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Plunge in oil prices: A good chance for Govt to boost economy amid passing benefit to end-consumers

Published on 16th May, Edition 20, 2016

 

The continuously declining oil prices internationally mostly helping Pakistan in reducing its oil import bill that recently witnessed a decline of 7.83 percent during first half of July-December of the current financial year over the corresponding period last year. Pakistan’s oil import bill has recorded at $6.95 billion during July-December of fiscal year 2015-16 as compared to $7.54 billion of the same period of previous year fiscal year showing decline of 7.83 percent.

The break-up of $6.95 billion oil import bill showed that Pakistan has imported petroleum products worth of $4.3 billion and petroleum crude worth of $2.64 billion during the period under review.
Pakistan being oil importer is also benefiting from the reducing oil prices. Lower oil prices helped in slashing oil import bill by $3-5 billion during this fiscal year. The oil import bill has gone down by over 22 percent in the month of December 2014.

Low oil prices on the international market helped Pakistan save around $2.5 billion in imports of petroleum products during the first four months (July to October) of this fiscal year, according to a latest report of the State Bank of Pakistan (SBP). Pakistan would be able to save around $7.5 billion this fiscal year if the current oil prices prevail. Import bill of petroleum products plunged by 43 percent to $3.263 billion during the four months from $5.733 billion a year ago.

Oil prices have been falling for more than 18 months, but fiscal year 2015 ending on June 30 did not reflect any significant change. Since June 2014 to June 2015, oil prices dropped by over 50 percent in the international market but Pakistan’s import bill did not reflect a significant decline.

World oil prices have plummeted to below $50 a barrel from around $115 in mid-2014. Brent oil prices were close to $46 a barrel while US crude was just under $43. The international oil prices have fallen to about $45 per barrel, continuing their downward spiral since June last year as the market remains oversupplied. In the last one and a half years, prices of oil in the international market have gone down by 75 percent, falling from $110 per barrel to below $28. At present, they are hovering around $40.

During the fiscal year 2015, the import bill of the petroleum products was $12.155 billion, a decline of only $2.6 billion compared to the preceding year. The decline in the bill should be around $7 billion the current oil import bill would be encouraging for the government.

Possible savings of $7.5 billion during the fiscal year would be much bigger than the expectations as the government has been borrowing recklessly from the international markets and donors to keep foreign exchange reserves at $20 billion.

Pakistan has record reserves and it is a sign of stability. However, the present government has borrowed about $18 billion during two-and-a-half years. The big saving is also very significant as the recent Eurobond issue by the government could only raise $500 million, and that at a high rate of 8.25 percent. The selling was widely criticized, particularly in the presence of record forex reserves.

The government argues that it needs more borrowing for debt-servicing, which would increase from 2016. Debt-servicing was $6.99 billion in fiscal year 2014, but dropped to $5.417 billion in fiscal year 2015.

 

The Finance Minister, Ishaq Dar has said that the government would put a check on import of luxuries that has been a cause of widening trade deficit. Increased imports, like that of food, in fiscal year 2015 ate up the benefit of low oil prices. Food imports jumped to $4.624 billion during 2014-15 from $3.913 billion in 2012-13, an increase of $1.7 billion in two years.

The downward spiral of oil prices in the international market should be seen as good sign for Pakistan that is energy deficient and relies heavily on oil imports from Middle East countries. But the constant fall in global oil prices and other commodities are a menace to its revenue efforts as the country heavily relies on taxes on international trade for revenue generation. Pakistan collects 48 percent of its total revenue by levying customs duties and other taxes on imports.

In Pakistan there is a debate on about how much of the reduction in world crude prices should be passed on to end-consumers. Pakistan under the International Monetary Fund’s program has to achieve stringent revenue collection targets. The government sees taxes on international trade as an easy and less costly means to achieve the revenue targets.

In the second quarter of the current fiscal year, the government raised import tariffs that included an increase in customs duty and imposition of regulatory duty on a large number of items. Sales tax on certain petroleum products is at its historic peak. This rate of tax is and equivalent to anti-consumption and luxury tax imposed to discourage consumption of certain products.

Pakistan economy has suffered due to increasing costs of energy and petroleum products. This has created challenges, especially for the export sector, in the global markets.

Pakistan should pass on the benefit of lower oil prices to be able to reduce production costs and enhance competitiveness.

The fall in oil prices is good for economic growth. The experts developed their models by analyzing the substantial reduction in oil prices in the mid-80s due to the supply glut.

Global crude prices may fall, it is not clear as to what extent the government would keep increasing especially sales tax, on oil products. Revenues may increase to a certain extent. But further increase will bring the revenues down. In this context, the government must also create economic incentive for smuggling and may divert imports to the Afghan transit trade.

There are already persistent complaints of diversion of transit goods to the domestic economy due to porous borders. Oil smuggling from Iran is also rampant and is meeting domestic needs in areas bordering Afghanistan and Iran.

The private sector, as well as domestic households, is looking at the government to pass on benefits of lower oil prices. There are sufficient compelling reasons for this, as it would benefit the domestic economy.

The plunge in oil prices is an opportunity for Pakistan to boost the domestic economy by passing the benefit on to the end-consumers. It would improve competitiveness of the industry and increase consumer welfare, which would have lasting benefits. In the short term, the loss of revenue will be the price worth paying.

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