Experts weigh in as Pakistan comes to terms with all-time high petrol prices

Record high prices of petroleum products and no respite in offing have raised inflationary concerns in the Pakistan economy where a current account deficit, driven in part by oil, has kept policymakers on edge over how to navigate the way forward.

At 13%, headline inflation in January hit a two-year high, with consumers also coming to terms with changes announced in the Finance Bill that withdrew sales tax exemptions to the tune of Rs343 billion.

With prices of petroleum products establishing new highs, experts have weighed in on how it may impact the economy going forward.

“The inflationary impact is a known factor,” Saad Khan, Head of Research at IGI Securities told Business Recorder.

“An increase in oil prices would have a direct impact as the weightage of motor fuel in the CPI basket is 2.7%.

“Simply put, a 10% increase in petroleum rates means that the CPI-based inflation reading would increase by 2.7 basis points,” added Khan, referring to the outright increase in inflation reading.

However, high petroleum prices affect other rates as well, with some products feeling a lagged change, while others push on the cost to the consumer straightaway.

As inflation picks up, the central bank may also spring into action through its monetary policy. While it kept interest rates unchanged in the previous meeting, the State Bank of Pakistan has raised the interest rate by 275 basis points since September already, and is scheduled to meet next month.

Monetary policy: SBP keeps policy rate unchanged at 9.75%

“Electricity prices also increase through monthly fuel price adjustments, while transportation costs also go up,” added Khan.

Meanwhile, Asad Rizvi, former treasury head at Chase Manhattan, warned that the latest increase in oil prices would be ‘devastating’ for the transport sector.

“Though oil prices have slipped after easing of Russian/Ukraine tension, the historic increase in domestic petroleum products will have widespread impact on the economy and devastating impact in the logistics and transportation business,” said Rizvi in a tweet post.

On the other hand, some called for an improvement in infrastructure and public transport in a bid to save much-needed foreign exchange.

“If we had adequate public transport across the country, our energy imports could have saved billions of dollars,” AAH Soomro, ex-managing director at KASB Securities, tweeted.

“That is dollar well spent,” he said, adding that "instead of political interferences and mafia influences, this is the easiest way to curtail fuel imports, cut pollution and increase economic security.”

Meanwhile, a report from IGI Securities added that the global hike in oil prices will negatively affect Pakistan’s trade balance as well.

Data shows that imports under the petroleum group increased a massive 74% year-on-year in January 2022, clocking in at $1.51 billion from $869 million a year ago. On a monthly basis, however, they decreased 16%.

“As of 6 months of FY22, average price of crude oil import is $ 75 per barrel. Even taking this base number and the current import trajectory, Pakistan is likely to end up with an import bill over $73bn in FY22 (previous highest was US$ 56bn in 2018),” said the report.

“For every $10/bbl increase in oil prices, overall petroleum-based import bill goes up by $170 million every month or $1 billion in 6 months,” it added.

From a market standpoint, higher oil prices have negative implications on the manufacturing sector due to rise in energy prices, and subsequent reduction in margins.

“However, market-heavy sector E&Ps and banks could potentially negate the overall market performance, but given current economic times, that performance seems unlikely to come by.”

However, the brokerage firm said that it expects crude oil prices to fall as production continues to increase faster than consumption and inventories build.

“However, this production catching up with demand won’t be anytime sooner. A significant sustainable oil price direction is in our view is likely to develop from 2HFY22, but we expect in near-term range of $ 75-80/bbl. Beyond, 2022 into 2023 we expect oil prices to average in the range of $65-70/bbl based on buildup in inventories, stable production from OPEC+ and Libya,” it added.