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Why Nawaz Shariff will likely secure another Term !

January 8, 2016

About 3-weeks ago when I first read the in the newspaper that Public Accounts Committee (PAC) is examining the special audit report on clearance of Rs 480 Billion Circular Debt, I was completely baffled because I did not find its impact on Fiscal Deficit that should have risen by 1.75 pct and simultaneously Domestic Debt should have risen by approximately same amount.

My interest has nothing to do with the rest of report, I am keener to know about the source of funding that has helped to reduce the Circular Debt.

I am surprised that despite Rs 480 Billion or (USD 4.58 Billion) adjustment, which is a huge amount in size and is 91 pct of the IMF lending ($4.98 Billion – Dec 2015), no one at any forum has discussed or raised this issue to know the source of funds.

After doing lot of soul searching, I have reached a point that gave me a glimmer of hope and if I am reading correctly, then this ongoing combination of GST on Petroleum and accounting adjustment could flip against all odds and bring out country from Circular Debt Misery.

Importantly, Nawaz government has to play its card intelligently, effectively and quickly to bring all essential economic changes (Fiscal & Monetary) for further gains. Such measures will increase the probability of easy sailing and then there will be no stopping for PML – Nawaz to secure another term and can even consider calling early elections.

Pakistan’s economy that until 2008 was growing at faster pace averaging above 5 pct GDP growth, started melting down soon after the 2008 Global Economic crisis, as rising oil prices above US 100 per barrel was not sustainable for the economy crippling all Leading Economic Indicators (Minus Housing & Real Estate – False Indicator).

During that period, overseas remittances was/is the only supportive factor that helped our economy to take a breather. Hence, in present scenario (oil glut) is the only risk factor that could slow down the pace of remittance inflow, but is unlikely to have larger impact on our economy unless job conditions in Middle Easters oil producing countries worsens.

Economic condition in Pakistan started deteriorating soon after Fed opted for extremely Loose Monetary Policy Stance (QE). Despite Global Slowdown, availability of excess and cheap funds encouraged Hedge Funds and Speculators to play havoc with price, pushing oil prices higher.

But in last 5-years, sharp increase in Shale Oil production in USA caused global oil prices to collapse that came to the rescue of all non-oil producing economies.

With the ongoing trend and technology advancement, USA is having a good grip on Shale Oil Production. It is comfortably reducing dependence on oil import.

USA announcing lifting of 40-years old ban on its oil exports and Iran almost ready to make aggressive comeback in the oil market, poses further threat/challenge to oil producing countries. The competition will get stiffer amongst all the major oil producing countries to capture its market share.

Trend of falling oil prices since last 15-months may not be ideal situation for oil producing countries, but it is surely most perfect condition for Pakistan’s economy that has suffered for almost a decade.

Here I would like to add that there is lot of misconception about Higher Petroleum prices in Pakistan, which is often discussed and quoted incorrectly. In comparison, Petrol price in Pakistan is cheapest in region.

Have a look a look and compare Prices of Unleaded Gasoline and Diesel respectively, in some parts of our region. (Slight Variance in price is possible due to Exchange Rate Moves). In USD terms Cost per Liter in US Dollar in Pakistan 0.72 Cents & 0.77 Cents, Vietnam 0.72 Cents & 0.49 Cents, Sri Lanka 0.81 Cents & 0.60 Cents, China 0.85 Cents & 0.74 Cents, India 0.87 Cents & 0.68 Cents, Bangladesh 1.09 Cents & 0.75 Cents,

Why Economy could still do Exceptionally Well 

If we do mathematical calculation, based on Pakistan’s annual oil bill (2014) @ $ 100 plus per barrel in previous years, annual oil costing exchequer was roughly around USD14 Billion. The slide in oil prices that we are witnessing since last 18-months may have done wonders, which is yet not reflected in economy because it is not discussed on any recognized forum. The savings in last 18-months amounts to nearly USD 9 Billion.

Let’s have a look at the average quarterly cost per barrel that may slightly differ from our original cost.

Average Quarterly Oil Bill Per Barrel

(July-Sept 2014) $ 96.67
(Oct – Dec 2104) $ 73.26
(Jan – March 2015) $ 49.05
(April – June 2015) $ 53.10
(July – Sept  2015)  $ 46.73
(Oct – Dec    2105)  $ 41.95

Total Cost of Oil ( July 2014 to December 2015) roughly is around  $ 13 Billion.
Therefore, savings against average oil cost in last 18-months based on above calculation is approximately USD 9 Billion.

