AFTER enjoying a three-year bonanza of falling oil prices, Pakistan would be well advised to take a second look at what just happened at the Opec meeting in Algiers. The world’s major oil-producing economies agreed to cut production by around 700,000 barrels per day, a modest reduction but possibly the first in a series of further such steps. The move was apparently helped by Saudi Arabia’s change of heart. This is the first time Opec has been able to agree on coordinated output amongst its member states since 2008. And it could be a turning point in the saga of plummeting oil prices that has given breathing room to importers like Pakistan, but badly battered the fiscal health of exporters like Saudi Arabia, who have been forced to resort to massive pay cuts in government jobs and layoffs in the private sector to cope.

For Pakistan, the thing to note is the 5pc jump in oil prices when news of the agreement broke. The next milestone is the November meeting when the cartel meets again to decide who will bear what share of the cuts. Given that Saudi Arabia is now on board with cutting output due to its deteriorating health, most analysts are expecting that this event marks a turning point. From this point on, it is likely that oil prices will only move upward, although the speed at which that will happen is not possible to predict at the moment.

The prospect of rising oil prices presents the government with its most serious immediate economic challenge. Both the State Bank and IMF have repeatedly warned about this, as have most independent analysts. By some measures, Pakistan’s external sector has benefited by $7bn since oil prices began their downward spiral a few years ago. Meanwhile, inflows in the form of remittances, foreign investment and exports have been coming under pressure, although to varying degrees. Foreign direct investment and exports have fallen dramatically since the oil price bonanza kicked in, while remittances have started showing pressure more recently since July. In addition, the beneficial impact of declining oil prices has been offset by a corresponding increase in non-oil imports, meaning our import bill — which consists largely of oil — has been constant throughout this period when prices were coming down. This is the reason why the State Bank and IMF have both noted the increase in foreign exchange reserves by adding the caveat that this represents comfort only as long as oil prices do not climb. That scenario may have kicked off in Algiers, and is likely to ramp up further in the months to come. The picture on the external front was never as bright as it was painted to be, and now at a crucial juncture, as the country exits an IMF programme, prepares to mount road shows for its bonds in global markets, and debt service obligations loom, the breakout of fresh uncertainty about the future of low oil prices calls for a cautious approach.

Published in Dawn, October 1st, 2016