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Oil on the boil is bad news for govt

January 15, 2018

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THE recent sharp rebound in global oil prices on the back of supply cuts by the 14-nation Opec oil cartel and other producers led by Russia does not augur well for Pakistan’s economy, industry, exports and households.

With around two dozen oil exporters agreeing to extend their deal to limit their production through 2018, crude oil prices are set to spike significantly over the next several months.

Last week, global oil prices rallied to more than a three-year high of $70 a barrel. Prices have edged up faster than analysts had expected. Oil has gained almost five per cent since the start of this year, and is forecast to move up further.

“The country’s energy import bill has already risen heftily as global oil prices have spiked by almost a third in the last several months… it’s likely to increase considerably going forward,” observed Zeeshan Afzal, an analyst at the Insight Securities brokerage. “The upward journey of crude prices can be expected to go on for some time, though it is difficult to forecast the peak.”

Pakistan’s energy import bill grew 30pc year-on-year to $5.2 billion during the first five months of the present financial year. The current-account deficit almost doubled to $6.43bn during the period, indicating it would go far higher than the full-year target of $9bn.

Half-yearly trade gap also surged to almost $18bn (or 70pc of the targeted $25.7bn for the whole fiscal year) and net official foreign exchange reserves fell to below $14bn.

Rising prices will have consequences for the embattled PML-N in an election year

Analysts agree that rising oil prices will add to pressure on the country’s forex reserves, widen trade gap as we spend more on the energy import bill, push domestic power prices, increase the already high cost of doing business affecting export competitiveness, expand budget deficit, spike inflation and squeeze household incomes.

“It is not good news for Pakistan… whenever oil goes up our economy tanks,” contended Salman Shah, former finance minister in the Musharraf government. “Higher oil prices will prove to be a major drag on the economy already facing serious headwinds.”

Many attribute whatever macroeconomic stability the country has achieved over the last four years to the lower global oil prices that began falling in 2014, a year after the Pakistan Muslim League-Nawaz government had returned to power. But many like Pervez Tahir, former chief economist at the Planning Commission of Pakistan, lament the government did not use the opportunity afforded by lower oil prices to restructure the economy.

“Instead of taking a hard decision, Nawaz Sharif chose to (partially) pass on the impact of lowering prices to domestic consumers, who had already absorbed the expensive oil in their monthly budgets for political reasons,” he said. “The revenues collected thus could have been used for developing and restructuring the economy, and it would have been in a much better shape now to face the shock of rising crude prices.”

Analysts believe that there is little the government can do to offset the potential impact of higher oil prices on the economy.

Some of them say that there is no option but to learn to live with higher energy prices because the government has locked in higher-than-the-global electricity rates with new power producers for the next 25 years. Rising prices will unleash inflation, push the cost of doing business affecting our export competitiveness, increase pain at the pump, and squeeze the people of their meagre savings. And all this because they will have to increase the domestic energy prices as global oil markets escalate.

Analyst Ali Khizar advised the government to seek help from the Saudi government in the form of deferred oil payments to mitigate the impact of its rising prices on the economy. “Higher oil prices pose a major risk to external-sector stability in the present circumstances when current account is growing on surging imports. If we get this favour from the Saudis — like they have helped us many a time in the past — we can easily cross this bridge without any big shock to the economy.”

As the country heads towards new elections in late summer this year, with the PML-N government facing serious challenges from its opponents, Zeeshan Afzal reminds it of the consequences of absorbing the impact of oil price increase because it would lead to significantly higher subsidy burden on the budget.

“There is little the government can do about the surge in global oil prices. But it can mitigate the possible losses to the economy by passing on its real impact on electricity consumers and motorists instead of subsidising them in an election year,” he said. “You cannot offset the impact of higher crude, but you can reduce the damage to the economy by passing on its impact to consumers.”

Published in Dawn, The Business and Finance Weekly, January 15th,2018