Understanding the threat to Pakistan’s economy is all the more vital Post-Trump
“In 2008, the account deficit was increased by 17% (US$ 4.784 billion) and the government was able to offset the burden through external financial sector. However, the current situation is relatively different because of a drop in the remittance by 831 USD million, the culmination of IMF and Post-Trump US Aid policies.”
The recent OPEC and non-members’ agreement for an oil production cut by close to two million bpd (barrels per day) is projected to have a visible effect on the economy of Pakistan, which imports 80 percent of its total oil consumed. Recently, litre price of petrol and diesel went up by Rs2.25 for the next few days. Finance Minister Ishaq Dar said “the government had passed on to the consumers the partial increase recommended by the Oil and Gas Regulatory Authority”.
Although the impact would not be completely transferred to the consumers but for how long remains a question. Certainly, an increase in oil prices would trigger a trickledown effect on the economy impacting, ultimately, GDP, balance of payments, fiscal deficit and ending into inflation, by and large.
According to the stats available from Pakistan’s ministry of finance, last year the government had successfully brought down the fiscal deficit from 5.3pc to 4.3pc, aiming for a further decline to 3.5pc till 2018. Despite the decrease in budget deficit, the recent increase in oil prices indicates that the government is short on revenue, resulting in an increase in oil prices aimed to meet expenses. This proves that Pakistan’s economy is affected by the international increase in oil prices and fiscal deficit will continue to increase.
“It is the fiscal deficit that has resulted in such a policy; revenue as expected is not rising and expenses are scheduled for the coming year. They need to finance the expenses,” said Salahuddin Ayyubi, assistant professor of economics at FC College University.
In addition, fuel taxes are the principle source of indirect revenues in Pakistan and the consumption of petroleum products are comparatively price inelastic and income elastic. Owing to this, the government fluctuates the prices through Petroleum Levy Development in order to generate the revenue according to its needs.
Hence, the government increases the PDL even when there is an overall decline in oil prices in the international market. In a report Pakistan: Summary of Consolidated Federal and Provincial Budgetary Operations, 2016-17, by Ministry of Finance, the indirect revenue collected by Petroleum Levy is Rs35,778 million.
An increase in the import bill would also have a significant impact on the balance of payments, in turn contributing to inflation. In 2008, the account deficit was increased by 17pc (US$ 4.784 billion) and the government was able to offset the burden through the external financial sector.
However, the current situation is relatively different because of a drop in remittances by $831 million, the culmination of IMF and Post-Trump US aid policies. Given this, a definite decrease in foreign exchange reserves will be implicated which calls for serious attention. Perhaps the government could not afford to be solely dependent on the external financial sector and needs to come up with long term solutions.
In Pakistan, energy and transport sectors are the major consumers of oil (the share of transport, power, and industrial, agricultural in oil consumption remained 55, 35, 12 and one percent respectively).
Thus the increased oil prices will not only have repercussions on the fiscal budget and balance of payments, but will, as a result, also increase the prices of electricity, transport, gas, edibles and machinery in market.
Pakistan’s total circular debt on power generation companies swelled to Rs337.7 billion in FY 2016 and has exceeded the benchmark of Rs126 billion set by the IMF.
“The government must cut its expenditures, as it is making a lot of unnecessary ones.” – Ex-Finance Minister Salman Shah
Considering this, government should come up with effective policies and plan to curb the current rise in international prices. The government should shift towards alternative sources for energy production.
Ayyubi agrees. “The government should plug fundamental linkages,” he said, “it must pay attention to direct taxes rather than indirect sources of tax collection as it affects the poor more than rich”.
He also said “There is no short term solution to it but steps taken now will be less costly than a step taken tomorrow”.
When asked for comment, former Finance Minister Salman Shah said possible solutions may well be tied to government spending. “The government must cut its expenditures,” he explained, “as it is making a lot of unnecessary spending.”
One of the top priorities for the government as election nears, therefore, will be keeping local prices in check, to the deficit is controlled and the economy is kept from imploding.
