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AN oil terminal at Port Qasim. “Decreasing oil prices must help boost growth, moderate the speed of price increases, contain the current account deficit, narrow the fiscal gap and pull down the cost of electricity generation as well as that of doing business for the industry,” argued Khurram Schehzad, chief investment officer at Lakson Investments.
Low global oil prices have provided the Nawaz Sharif government an unexpected economic and political breathing space, saving it a windfall, and, at the same time, affording it the ‘opportunity’ to stimulate growth.
“The government could not have asked for more [at this moment],” concluded Sayem Ali, senior economist at Standard Chartered Bank. “The tumbling global oil prices should have a significant positive impact on the economy. The question is: will the government try to seize this chance and use the break to fire up growth?”
Oil prices have plunged over 40pc to five-year lows in the last few months. Many analysts are predicting prices to fall further as Opec, the cartel of oil-producing countries, tries to put shale gas producers in the United States out of business amidst forecasts of a major cut in oil demand next year.
Pakistan meets 80pc of its total energy requirement by importing oil. During the last fiscal, the country’s oil import bill of $14.8bn constituted more than one-third of total imports of $42bn. Also, oil is used to generate more than two-fifth of electricity, forcing most consumers to pay a high price for power and the government to pick up a big, fat subsidy bill to support low-end users.
Former State Bank of Pakistan Governor Ishrat Hussain argues that low oil prices will significantly improve the country’s balance of payments situation, stabilise the exchange rate, narrow the fiscal deficit through a reduction in energy subsidies and slow down inflation.
“But the downside to lower oil prices is that sales tax collection will be lower than the budgeted amount, making it even harder for the government to meet its tax target.”
Volatile oil prices has been the single most important factor responsible for stalling growth, growing the energy shortage, widening the current account and budget deficits, spiralling prices, and eroding business confidence in Pakistan since 2007.
The government is expecting savings of $2bn, or 0.8pc of GDP, on the oil import bill during the current financial year — MoF spokesman
The erosion of foreign exchange reserves has compelled two successive governments to seek unpopular bailout packages from the IMF to support the balance of payments and stave off defaults since 2008.
Pricey oil-based power generation often forces the government to underutilise the generation capacity to stave off pressure on foreign exchange reserves and keep down the subsidy bill, resulting in blackouts for industrial, domestic and commercial consumers at the cost of investment and growth.
“Decreasing oil prices must help boost growth, moderate the speed of price increases, contain the current account deficit, narrow the fiscal gap and pull down the cost of electricity generation as well as that of doing business for the industry,” argued Khurram Schehzad, chief investment officer of Lakson Investments.
“A sustained drop in international oil prices and the transfer of its impact to consumers must make manufacturing and exports competitive, push domestic production and boost real household incomes and savings in Pakistan, like in any other oil-importing country,” noted Khurram.
Rana Asad Amin, the finance ministry spokesman, said the government is expecting savings of $2bn, or 0.8pc of GDP, on the oil import bill during the current financial year.
“This will ease the pressure on the current account and foreign exchange reserves and the rupee, as well as provide relief to the people in the form of lower transport and energy prices and decelerating inflation,” he added.
Inflation for November was recorded below 4pc owing to decreasing domestic oil prices, and has spawned hopes of a further interest rate cut next month.
At the same time, Rana Asad claimed that the collection of sales tax and customs duty will take a hit of Rs50bn, putting pressure on the budget. “We may have to cut our expenditure further to meet the fiscal target for the present year [because of lower sales tax collection on petroleum products].” He added that the ministry hadn’t so far calculated the possible impact of low oil prices on the subsidy bill.
Last year, according to the central bank, the government had used accounting tricks to hold down the fiscal deficit to 5.5pc of GDP instead of showing the actual 7.5pc. The bank is not very confident about the government achieving the budget target even this year, mainly because of subsidies and resurgent unpaid bills of power companies. It has promised to pay Rs50bn this month and requested them to suspend their notices invoking sovereign guarantees.
On the other hand, analysts like Sayem estimate a reduction of Rs120-130bn, or 0.5pc of GDP, in the energy subsidy bill and $3-3.5bn in savings on the import bill during the current fiscal year.
The deceleration in inflation due to lower energy and transportation prices is also expected to escalate household savings and consumption going forwards, he said.
Businesspeople like Gohar Ejaz consider falling oil prices a blessing for the economy, whose capacity to increase production and create jobs has been considerably eroded by years of energy crunch and lack of investment in capacity expansion.
