January 9, 2019 (MLN): Substantial drop in crude oil prices in the recent months amid supply side adjustments is a major positive for Pakistan’s economy as it would lower the import bills in coming quarters, if the oil prices remain on the lower side.
During FY2019 international oil prices have dropped due to concerns regarding oversupply and slowdown in global economic growth. Moreover, rising crude oil production has been also a major reason for this decline.
Since most of the rise in inflation and core inflation is now cost push, further rise in interest rates would have limited impact on the course of inflation.
In addition to this, current account deficit (CAD) and CPI projections have significantly improved due to recent fall in global oil prices, moreover, decline in oil prices and pre-emptive hikes are likely to help offset the second round effects of PKR depreciation hence, allowing SBP to see impacts of recent adjustments. Therefore, further monetary tightening is not needed, contrary to the news flows suggesting that IMF requires further interest rate hike.
Thus, recent drop in international crude oil prices would calm down the wave of cost push inflation caused by recent economic adjustment such as gas prices, import duties, exchange rate, fiscal curbs etc.
Not limiting to balance of payments, energy prices have a far-reaching impacts on Pakistan economy, including utilities (such as electricity and natural gas) costs, inflationary trends and fiscal balances (such as subsidies and taxes) and manufacturing costs.
In the month of December, the fall in crude oil prices have directly impacted inflation as it declined by 0.4% MoM, if the oil prices follow the same trend it is expected to have further negative impact on inflation.
Oil price and CPI Trend
The trend of oil prices has been observed volatile as a few years ago it was above $100/bbl, whereas, the prices slumped on the discovery of shale gas, moreover, in early 2017, the prices picked up a hike as production cut had been observed.
Due to the recent meeting among OPEC and Non-OPEC members, they decided to remove 1.2 million barrels a day from the market created uncertainty as some are expecting the oil price to remain on low level while others are expecting the oil prices to be facing a temporary setback.
While the drop in the international oil price is taken as progression for the domestic economy, this would concurrently impact different sectors of the economy differently.
The low oil prices is negative for oil and gas exploration and production firm, oil marketing companies and refineries.
On the other hand, it would positively impact the agriculture, power producers, chemicals, cement, steel, textile, car manufacturers and transportation sectors of the economy.
On the whole, the economic situation is closely hook on oil prices, any reduction in oil prices would greatly benefit the economy.
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