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Impact of reduced oil prices on economy of Pakistan

Published on 16th Feb, Edition 7, 2015

 

Pakistan is a country which imports oil and with a decrease in the prices of oil internationally, the import bill is likely to be affected in a positive manner. During the fiscal year 2014, out of an import bill of US$41.7 billion, 35.3% or US$14.8 billion was used for oil and related products. Thus with a decrease in the prices of crude oil, the impact is likely to be positive for the import bill and for the favorable balance of payment of the country.

With the prices of oil falling globally, there is a positive impact on Pakistan as its oil import bill has shown a decline of 7.83% according to statistics from the Pakistan Bureau of Statistics. This is so because the import bill was recorded at $6.95 billion during the period of July-December of fiscal year 2015 whereas in comparison to the same period in the fiscal year 2014, the import bill was valued at $7.54 billion. The break-up of the current fiscal year’s import bill showed that the nation has imported petroleum product worth of $4.3 billion and petroleum crude which is worth $2.64 billion. Thus with the prices of oil falling internationally and Pakistan being an importer of oil, it is being blessed with reducing oil prices. It is also believed that due to this reduction in the prices of oil, Pakistan may very well be able to reach its target of GDP of 4.3% this year despite having faced strong headwinds against the economic progress initially.

Jeffrey Franks, the Mission Chief of the International Monetary Fund (IMF) has stated that the forecast of the economy’s growth has also been increased from 4.4% to 4.7% for the next year because it is believed that the reduced oil prices will further encourage the economy and cause it to progress due to the positive impact. Furthermore, he even touched upon the topic of the energy issues being faced by the country. While the reduction in oil prices isn’t going to resolve the crisis but it will certainly help in reducing the economic problem, which is being faced. Within the energy sector firstly, the country will be able to save money on oil imports; $4 billion less would have to paid thus allowing Pakistan to save a great deal. Furthermore, due to an increased amount of cash reserves, the problems of the circular debt could be solved by the government; the issue of companies not having enough money to function in an appropriate manner as well as the issue of subsidies could be dealt with.

The discount rate has also been cut down by the State Bank of Pakistan to 8.5% which is included with the expectations by analysts and lower inflationary pressures. Apart from the reduction in the prices of oil having a role to play, business members and leaders within the community also requested the State Bank to ease the monetary policy so that private sector investment could be encouraged and for economic growth to be accelerated further.

 

Furthermore the Iranian government has proposed to offer Pakistan regarding investigating an opportunity to supply around 3,000 MW of electric power along with export of power 1,000 MW to the country. The letter addressed to the NTDC (National Transmission and Dispatch Company) by the Iranian government pledges to increase the substation in Jakigur in Iran to 125 MVA in order to create the capacity needed for additional supplies to be sent to Pakistan along with extending the validity of the sale current agreement and the revision of the tariff.

Apart from this option, Pakistan is also exploring the options of importing power from China and central Asia. However due to security concerns and the difficult terrain, questions remain as to whether or not these projects will actually be undertaken to their fullest capacity. The Iranian option is thus considered to not only be the safest, but it is also considered to be the cheapest and free of hassle.

The reduction in oil prices has a role to play in this matter as well. This is because the deal was signed by Pakistan at 8 cents (approximately Rs 8) per kilowatt even if oil prices were to increase to a price of $120 per barrel. With the prices of oil having fallen around 30% of the upper limit, if the deal is properly negotiated, it could be benefited from at half the price. Compared to the generation of furnace oil by Pakistan on its own, which costs 20 cents per unit, this certainly seems to be turning out to a cheaper option and to make it a better project; neither would Pakistan have to invest in the generation or the environmental impact of the project.

With reduced global oil prices, the government has also begun to boost regarding having the lowest oil prices in the region, however, despite this, the country recently and still seems to be looking within a fresh countrywide petrol crisis with citizens in various part of the country being haunted by the shortage of petrol. While the Ministry of Petroleum and Natural Resources claims that there isn’t any shortage, the real scenario showed otherwise in various cities. Petrol pumps in cities such as Lahore, Sargodha, Faisalabad, Dera Ghazi Khan, Bhakkar and several cities of Balochistan, Sindh and Khyber Pakhtunkhwa (KP) following the reduction of oil prices announced by the government had remained closed with the excuse that no petrol was available for sale. Furthermore, complaints were received that many petrol pumps selling oil at old prices in the rural areas particularly the areas which are mostly out of sight of the district administration as well as the price control committees. A number of citizens were of the opinion that despite the reduction in oil prices, instead of being a reason for bringing them relief posed to be more of a burden.

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