“This period of low oil prices offers us a great opportunity to put our house in order. We can become a self-sustaining economy in just three years if we use this opportunity to our advantage,” the Aptma leader said.
Published in Dawn, Economic & Business, December 15th , 2014
Low global oil prices have provided the Nawaz Sharif government an unexpected economic and political breathing space, saving it a windfall, and, at the same time, affording it the ‘opportunity’ to stimulate growth.
“The government could not have asked for more [at this moment],” concluded Sayem Ali, senior economist at Standard Chartered Bank. “The tumbling global oil prices should have a significant positive impact on the economy. The question is: will the government try to seize this chance and use the break to fire up growth?”
Oil prices have plunged over 40pc to five-year lows in the last few months. Many analysts are predicting prices to fall further as Opec, the cartel of oil-producing countries, tries to put shale gas producers in the United States out of business amidst forecasts of a major cut in oil demand next year.
Pakistan meets 80pc of its total energy requirement by importing oil. During the last fiscal, the country’s oil import bill of $14.8bn constituted more than one-third of total imports of $42bn. Also, oil is used to generate more than two-fifth of electricity, forcing most consumers to pay a high price for power and the government to pick up a big, fat subsidy bill to support low-end users.
Former State Bank of Pakistan Governor Ishrat Hussain argues that low oil prices will significantly improve the country’s balance of payments situation, stabilise the exchange rate, narrow the fiscal deficit through a reduction in energy subsidies and slow down inflation.
“But the downside to lower oil prices is that sales tax collection will be lower than the budgeted amount, making it even harder for the government to meet its tax target.”
Volatile oil prices has been the single most important factor responsible for stalling growth, growing the energy shortage, widening the current account and budget deficits, spiralling prices, and eroding business confidence in Pakistan since 2007.
The government is expecting savings of $2bn, or 0.8pc of GDP, on the oil import bill during the current financial year — MoF spokesman
The erosion of foreign exchange reserves has compelled two successive governments to seek unpopular bailout packages from the IMF to support the balance of payments and stave off defaults since 2008.
Pricey oil-based power generation often forces the government to underutilise the generation capacity to stave off pressure on foreign exchange reserves and keep down the subsidy bill, resulting in blackouts for industrial, domestic and commercial consumers at the cost of investment and growth.
“Decreasing oil prices must help boost growth, moderate the speed of price increases, contain the current account deficit, narrow the fiscal gap and pull down the cost of electricity generation as well as that of doing business for the industry,” argued Khurram Schehzad, chief investment officer of Lakson Investments.
“A sustained drop in international oil prices and the transfer of its impact to consumers must make manufacturing and exports competitive, push domestic production and boost real household incomes and savings in Pakistan, like in any other oil-importing country,” noted Khurram.
Rana Asad Amin, the finance ministry spokesman, said the government is expecting savings of $2bn, or 0.8pc of GDP, on the oil import bill during the current financial year.
“This will ease the pressure on the current account and foreign exchange reserves and the rupee, as well as provide relief to the people in the form of lower transport and energy prices and decelerating inflation,” he added.
Inflation for November was recorded below 4pc owing to decreasing domestic oil prices, and has spawned hopes of a further interest rate cut next month.
At the same time, Rana Asad claimed that the collection of sales tax and customs duty will take a hit of Rs50bn, putting pressure on the budget. “We may have to cut our expenditure further to meet the fiscal target for the present year [because of lower sales tax collection on petroleum products].” He added that the ministry hadn’t so far calculated the possible impact of low oil prices on the subsidy bill.
Last year, according to the central bank, the government had used accounting tricks to hold down the fiscal deficit to 5.5pc of GDP instead of showing the actual 7.5pc. The bank is not very confident about the government achieving the budget target even this year, mainly because of subsidies and resurgent unpaid bills of power companies. It has promised to pay Rs50bn this month and requested them to suspend their notices invoking sovereign guarantees.
On the other hand, analysts like Sayem estimate a reduction of Rs120-130bn, or 0.5pc of GDP, in the energy subsidy bill and $3-3.5bn in savings on the import bill during the current fiscal year.
The deceleration in inflation due to lower energy and transportation prices is also expected to escalate household savings and consumption going forwards, he said.
Businesspeople like Gohar Ejaz consider falling oil prices a blessing for the economy, whose capacity to increase production and create jobs has been considerably eroded by years of energy crunch and lack of investment in capacity expansion.
“This period of low oil prices offers us a great opportunity to put our house in order. We can become a self-sustaining economy in just three years if we use this opportunity to our advantage,” the Aptma leader said.
Published in Dawn, Economic & Business, December 15th , 2014
