THERE is not a soul who could have foreseen the price of oil rolling down from $115 a barrel eight months ago to just around $45 last week. And fewer still could have predicted State Bank of Pakistan’s basic interest rate to dip to a 10-year low of 8.5pc.

Most economists, corporate executives and market analysts watching the phenomenon with disbelief term it a ‘Godsend opportunity’ and a ‘windfall gain,’ which could infuse new life into the country’s moribund economy. But many of them also added caveats, and are not sure that the opportunity would not be squandered.

“For the corporate sector, these windfalls would translate into a much needed decline in the cost of doing business,” Kamran Y. Mirza, CEO of the Pakistan Business Council, told Dawn on Thursday. He believed that the government had received the ‘fiscal space’ to rationalise every aspect of the economy.

“It is one more chance for the PML-N government to fulfil the promises made in its election manifesto about reforms and restructuring of the economy.” He affirmed that the oil price plunge and the interest rate cut was a ‘win-win’ situation for all.

The ease in inflation — which the SBP now projects at 4.5pc, down from the 5.5pc for the current fiscal — would increase consumers’ purchasing power, eventually leading to higher industrial output and strong bottom lines for corporates. With lower interest rates, private sector borrowing would pick up pace, providing industries with cheaper capital.

Nasim Beg, vice chairman of Arif Habib Savings, endorsed that view. He pointed out that the cost of short-term borrowing by corporates for their working capital requirement would decrease with the decline in interest rates. And companies with stalled plans could go for expanding and modernising their plants. This would inevitably provide employment opportunities to the country’s bulging youth population.

“These windfalls would translate into a much needed decline in the cost of doing business,” says Kamran Y. Mirza

Beg, however, expressed some anxiety over the possibility of a slowdown in remittances if jobs in the Gulf countries are lost due to the slump in oil prices.

Meanwhile, along with a decrease in the cost of fuel, the drop in interest rates would help leveraged companies trim down the biggest expenditure item on their balance sheets, he said.

He did not believe that the country’s stock market had touched its peak, but also cautioned that the KSE-100 index, being heavily tilted towards energy stocks, was not the best measurement for the market’s performance, and suggested that investors go for stocks of fundamentally strong companies. “Over the long run, stocks and real estate have historically given out the best returns,” he noted.

Raza Jafri, head of research at AKD Securities, admitted that the government — being the biggest borrower — would have to pay lower interest rates on Pakistan Investment Bonds and Treasury bills. With debt servicing being one of two (the other being defence) major items on the expenditure side, the decrease in interest expenditure would have a salutary effect on the fiscal deficit, which would then be reflected in other major economic indicators.

Yet, Raza believes that lower fuel costs and interest rates are not enough, and that more is required for industrialisation to pick up pace. “The perennial problems of circular debt and power outages will have to be solved before we expect corporates to expand, raise the level of profitability and distribute higher dividends.”

Low interest rates could also lure consumers to increase their spending, further spoiling the savings-to-spending ratio. For some, the decrease in fuel costs together with low instalments on leasing, may provide an ideal opportunity to spend on luxury items like automobiles.

Other analysts believed that as the cost of furnace oil has gone down, industries dependent on the costly fuel, such as cement and independent power producers, could see higher capacity utilisation, translating into growth in their top and bottom lines.

Some analysts believe that the heavy cut in the price of petrol would reduce transportation costs. But Muzammil Aslam, MD of Emerging Economics Research, argued that the transportation cost could decrease more for people with their own conveyance, which is no more than 10pc of the population.

But he admitted that with the expected increase in consumer financing, spending on automobiles, electrical appliances and other non-essential goods would increase, which could boost the profitability of these industries. He added that $15bn oil import bill would be sizably reduced, leading to a positive impact on the balance of payment position. It will also lead to higher reserves, lower inflation and still lower interest rates. However, there is a darker side to the tale.

“The country had to pay higher subsidies when oil prices were sky high, and these subsidies will recede. Yet its revenues would take a big hit in the form of lower import duty,” he said. He elaborated that at $115 a barrel, the duty worked out at $28; meanwhile, with oil at $50 a barrel, the duty has dropped to $15 a barrel. This is why the government has booked a loss of around Rs100bn in six months from the decrease in revenue from the import duty on oil.

Aslam also recommended that the government strike a balance for macroeconomic stability so that consumerism does not mitigate the advantages of these developments, as had happened during the era of former Prime Minister Shaukat Aziz, when interest rates had also slipped to single digits.

Published in Dawn, Economic & Business, February 2nd, 2015

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