Circular Debt Adjustment

Since the adjustments of Rs 480 Billion Circular Debt reported in PAC note is not yet reflected in SBP Economic Data Website. It is yet to be seen that if data inclusion was delayed due to some working and if it is going to appears in next SBP Domestic Debt Data Update or not. Adjustment means the amount should be increased by similar amount. Simultaneously it should result sharp increase in Fiscal Deficit number, which should rise by 1.75 pct. Budgeted Fiscal Deficit target is 4.3 pct.
However, if this figure is not reflected in SBP’s next Domestic Debt update and Fiscal Deficit does not soared accordingly, then there is a high probability that Circular Debt Adjustment is done though revenue collected by increasing GST on petroleum product and is not disclosed for the moment.

My best guess is that since the adjustment amount is sizable that cannot be done at one go. Hence, adjustments of Circular Debt must be going on since quite a few months, this why IMF have been silent on this and quite a few other monetary issues.

Time to Say Goodbye IMF

On March 30 2015, in my News Analysis “ IMF Challenge – Government Must Pay Back Borrowed Funds”  appeared in Business Recorder
I suggested that Pakistan should terminate its 16th IMF program and pay back USD 3.7 Billion borrowed money forecasting that oil prices will remain soft for longer duration and by paying back to IMF, Pakistan will get enough space to breath.
Or else under IMF’s surveillance program our hands will remain tight and the country will remain deprived of this God gifted opportunity. Unfortunately, no one paid heed to my suggestion, probably fearing oil could bounce back.
However, the current fall in oil prices is so deep that overall Pakistan’s BOP and Current Account position should benefit. Calculated Fiscal and Monetary measures will further help to improve country’s economic position.
Hence, this time I see no reason that why Pakistan should not a bid farewell to IMF program.

Monetary & Fiscal Measures

SBP/MOF should immediately reduce its borrowing cost and take multiple advantage of current favorable condition, as there is plenty of space to act. Government Securities (T/bills, PIB & Sukuk) has already surpassed Rs 7.374 Trillion.

Though Government may hesitate to pass on lower oil price advantage to consumer due to unmanageable Circular debt, but there is still enough room for petroleum prices to ease and relief could be given to end user.

This is an ideal opportunity for Pakistan economy to bounceback.
With sensible planning Inflation is easily manageable and it should stay around 3 pct by end of FY 15-16 and around 3.5 pct by end of calendar year 2016.
To manage inflation, there should be no consideration to increase food support prices. Neither any subsidy should be given. Nor SBP should succumb to exporters demand to weaken Rupee.
Ideally both, SBP and Ministry of Finance (MOF) should sense the economic urgency and avail this opportunity by reducing its funding cost by slashing Discount rate by 250 basis point and cut Coupon Rate by 300 basis point. This will reduce borrowing cost by Rs 200 Billion.
By not having IMF tag, Private sector will grow. Focus should be to expand Manufacturing and Industrial sector. It will create job opportunities, exports will get much needed push and revenue collection will increase. But to make it more effective Corridor should either be removed gap between Floor and Cap should be widened, which will encourage banks to lend support to Private sector.
However, I am assuming that as per PAC report, Circular Debt position has eased government’s monetary condition and it will continue to collect huge amount through petroleum GST collection, as petrol price in Pakistan is still far better than our competitors in the region.

Further, SBP Policy Rate Cut and Coupon Rate Cut will provide more room to the business community to deliver if borrowing cost is reduced.


If my assessment is correct then PML-Nawaz is surely in the driving seat and will continue to benefit from lower oil prices and CPEC growth. By September 2016 when IMF is done with is lending, Oil costing at an average of $ 50 per barrel, in 9-months period another savings of nearly USD 6 Billion should be expected that would offset Funds borrowed from IMF.

Hence, I fully support the government, which is conditional, if the money is flowing in the right direction because National Interest is my priority.

I see no harm if GST on Petroleum is hit the highest level. Overall people should benefit. But more importantly Corruption should be discouraged at all levels.

I know many readers may not like my idea of putting few good words for the present government. But I am a professional and my preference is National Interest over other issues. Therefore, I would support anyone doing favor to nation.

With the ongoing favorable economic condition and if better sense prevail, then the probability is high that PML-Nawaz could comfortable with next term and may consider Early Elections.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction) 

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