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Coronavirus
VERY HIGH Source: covid.gov.pk
Pakistan Deaths
27,246
4024hr
Pakistan Cases
1,226,008
2,16724hr
4.22% positivity
Sindh
450,787
Punjab
422,790
Balochistan
32,769
Islamabad
104,242
KPK
171,388

EDITORIAL: Finance Minister Shaukat Tarin has asked the Ministry of Energy to adopt "forward planning" while dealing with volatile energy prices in the international market. Forward planning is being defined as hedging, an activity that many major procuring entities - both in the private and the public sector - engage in to minimize costs; however, there are two main requirements before hedging can be effective: (i) adequate storage capacity for that product; and (ii) a system that allows for hedging without punitive measures taken against the individual(s) in the event that prices subsequently fall still further. In Pakistan at present with the rupee depreciation going apace since May 2021 failure to hedge is costing the country not only foreign exchange, which is mostly debt, but the cost of the item to the general consumer is rising not only as much as its international price but also due to the depreciating rupee.

A persistent criticism against the Khan administration has been poor governance that is partly attributable to a prevalent system in which the bureaucracy is extremely averse to taking any risks that may lead to criminal charges, hence 'no hedging and no out of the box solutions in procurement' is the preferred option. This behaviour resulted in the country recently losing millions of dollars not only in fuel imports but also by not purchasing the quantity of sugar approved by the Economic Coordination Committee of the Cabinet (ECC) and ratified by the Cabinet.

Fuel was not procured when the price was low ostensibly because storage facilities were limited and the decision-makers were reluctant to purchase at that price fearing that prices may fall further. The result which is untenable from the perspective of the consumer is the proposal by the Power Division to pass on the phenomenally increased cost to the consumers, a recommendation that is currently being opposed by the regulator, Nepra. In the case of sugar, too, it is the Pakistani consumer that will pay the price of higher priced imported sugar.

Hedging is an economic activity that is no longer a luxury but is critical these days as Pakistan's import bill continues to rise with an ever-increasing component attributed to failure to import at a time when prices were lower. In this context, it is relevant to note that the International Monetary Fund Working Paper dated 2001 titled Hedging Government Oil Price Risk noted that "oil price risk is the risk that oil prices may change rapidly, substantially, and unpredictably. Governments bear this risk in two main ways. Governments in oil producing countries often rely heavily on revenue from oil production. Governments that administratively set oil-related product prices will suffer financially when input prices rise if they do not raise output prices. And, in both cases governments will be very aware of the social, political and economic cost of volatile oil prices...oil price risk markets seem a possible solution." However, the paper adds that "governments so far have not substantially used oil price risk markets. There are a number of reasons why, most importantly the political economy of using these markets and a lack of institutional capacity." And recommends that: "The IMF should recommend oil dependent countries, especially those with an IMF supported programme to explore the scope for hedging their oil price risk in conjunction with the World Bank and other official agencies with specialist knowledge in this field."

Regrettably the IMF in its programmes in Pakistan including the ongoing one, has not focused on this recommendation, yet, one would hope that the scheduled sixth review talks this month with the Fund focus on this and some arrangement be made in this regard.

Copyright Business Recorder, 2021

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