Decline in global oil prices: Country's economy to have both positive, negative impact: Dr Ashfaq

The massive decline in global oil prices touching $30 per barrel would significantly benefit macroeconomy of the country, as import bill would decline, resulting in lower trade and current account deficits and lower inflation, but in the long run it may hit exports and remittances negatively.

This was stated by economic experts and leading stock exchange brokers while talking to Business Recorder. They also said that oil shares have 18 percent weight in the Karachi Stock Exchange (KSE) 100 Index and as oil prices crashed, stock exchange also crashed.

Oil prices declined significantly with West Texas Intermediate (WTI) down by 26.5 percent to $30 per barrel and Brent Oil down by 25 percent to $34 per barrel. This was the direct consequence of disintegration of OPEC-Plus alliance as major oil exporting countries notably Saudi Arabia and Russia could not agree to cut oil output to reduce global supply.

Former Adviser to Finance Ministry Dr Ashfaq Hassan Khan said that oil prices registered a sharp decline due to global economic slowdown on account of coronavirus outbreak as well as Saudi-Russia price war. However, the latter appears to be a temporary phenomenon as decline in oil price would adversely affect the revenue of oil producing countries.

"Even if the oil producing countries resolve the price war and reduce production, oil prices would still remain depressed due to decline in demand on account of coronavirus", said Khan, adding that Italy has shut down 14 cities which contribute 40 percent of the country's GDP and 15 percent of the EU's GDP. Flight operations globally were either suspended or reduced and the same is the case with other transport, said Khan, adding that even if coronavirus is controlled within a short time, its negative impact would remain for a year at least on the global economy.

He further said that decline in oil prices would have a positive as well as negative impact on Pakistan's economy. Depressed oil prices would help in cutting the import bill as oil is around one third of the total import bill, the government can collect additional revenue under petroleum levy and the inflation rate could come down if the impact is passed on to consumers, he added.

However, at the same time if crisis in oil producing countries is prolonged, Pakistani workers abroad would be affected and, resultantly, remittances would be hit negatively. Further with economic slowdown, the demand for Pakistani products would decline, and bring the country's exports down, Khan added.

"Oil shares have 18 percent weight in the KSE 100 index and as oil prices crashed it also hit the stock market", said Samiullah Tariq broker and Director Research and Business Development at Arif Habib.

Tariq said Pakistan is a net importer of oil with petroleum group imports contributing 25 percent to imports. WTI oil prices averaged $56/bbl during past 12 months and have currently nosedived to $30/bbl. Pakistan would be able to save $5 billion per annum on its imports, he added.

He further said a decline in oil prices reduces Pakistan's import bill hence resulting in lower trade and current account deficits and savings in foreign currency. Lower inflation would compel the monetary policy committee to monetary easing that would lead to improved consumer purchasing power that in turn would benefit other sectors with higher demand.

He added that major benefiting sectors would be 'cyclical sectors like cement, steel and automobiles'. Major sectors which will bear the brunt of lower oil prices would be exploration & production (E&P), refineries and oil marketing companies (OMCs).

He said lower oil prices would improve the government's budget balance as it enhances government's ability to collect taxes and reduces the amount of subsidy the government provides on sale of energy. In addition, the government would be able to spend the additional taxation on PSDP, improving growth prospects of the economy. The objective of the government should be, in addition to lower inflation, cover tax collection shortfall and implement long-awaited energy sector reforms including gas and electricity, he added.

Tariq said that the most visible impact of lower oil prices should be on inflation as it has been the talk of the town and an Achilles heel for the government. Average Arab light oil price for February 2020 was $58/bbl. The ex-refinery price for motor gasoline should decline by Rs 20/liter. It should reduce inflation by 80bps, which should be fully visible in April-2020 CPI and nullify the expected food prices increase due to Ramazan. April 2020 CPI should decline to 9.2 percent year on year, he added.