Rising oil prices not good news for Pakistan warns expert

The rise in oil prices in international markets may indicate the return of global demand, which was slowed down amid the coronavirus pandemic. However, a financial expert has warned that this is not a good sign for Pakistan, which is a major importer of POL products.

“OPEC+ supply cut extension pushed crude oil prices north of $70 per barrel, last seen in May 19. The development is a good sign for the oil producers but for a debt-laden economy like Pakistan it's a worrying sign,” stated a report by Ismail Iqbal Securities.

The report added that the country’s current account deficit has already started to expand, while the impact of higher oil price is yet to come.

“For every $10 per barrel increase in oil prices, the import bill is estimated to expand by $2.2 billion. To take things into perspective average monthly oil import bill in 7MFY21 remained at $695mn at an average crude oil price of $46 per barrel while at $70 per barrel monthly oil import bill and the CAD would increase by approximately $550mn,” said the report.

The oil imports during July-January (2020-21) were recorded at $5640.751 million against the imports of $7131.451 million during July-January (2019-20), showing a decline of 20.90 per cent, according to data by the Pakistan Bureau of Statistics (PBS).

The report added that the additional burden on the import bill would also add to fiscal challenges as the government has already lowered the petroleum levy to Rs13 per litre to maintain petroleum prices at current levels.

“In order to meet the annual target of Rs 450 billion (which at one point looked easily achievable as 1HFY21 collection stood at Rs 275 billion), the levy for the remaining part of FY21 needs to be set at Rs 18 per litre, while petroleum prices would have to go up by Rs 14 per litre to Rs 126 per litre. The inflationary impact would add to political woes, while expectations of interest rate hikes would also resurface,” it added.