Uptrend may increase inflation, import bill and widen fiscal deficit in economy
KARACHI: The international oil prices are rapidly rising in global markets. The uptrend in the global commodity is likely to give birth to new challenges in the domestic economy including increase in inflation, surge in import bill and widen fiscal deficit.
The international benchmark crude oil Brent increased 28% since December 2020 and hit a one-year high of over $66.5 per barrel on Monday and continued to move around $65-66 per barrel on Tuesday. Majority of the global and local research houses have projected the oil price to maintain its uptrend and hit $70 per barrel ahead of the return of summer season when demand peaks every year.
Experts said the federal government would have no other option, but to pass-on the likely increase in the international oil price to domestic consumers. This would trigger oil inflation in the economy which is already feeling the heat from food inflation. Besides, this may potentially increase fiscal deficit, as import of expensive oil and RLNG may increase the government reliance on borrowing from local banks and global lenders.
“If the international oil prices maintain uptrend or maintain near current high levels over the next three to four days (till Feb 26-27) then the government may increase local petroleum oil prices by Rs5-7 per litre for the next 15 days,” A A Gold Commodities Director Adnan Agar said while talking to The Express Tribune.
“The increase in oil price would not be an easy option for the government ahead of the Senate elections on March 3,” he said.
“The increase in local oil price may trigger a fresh wave of inflation in the country. The cost of production and transportation of almost all the goods would go up accordingly,” said Pak-Kuwait Investment Compny (PKIC) Head of Research Samiullah Tariq.
“The current oil prices in world markets are already high for an emerging economy like Pakistan. A further increase may make things worse while the country has limited fiscal space to spend more,” said Alpha Beta Core (ABC) CEO Khurram Schehzad.
To recall, Pakistan has very recently resumed the International Monetary Fund’s (IMF) loan programme worth $6 billion which was on hold since outbreak of Covid-19 in Pakistan in February 2020. The global lending institution was already demanding the government to increase its income through new taxation measures and have control over expenditures.
The recent increase in international oil price and a likely further surge would raise Pakistan’s import bill by $160-170 million per month. “This will, however, not be a big challenge for Pakistan at this point when the current account balance stands in surplus worth over $900 million in the first seven month (Jul-Jan) of current fiscal year 2021,” Tariq said.
The import price of RLNG moves along with Brent. Schehzad said the reopening of global economies from lockdown with availability of vaccine has boosted hopes for revival of the global economy. The developments would increase demand for oil globally with demand particularly to come from cars and airline industries soon.
Agar said the recent increase in oil price was triggered by freezing weather in Texas, which brought economic activities, including oil production, to a complete halt. This disrupted US oil exports and global supply chain management of oil.
He was of the view that the oil may see a correction of $10-15 per barrel after touching $68-70 under the current cycle. “It (Brent) would, however, go again up to $65-70 per barrel ahead the return of summer season (Jun-Jul). By the time, a large population in the US and Europe would have been vaccinated and the global economies would be in up gear.”
The Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC members including Russia are expected to slightly increase production on March 4 compared to very low production for the past several months. “The likely development is expected to invite a correction of $10-15 per barrel,” Agar said.
Tariq, however, believes oil would return to around $50 per barrel in short to medium term.