The steep fall in oil prices is sure to slash the trade deficit by reducing the import bill, lowering cost of production and making exports globally more competitive. It will help stablise the rupee.

In November, the total import bill of $3.63bn was down 14.9pc from October’s $4.266bn. While the breakdown is yet to come, government officials link it to the decline in oil imports.

Benchmark Brent crude prices have fallen over 40pc since July 1 to a five-year low of $64.26 per barrel on December 10, from $112 per barrel.

However, there are two reasons for the 12.5pc increase in overall imports during July-November. First, food imports have been on the rise. And second, the impact of the oil price decline comes with a time lag “because of the difference in prices contracted a few months before actual delivery and the prices when we get shipments,” oil industry officials say.

They say the full impact of the oil price decline during July-December 2014 would be evident in the import bill for the January-June 2015 period. Even if oil prices stabilise around $60 per barrel, the oil import bill for FY15 would be down by at least $1bn.

During July-October FY15, the oil import bill had dropped by just $93m from the same period in FY14, whereas the combined volume of imported crude oil and petroleum products remained more or less the same. Oil industry officials say import statistics from November 2014 to June 2015 would show a time-lagged, steeper impact.

Oil industry executives say the full impact of the global oil price decline would be evident in the import bill for the January-June 2015 period. Even if oil prices stabilise around $60 per barrel, the oil import bill for FY15 would be down by around $2bn, they add

Meanwhile, Pakistan’s external sector outlook has improved not only due to falling oil prices but also due to higher forex inflows from the launch of the $1bn dollar-denominated Sukuk last month, $2bn Eurobond issue in April, continuing double-digit growth in home remittances and the rise in foreign investment. The $3bn inflow through the Sukuk and Eurobonds has pushed forex reserves up from $10bn at end-March to about $13.922bn by December 5, latest SBP data show.

The rupee, too, has lost only 2.1pc value against the dollar between April 1 and December 11, and has been recovering for the last few days.

And while exports in July-November are down 4.2pc year-over-year to $9.992bn, a decent 9.5pc yearly increase in export earnings during November indicates that the country has started reaping benefits of the oil price plunge.

Finance Minister Ishaq Dar says the FY15 export target of $26bn looks attainable. He says the slashing of local oil prices after the fall in international prices have cut the cost of industrial production and transportation, and the lower cost of imports due to stable rupee? has made imported inputs cheaper, making export industries more competitive in the world markets.

Falling inflation and interest rates are also expected to support export growth.

However, some analysts say the historic fall in global oil prices may ultimately slow down the steady, double-digit growth in home remittances, particularly because more than two-third of remittances come from oil-rich GCC countries.

But others, including former SBP governor Dr Ishrat Hussain, point out that most of these countries have enough forex reserves to tide over the ill effects of lower oil prices. This means that Pakistanis living there should not be financially distressed and should keep sending enough foreign exchange back home.

Those who believe that remittances would continue to rise at the current pace insist that the impact of the job localisation drive in the GCC region would be offset by the creation of thousands of new jobs ahead of the World Expo 2020 in Dubai and the FIFA World Cup 2022 in Qatar. They also point out that for the last few years, Pakistan has been exporting more skilled, highly-skilled and professional people to the GCC region, as well as to the UK and some other European countries. This, too, should keep the growth in remittances intact.

Analysts are divided over whether global oil prices would stabilise now or fall further. Those who foresee further declines cite the sluggish growth in global demand and the prospects of shale gas becoming a real competitor to crude oil in a few years. If that happens and oil prices fall further, the benefit to our oil import bill would be no less than $2bn per year, oil industry officials say.

But what about the possible increase in the cost of servicing external debt and liabilities after the issuance of the Sukuk and Eurobonds?

The profit rate on Sukuk is relatively low at 6.75pc per annum. But a higher rate is applicable on the Eurobonds — 7.25pc on $1bn five-year Eurobonds and 8.25pc on $1bn 10-year Eurobonds.

However, finance ministry officials say managing the cost of these bonds shouldn’t be a big deal. They point out that $1.18bn has already come in through 3/4G licence auctions, the privatisation programme is in progress, and last month’s upgrading of Pakistan’s sovereign credit rating by Moody’s is sure to accelerate investment flows into the country.

Published in Dawn, Economic & Business, December 15th , 2014