If sustained, a steep fall of around 35 per cent in international oil prices, the economic observers say will help the dollar-hungry government of Pakistan save at least $ 5 billion a year on account of oil imports.
Also, coupled with improved foreign inflows, the current southward trend in crude oil prices would keep the inflation rate as low as the State Bank would find some “room” to cut the 9.5 per cent discount rate by further 50-100 basis points (bps) in months to come, the analysts said.
The Pakistan Bureau of Statistics (PBS) recorded the consumer price index (CPI) inflation during November at 3.96 per cent compared to 10.90 per cent of last year. This, the analysts said, showed an 11-year low.
“November 2014 CPI reading is lowest since November 2003 when the index stood at 4.2 per cent,” recalled analysts at Topline Research.
Moreover, during Nov-14, Abdul Azeem of InvestCap Research observed, the economy witnessed a deflation of 0.52 per cent compared to 0.21 per cent inflation in Oct-14. Deflation is defined as a general level reduction of prices in an economy.
“The decline was mainly led by 6.87 per cent (MoM) decline in transport group and 0.49 per cent drop in prices of the food and non-alcoholic beverage group,” viewed Abdul Azeem.
The two groups have a respective weight of 7.20 and 34.83 per cent in the inflation basket. The core inflation, measured by non-food non-energy CPI (Core NFNE), stood at 6.9 per cent during Nov-14 compared to 7.8 per cent during Oct-14. “It was 8.5 per cent in Nov-13,” the analysts said.
Azeem expects inflation level to average on six per cent during FY15 as the high base impact of CPI was expected to continue. The “massive” decrease, as Topline analysts described it, of $ 38 or 35 per cent in international oil prices, if sustained for next one year, would help the resource-constrained government of Pakistan save at least $ 5 billion under the head of oil imports, a major drain on the country’s improving foreign exchange reserves.
“With international crude below US$70/bbl versus average US$108/bbl in FY14, Pakistan should be able to save US$5bn from oil imports on an annualised basis,” said the analysts.
This amount, they said, constitutes 2 per cent of the country’s Gross Domestic Product (GDP).
“This is assuming oil to remain at US$70/bbl for next one year,” they said, adding that “This saving is more than the initial estimates of current account deficit”.
Further, the analysts foresee the country’s external account to become stronger on the back of expected inflows of $ 1 billion under the International Monetary Fund’s “successful” review last month.
Also, the government has successfully raised $1 billion from Islamic bonds (Sukuk) offering in international markets.
Further, as inflation eases down the analysts foresee space for the central bank to make a further rate-cut of 50-100bps in the upcoming monetary policy due in January next year.
“The lower CPI indicates that further 50-100bps room is still available in SBP discount rate,” said Abdul Azeem.
Therefore, he said, the low interest rates scenario provided further impetus to the local stocks market, particularly the leveraged sectors.
“Coupled with likely improvement in forex reserves position, we expect higher cut in policy rate in 2015,” viewed Topline analysts.
Up to November 21, the central bank recorded the country’s dollar reserves at $ 13.219 billion which, Finance Minister Ishaque Dar claims, would hit the $ 15 billion by the end of this month.
