Oil price is steadily surging in the international market and rose to three-years high of $ 68 per barrel on Monday. The price of crude oil is expected to rise to $ 80 in the next six months. Good days for Pakistan’s economy seems to be over as the oil import bill will significantly go up in the second half of the current fiscal year. The State Bank (SBP) and JP Morgan, a renounced international investment bank, have anticipated that price of international oil benchmark would reach $ 70 per barrel in the coming few months. Goldsman Sach, however, revised up its forecast to $ 75 per barrel in three months and $ 82 in the next six months.
The continuous surge in oil prices in the world market due to pick-up in demand and weakening of US dollar against major world currencies under global currency war has forced the government to pass on the burden to consumers. The industrialists decried the 20 percent increase in the prices of petroleum products because it will have a domino effect on the entire economy by inducing cost- push inflation and wiping out the whatever negligible comparative advantage our exports still have in the international market. It would make transportation of commodities and their prices expensive, fuel inflationary pressure and prompt the SBP to further enhance the benchmark interest rate which it raised by 25 basis points two weeks ago to 6 percent. Simultaneously, the uptick in the international oil prices and country’s ballooning import bill would further widen the current account deficit if appropriate measures are not taken to bolster exports and inward remittances. Moreover imports have to be cut otherwise foreign exchange reserves will continue to deplete quickly. The petroleum import bill has surged by 33.4 percent to $ 6.67 billion in the first half of the current fiscal year compared to $ 5 billion in the same half of the previous year. Similarly, the current account deficit increased by 59 percent to $ 7.41 billion in the first half of the current year against $ 4.66 billion in the corresponding period of the previous year. Rebalancing of oil demand and supply in the world market may push up the current account deficit at $ 100 million per month Substantial increase in inward remittances through banking channels may not be encouraging due to the return of 600000 Pakistani workers from Saudi Arabia and increase in withholding tax on home remittances. Pakistanis abroad will prefer to send their hard earned money through hundi system.
Exports can be substantially increased if Free Trade Agreement (FTA) with China and Preferential Trade Agreement (PT with Indonesia are renegotiated. Pakistan can take a quantum leap for increasing exports of textiles, grains, fruits and vegetables to Indonesia. The import bill of palm oil can be reduced if production technologies of indigenous oilseed crops are improved along with establishment of oil extraction and refining facilities. Moreover, new crops like Jojoba which is a good oilseed crop and by cultivating it on desert area will initiate the process of de-desertification. The rice exporters association had demanded incentives to increase export of rice to European Union worth 265 million dollars. The direction of Pakistani exports is restricted to North America and Europe. To bolster exports new markets have to be explored. The import of petroleum products can be brought down by increasing production from the oil wells of Khyber Pukhtunkhwa and Sindh.
The continuous rise in oil prices will jack up the production cost electricity from diesel and furnace oil. The owners of Independent Power Plants will exert pressure on government to increase the purchase price of the electricity, causing a slowdown in agriculture and manufacturing sectors. Appropriate measures should be taken to minimize the impact of surge in oil prices.