High commodity prices — what could have been done differently?

With Brent Crude prices at very low position of around $20 a barrel around the third week of April last year, and only rising rather slowly for the next few months, Pakistan had the opportunity to carry out extensive oil storage at the back of pro-active hedging strategy. Yet this was not done in any effective and meaningful way.

OPEC+ countries have also conducted themselves in a rather less than benevolent way, constraining supply drastically from around the start of the year to jack up prices, which have crossed $80 a barrel. Perhaps, given the onslaught of the pandemic, and the vaccine and enhanced health expenditures it entailed, including raising substantial stimulus needs, a rather more transitional-natured approach could have been adopted in terms of constraining oil supplies.

Yet this was not the path taken by OPEC+ countries, who reportedly continued to heavily rely on greater revenues from oil. This reflects an undue prioritization of domestic base by these countries than caring for net oil importers like Pakistan; higher oil prices are playing havoc on their growth prospects, macroeconomic management, poverty, and overall the political future of governments.

Overall commodity price shock, and with it significantly higher imported inflation for countries has happened due to supply shock.

While there have been genuine capacity issues and huge shipment backlogs as important reasons that have resulted in this global supply chain crisis, one important issue reportedly is undue profit-mindedness of suppliers, constraining supply artificially to receive greater prices.

This once again has produced difficult consequences for developing countries both in terms of balance of payments management and in greater hardship for people. Spending more foreign exchange reserves on higher-priced imports has added to already difficult external debt situation of developing countries.

Domestic market reform, greater autarkist policies and disallowing unnecessary imports should have been on a much higher priority list on Pakistan’s economic policy, given the fact that rising price trends were building for some time. In any case, this needs to gain greater momentum at the earliest possible. This may be a rather long supply and price issue, and difficult to predict. In a recent Project Syndicate (PS) article ‘Why are supply chains blocked’ Michael Spence highlights in this regard: ‘Global supply networks are similarly complex.

But, while we might be able to anticipate broad trends – such as that demand will increase – there is no model or set of models that enable us to predict with any precision how such trends might affect specific elements in supply chains. We have no way of knowing, for example, where new bottlenecks will occur, let alone how market participants should adjust their behavior.’

Rising inflation is likely to raise pressure on central banks to enhance policy rate. While this may be a workable option for financially developed economies with greater source of their investments on bank borrowing to check inflation, yet for the countries which, including Pakistan, are not this could set in motion, not to mention increased interest payments on debt, severe stagflationary pressures. Developing countries where inflation is at least equally a fiscal phenomenon need greater growth, less debt burden, and larger space for welfare spending. A tight monetary policy will only be counter-productive in such countries. Programme countries, including Pakistan, would most likely need to convince International Monetary Fund (IMF), which traditionally has little flexibility in not advising or pushing for enhancing policy rate as inflation rises. Instead, the multilaterals and major treasuries should generate greater financial support for countries, including greater SDR allocation, for developing countries in particular so that countries are helped against economic misery and political instability.

(The writer holds a PhD in Economics from the University of Barcelona; he previously worked at

the International

Monetary Fund)

He tweets@omerjaved7

Copyright Business Recorder, 2021