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Worse to come: Oil price hike

Updated September 03, 2013

IF Saturday’s hike in oil prices was considered steep, we may be in for a bigger surprise in the weeks to come. Going forward, resurging global crude oil market and the weakening rupee are projected to bring more pressure on the cash-starved government to further raise domestic oil prices unless it is prepared to bear the burden in the shape of increased subsidy expenditure. Chances are that it will pass on the bill to the consumers rather than pay from its own pocket. The information minister has already indicated as much. Given the current economic conditions and financial troubles that have forced the government to borrow a staggering Rs594bn from the central bank in the first 45 days of the present financial year, it will be suicidal for it not to pass on the price rise to the consumers. It does not have much of a choice here, even if it wanted to help the people and mitigate their pain at the pump.

International crude prices have been fluctuating in recent weeks on supply disruption fears owing to the present turmoil in the Middle East. More recently, the prospects of stronger economic growth in China and the European Union have supported the market in continuing its forward march. The oil price in London, for example, has already soared by $12 a barrel — from above $102.26 to more than $114 in the last two months and is projected to touch the $120 mark soon. Market stability largely depends on how the US shapes its Syria policy. So far indications are that Washington may attack that country. If that happens, the oil prices could go wayward. That is where the real threat to Pakistan’s fragile economy lies.

While the country may survive the current surge in global oil prices, further increase could bring its meagre foreign exchange reserves under greater pressure. Although the IMF is expected to approve a loan of $6.6bn over the next few days to help Islamabad improve its reserves and address its balance-of-payment woes, the soaring oil prices could partly offset the effort to stabilise the economy and exchange rate, at least for now. Any future surge in oil prices will trigger faster price inflation and erode the purchasing power of the people, especially those in the fixed income bracket, and spawn demands for fuel subsidy. While there’s little alternative to passing on the price increase to consumers, the government must pursue governance, tax and structural reforms more vigorously and rapidly to fortify the economy and the people against any future external shock.