KARACHI – Pakistan’s imports of POL products in 2010-11 could hit its highest mark of $12.50 billion if crude oil prices stayed at around $90 per barrel. The POL imports bill aggregated to around $10.60 billion in 2009-2010, however, it might balloon to $12.50 billion in 2010-11. Oil prices have averaged $79.5 per barrel and the oil import bill for the fifth month of 2011 stood at $4.3 billion, up 13 percent from the corresponding period last year.
“A sensitivity analysis was conducted on oil prices at $83 per barrel, $86 per barrel and $90 per barrel to see how it impacts the balance of payments in FY11,” said Muzammal Aslam of JS Research. In the worst case scenario, if the oil price averages $90 per barrel, Pakistan’s import bill will augment to $12.4 billion, compared to the base case assumption of $11 billion (based on a full year average of $80 per barrell), he said.
If oil prices hover around $100 per barrel in the second half of 2011, the risk to the economy would approximate to $1.4 billion. This could be manageable, given the present reserves of $16.42 billion, higher agricultural commodity prices and external support.
On the other hand, benefits of higher oil prices will continue to be reaped by oil exploration companies, with POL likely to be the biggest beneficiary (earnings upside of eight percent) followed by OGDC and PPL (six percent and two percent earnings upside, respectively) in the event oil prices averages at $90 per barrel in FY11. Although margins of oil marketing companies’ are now fixed, they are likely to benefit as well from substantial inventory gains.
Pakistan’s macro economic fundamentals melted in 2008, when oil prices peaked at $147 per barrel. Consequently, foreign exchange reserves depleted sharply, rupee’s value eroded massively that ultimately shattered the investor’s confidence.
Since hitting a trough of $32.7 per barrel in December 2008, oil prices have currently rebounded to $90 per barrel. Therefore, it is imperative to keep track of international oil prices, while following the country’s macro economic fundamentals.
Higher oil price was the primary reason for the meltdown in 2008. The government, which had spent Rs 250 billion in subsidies during 2007-09, is free from providing any subsidy on domestic oil prices this time around. Hence, oil consumption is rationed now. Secondly, the dollar-rupee parity is no longer pegged, which has freed the rupee from over valuation. These two developments have had a significant impact on the balance of payments and thus the current account deficit was reported at a meagre $504 million in the five months of FY11 against $1.8 billion and $7.3 billion in the five months of FY10 and FY09 respectively.
Since July, electricity and domestic oil prices have surged by four to 17 percent. Hence, transport and fuel inflation for the first five months stood at 16-21 percent against the headline inflation of 14.4 percent. If oil prices rise by another $9.0 per barrel or 10 percent, it would directly impact CPI by of 1.5 percent. The current account deficit and reserves projection for the full year are $3.5 billion and $19 billion (including IMF proceeds), respectively. If the oil prices peak at $100 per barrel, the deficit is expected to touch $5.0 billion and reserves to deplete to the $17.5 billion level, which would still be acceptable. However, without a sustainable increase in exports and inflows, it would be difficult for the government to manage rising oil prices from FY12 and onwards, as repayment of the IMF loans will commence. Experts believe that the critical time for the economy will begin from July 2011 and advise investors to closely monitor oil prices and Pakistan’s reserves position to avoid becoming a victim of a possible meltdown.
