High global oil prices may trigger Pakistan’s economic crisis

As international oil prices rise rapidly, Pakistan needs to gear up to face the economic challenges that it would trigger. This spike in the global oil prices is likely to result in a surge in inflation, a high import bill and an enlarged fiscal deficit.

The international benchmark crude oil Brent was up $1.06, or 1.6%, at $65.30 a barrel by 0204 GMT, after earlier hitting a high of $66.38. US crude rose 81 cents, or 1.4%, to $62.51 a barrel, after hitting a session high of $62.73. Both benchmarks have risen more than 1% after climbing nearly 4% in the previous session.

This recent rise in the international prices was set off by freezing weather in Texas, which brought economic activities, including oil production, to a standstill.

It is expected that it could take at least two weeks to restart the more than 2 mb/d of Texas oil production halted from last week’s cold snap and the probability of a fast resumption is low.

Most of the local and global research houses believe that this positive momentum would be maintained in the oil complex. On signs of a much-improved market demand due to COVID19’s vaccine rollout, the Wall Street bank expects Brent prices to rise up to $70 per barrel in the second quarter from the $60 it had predicted previously.

Fluctuations in oil prices impact economies differently depending on whether they are net oil-importers or net oil-exporters. High oil prices for net oil-exporters generally improve the general balance of payment due to the increase in oil revenue.

On the other hand, high oil prices for net oil-importing countries like Pakistan usually lead to high import costs with an adverse effect on GDP, inflation, exchange rate and balance of payment. Also, high oil price volatility creates uncertainty regarding cashflows which in turn makes it challenging for the government to formulate policies.

Analysts believe that the only option the Pakistan government is left with after this anticipated oil price hike is to transfer the burden onto the domestic consumers. The country which is already grappling with food inflation would now have to deal with the oil inflation crisis as well. Widening of the fiscal deficit is also expected as import of high-cost oil and RLNG might increase the government reliance on borrowing from global lenders and local banks.

Considering the fact that the current oil prices are already high for an emerging economy like Pakistan, this further increase is likely to trigger a new wave of inflation in the country. The consumers are going to bear the brunt of this spike as the cost of production and transportation of all goods would go up. This would further complicate the family budgets that have already been strained by high gas and electricity prices.

This increase in the price is also believed to have caught the federal government at an inopportune moment as it prepares for the Senate elections on March 3.

PM Khan faced resistance from the masses and the opposition alike when he approved an increase in the cost of the petroleum products for the third time in 31 days last month.

Recently, IMF agreed to resume Pakistan’s stalled $6bn loan program after the country agreed to rationalize expenditures, increase electricity prices and impose additional taxes. The rise in global oil prices would be another blow for the domestic consumers as the government would be forced to hike the prices of petroleum products once again.

Though it is predicted that this surge would raise Pakistan’s import bill by $160-170 million per month, it would not be a big obstacle due to the current account balance standing in surplus worth over $900 million in the first seven months (Jul-Jan) of current fiscal year 2021.

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