PAKISTAN may not have completely missed the opportunity to benefit from the historic low oil prices, but it appears to be running out of time to adjust given the limited space left before the end of heyday.

That is the message Finance Minister Ishaq Dar seems to have taken from the 48th annual meeting of the Asian Development Bank in Baku and the crucial review of the International Monetary Fund (IMF) currently in progress in the UAE. In the last review, Dar was advised by the Fund to create buffers before the oil prices start rising again.

In Baku, it was ADB President Takehiko Nakao who emphasised the need for reducing fuel and energy subsidies by Pakistan and other low-income oil importers while the oil prices are low.

Apart from the possibility of increased resources for infrastructure following signs of cooperation and reforms by the ADB-AIIB, the importance of Islamic financing, the spill over from low oil prices and the resultant necessity for structural reforms remained the thematic areas of interest at the ADB Board of Governors meeting.

With its fast-paced economic development resulting in a four-time growth in per capita income in just 15 years, host Azerbaijan appeared to be the darling of the meeting’s participants.

The ADB management insisted that it is reforming itself to be ‘stronger and faster’ by merging its commercial and soft lending arms.

However, questions kept on pouring intermittently about how this change will be relevant to the region given that the China-led Asian Infrastructure Investment Bank (AIIB) is emerging as a competitor to counter the Japan-led ADB with its expectedly leaner administration and perhaps cheaper financing.

ADB president Nakao kept on repeating that the two Asian institutions would complement, and not compete with, each other as infrastructure needs in Asia and the Pacific far exceeds their resources.

Experts at the annual meeting noted the crosscurrents out of the lower oil price spill over and did not see it as a guarantee for global economic growth, as some bankers predicted oil prices to rebound within months.

Cavit Dagdas, the ADB governor for Turkey, said the current low prices could contribute 0.5-1pc to the global economy, but oil exporters should adopt new policies for macroeconomic diversification. And the oil importers have an historic opportunity to cut fuel subsidies and get ready for the next price surge. He said $50-60 per barrel oil is the more acceptable level.

Marios Maratheftis, Standard Chartered’s global chief economist, predicted a rebound in oil prices in the second half of the year, given that the demand for oil is strong and the supply is getting tight, along with the negative impact on US shale. He saw crude reaching $75-80 per barrel by September. “Be prepared for this adjustment,” he said, adding that it can signal an end to the zero interest rate era.

While Finance Minister Ishaq Dar’s call for accommodative monetary policies by advanced economies to trigger global growth seemed in line with Marios’s argument, it would be Dar’s nightmare to see the oil price rebounding while the Pakistan economy is yet to enter an expansion phase.

Marois anticipated Asia to continue performing well, but with greater currency and market volatility. The bigger challenge is of China staying slow for some time. And despite predictions of a doomsday scenario by some, the eurozone is not going to break up and is happy to run current account surpluses, he observed.

Hiroshi Watanabe, the governor for Japan, said while the export centres’ costs have gone down, they are not finding places to sell their goods because of the cycle of global sluggishness. Meanwhile, countries like Japan are facing deflation and not getting orders for engineering goods so they could get out of the deflationary situation.

Watanabe did not agree with Standard Chartered’s prediction of a rebound in oil prices to $70-80, and said strategic oil pricing would remain around $60-70.

Anoop Singh of JP Morgan Chase noted the crosscurrents in the prevailing oil prices and exchange rates and predicted the global economic growth to outweigh the negatives with an improved room for investment. But he said increased productivity is urgently required through improved technology and innovation.

Natalia Khanzhenkova of the European Bank for Reconstruction and Development said the economic outlook for oil exporting countries is weakening, which could negatively impact remittances. Some countries could also expect a return of their overseas workers. This could affect the banking and financial sector. All of this poses a critical policy challenge and requires urgent structural reforms to avoid a spill over.

An independent economist from Azerbaijan said the US would not like oil prices to stay too low to enable China to cut its product prices further, and that it would not like prices to go up too much to enable Russia to dictate to its terms, as all the while Saudi Arabia tries to remain an oil giant. He said Azerbaijan, where oil accounts for 90pc of all exports, would like prices above $60 a barrel.

The participants also noted that Islamic financing is booming around the globe, growing at a compounded annual rate of 20pc during 2007-2013. Its assets were estimated at nearly $2trn in the first half of 2014, up from just $150bn in the 1990s. There are now over 600 Islamic financial institutions operating across more than 70 countries.

Much of the growth came from Asia as five out of the 10 largest Muslim countries are in the continent. The experts appreciated the ethical code of conduct in Islamic financing, but also noted that standardisation is required to avoid risks.

Published in Dawn, Economic & Business, May 11th , 2015

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