Last update: Sun, 11 Dec 2016 06pm
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Oil shock: How vulnerable is Pakistan?

untitledHow vulnerable is Pakistans economy to oil shocks? Imports of oil products and crude oil account for nearly one-third of the countrys total import bill. These imports plug about a two-third of the total domestic demand for oil. So to no ones surprise; a shock from oil prices can send the countrys economic engines into seizure. Oil prices have been relatively stable since the start of FY12, compared to the last few years, but even at the current level, with per barrel rates above $100, the country is hard put to manage its foreign bills. Since export proceeds and inflows in financial and capital accounts are weak and spotty; if oil prices stay steady till the end of FY12, keeping all other things constant and ignoring payments to IMF, current reserves are enough to cover import payment for five months. Higher the import cover, lower the countrys vulnerability to oil shocks. The latest data available from the World Bank (for CY10) suggests that the countrys import cover, which stays close to 5 months; pales in comparison to many Asian countries. But, with oil price outlook on thin ice due to political tension across oil-producing countries, it would be unwise to stay complacent. In short, the key issue is deterioration in the countrys balance of payments position, if oil crosses its current resistance level. Average oil price at $150 per barrel means an additional burden of roughly around $470 million on the countrys monthly import bill, resulting in a higher country risk by weakening the countrys import coverage to less than five months. Similarly, taking cue from past trends of oil prices, it would not be irrational to assume oil price at $200 per barrel, nearly double from the current level, in a worst-case scenario. Still, if such a situation were to arise higher oil prices would be translated into an additional burden of $1000 million on the monthly import bill, which would in turn reduce the import cover to less than four months. There is no quick antidote to protect the country against such exogenous shocks. However, to reduce vulnerability and dependence, there are laundry lists, comprising of actions and strategies, circulating among policy makers, demanding to adopt a long-term road map to tilt the countrys energy mix to resources that can be tapped locally. In the mean time, it may be no disservice to rationalise energy prices to match international rates, thus encouraging efficient use of dear resources.