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Will we benefit from falling food & oil prices ?

October 26, 2014

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By: ASAD RIZVI   Published on October 23, 2014
Policymakers in Pakistan have not adopted policies, which could help in achieving higher growth in the real sense. Food inflation still remains high due to bottlenecks in the supply chain. Cost of bank borrowing still hinders new business opportunities. The economic managers may be making tall claims, but the current situation is far from satisfactory for a nation with per capita income of 1370 dollars and a growing gap between the rich and the poor.

Pakistan purchases Arab Light. It needs to be mentioned here that global benchmark, Brent oil, has fallen by almost 25 percent from its June 2014 peak and so far oil prices dropped to a four-year low. There are a number of factors that have caused a plunge in global oil prices.

One of the factors behind this recent downward trend is the International Energy Agency’s forecast for oil demand, which was well supported by IMF’s earlier statement forecasting a further drop in global growth rate. German economic ZEW data in the negative endorses the concern.

There is certainly an oil price war, and traders believe that Saudi Arabia is trying to recapture the European market to retain its oil customers. But there could also be a possibility that this is a planned strategy to clobber shale industry as cost of shale production is considerably high, which could be around USD 100 a barrel to be profitable.

For Pakistan’s economy, this is a blessing in disguise. And, for our economic managers this is a great opportunity as lower oil bill will give them a much-needed sigh of relief as falling oil prices ease pressure on balance of payment position. On an average, annual price fall of 10 dollars reduces oil bill by nearly 1.35 billion dollars or by 110 million dollars per month. It is advisable that they hedge oil purchases.

Furthermore, if we look at the 3-4 year global food prices trend, ie, rice and wheat, both are trading at 4-year low and sugar is down by nearly 30 percent, whereas, in terms of dollar/PKR exchange parity, Pak rupee since then has depreciated by almost 17 percent. This mismatch is due to higher support price fixed by the government. It is about time the government began to pay attention to the plight of masses who have been suffering from high inflation rate which lowers their purchasing power. Excessive printing of money is surely one of the major causes of high money supply.

If we have a deeper look at the overall economic condition, (international and domestic) monetary policy simply lacks vision, as it has been constantly raising the spectre of price hike, but fails to offer any remedy. With inflation rate comfortably well below 8 percent, there is hardly any justification for a higher discount rate. More importantly, it is required to check the rising domestic food and other items’ prices, which is government’s responsibility.

With falling oil and food prices, the government is certainly in a good position to argue and fight its cases against IMF’s demands for a hike in domestic energy prices. After current changes in the global prices, there is no justification to raise electricity prices and the central bank should cut its discount rate by 200 basis points while Ministry of Finance should reduce coupon rate by nearly the same percentage. Not only will these measures help reduce country debt burden substantially, they will help other businesses to flourish. A cut in coupon rate will force banks to rethink their strategy of investment in government securities, which has nearly reached a high of over Rs 5.650 trillion or well over 65 percent of commercial banks’ deposit base.

Copyright Business Recorder, 2014–oil-prices.html

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