KARACHI: Inflation is expected to slow down from its decades-high level following more than a one-third drop in the international oil prices since June.

Speaking to Dawn, AKD Securities CEO Muhammad Farid Alam said the impact of reduced global energy prices will start reflecting in the domestic market in the “first week of October”.

Brent, a benchmark for international crude oil prices, has gone down about 37 per cent in recent months. The government should make use of any wiggle room that the International Monetary Fund (IMF) allows it and pass on the impact of lower global oil prices to the end consumer, he said.

Even though Mr Alam’s brokerage house believes the recent crude sell-off may be “relatively short-lived,” he says extending relief to the flood-stricken people isn’t a bad idea. “The government is already borrowing at 15pc through treasury bills,” he said while making the case for a more aggressive intervention by the government to help the 33 million flood-affected Pakistanis.

In line with crude oil, global prices of diesel and petrol have also gone down 43pc and 34pc, respectively, from their peaks in June, thanks to the growing concerns about a worldwide recession.

The Consumer Price Index (CPI), a measure of headline inflation, surged 27.3pc in August, highest in 47 years. Even though the share of transportation in CPI is 5.9pc, energy prices indirectly affect most constituents of the index given the centrality of fuel in everyday life.

According to Arif Habib Ltd Head of Research Tahir Abbas, headline inflation in September is likely to settle at 25.3pc, with the year-on-year price increases led by food (29.5pc) and transport (63.9pc) sectors.

In a phone interview, Mr Abbas said the government may find some fiscal space to reduce petrol pieces “in the next fortnight”. “It’s yet to be seen if — and to what extent — the government passes on this benefit to the consumers. If that happens, it’ll reflect in the next month’s inflation number,” he said.

Any increase or decrease in international fuel prices doesn’t automatically get mirrored in the local prices. For starters, international fuel purchases take place at a 15-day average price. So any sharp downturn in the global crude market — as witnessed in recent months — doesn’t immediately translate into a reduced purchase price for Pakistani buyers.

Similarly, any devaluation in the local currency — a months-long trend that’s seen a reversal only in the last few days — also nets off against oil price reductions in the international market. Another factor that neutralises the benefit of a downswing in global oil prices is the “over and above” taxation, said Mr Abbas.

The petroleum development levy (PDL) constitutes one such tactic that the government is using to shore up its non-tax revenue. It’s charging the PDL in excess of Rs37 on every litre of petrol alone. The government has assured the IMF that it’ll increase the levy to Rs50 on both petrol and diesel to collect about Rs855bn in 2022-23.

“The government is seeking relief from the IMF on the PDL collection for three months. A nod from the IMF will help the government pass on the benefit of the declining oil prices in the global markets to the end consumer,” he said.

Published in Dawn, September 28th, 2022