerating economic data from the developed world and concerns over the credit market recede. The market, hit by weakening global demand, has dropped sharply from record highs above $147 in July.


Pakistan is at the verge of an economic tsunami as the outlook for the next year or two is serious even if it manages to get the planned three billion dollars in external financial assistance in the next few months. The benefits of a lower import bill, if oil and food prices continue to fall in a weak global economy, may also be lost by weakening exports. As a matter of fact among all major developing countries, Pakistan's economy is the weakest and most vulnerable to rising oil prices and international financial crisis as it has the worst levels of external deficit and inflation at 8.5% of the GDP and 17% respectively. The Financial Times commented in an editorial: "For rich countries, the $125 oil price will be a noticeable drag on economic growth; for poor countries, when combined with higher food prices, it will mean more poverty. Oil supply should grow in response but if it does not, $200 oil is just about conceivable. It would cause serious economic disruption, international tensions and currency crises for some poor nations".

The unpleasant truth is that Pakistan is among the most vulnerable developing poor nations.