IMPACT OF RISE IN OIL PRICES ON ECONOMY
Feb 6 - 12, 2012
The international current oil price is hovering around $101.93 a barrel. Its fluctuations continue to pose a serious threat to both developed and developing countries.
For oil importing countries like Pakistan, the impact of irregular and unexpected price rise endangers the already worsening economic condition.
Oil price rise is creating acute energy shortage in Pakistan which is now leading into hike in general prices, transportation cost, slackening agricultural and industrial activities. This is having a tremendous financial effect on our competitiveness in the external sector, creating record trade deficit and balance of payment gaps and eroding our foreign exchange reserves.
Brent crude oil prices grew around $94 a barrel at the start of 2011 to around $108 a barrel.
Citigroup analysts have raised their forecast that Brent crude oil prices should trade in a range of $100 to $120 a barrel and to average $110 for 2012. US conflict may sky rocket the oil price to $200 or above.
Pakistan imports a large amount of oil to the tune of 10 to 11 billion dollars per year, which accounts for 33 percent of its total imports.
The largest impact on GDP growth and the balance of payments because of rise in crud prices is anticipated to be in India, Korea, Pakistan, Philippines, Thailand, and Turkey. The oil price increases will affect China's economic recovery, but the direct effect of oil price hikes on China's economy would be much less than that on most Asia-Pacific countries.
Exports in Pakistan increased only 72 percent since 2002?03, whereas imports rose 227 percent. This is increasing current account deficit, which is growing at frightening levels.
Trade deficit widened to $11.5 billion in the first half of financial year 2011-12 due to slow growth in exports and more-than-anticipated rise in imports. The trade deficit stood higher by $3.2 billion or 38.5 per cent to $11.5 billion in six months (July-December) of the current fiscal year compared to the corresponding period of last year.
Estimates of the current account deficit - the gap between external receipts and payments - are widely different. The finance ministry feared a deficit of $2.7 billion. The International Monetary Fund forecast a gap of $3.9 billion while the State Bank put the figure in the range of $5.2 to $6 billion. A massive depreciation of the rupee against the dollar was also contributing significantly to the increase in the import bill.
Foreign exchange reserves have been under pressure for past couple of months, standing at $16.9 billion last week. Trade and services' imbalance is considered to be the major cause.
The massive increase in current account deficit is alarming and if deficit of goods and services sector is not controlled, Pakistan may see forex reserves freefall.
Higher oil prices directly lead to increase in food prices. The recent need to import food items like wheat, sugar etc, and depreciation of Pakistani rupee further leads to an increase in food prices due to increase in global oil prices and imports.
Around 30 percent of the country's installed generation capacity is based mostly on furnace oil. It is high time now that the country should revise its energy mix and start making actual improvement for utilizing alternate energy sources like wind and solar.
The government still does not have any tool to control this ongoing crisis as the circular debt is constantly going upward. Energy sector experts are of the opinion that the efficient and cost effective power plants will not be able to buy high priced fuel, as most of them are again waiting for clearance of liabilities.
Export proceeds and inflows in financial and capital accounts are weak and erratic. If oil prices stay steady till the end of fiscal year 2012, keeping all other things constant and ignoring payments to IMF, current reserves are enough to cover import payment for few months.
If oil crosses its current resistance level to $150-$200 per barrel, there will be further deterioration in trade and if no stern actions are taken the oil import bill will cross to $13-15 billion per year.
It is high time for the government to minimize the growing imbalance to save the country from another worst crisis. Otherwise, the country could lose its valuable present foreign exchange reserves and then be obliged to seek IMF assistance on harsh conditions to avoid insolvency.