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Pakistan economy burdened as oil imports hit record

The petroleum imports are the biggest spender, that is widening the trade deficit with implications for balance of payments. But, Pakistan will continue to be a big market for oil imports in the foreseeable future, as the growth in demand is more than 10 per cent a year. The government’s efforts to sustain a 7 per cent plus annual growth in GDP, an expanding domestic market for consumer goods and services, and higher export targets require creating larger exportable surpluses, are pushing oil imports.The domestic efforts to produce more energy — oil, gas, electricity, and coal, are likely to take four to five years more to help meet the energy demand.

Pressed by this growing demand, and to ease pressures on the balance of payments, the government has annnounced incentives and tax breaks for foreign and domestic producers of oil and gas in the form of the just-unveiled Petroleum Exploration and Production Policy (PEPP)-2007.

The State Bank of Pakistan (SBP), the central bank, for which it was officially issuing foreign exchange, has now shifted a part of the growing oil import bill to the inter-bank forex market, in order to conserve the official reserves.

A 10 per cent rise is indicated in petroleum group imports for the just ended fiscal 2007. The amount spend on imports reached a record $ 7.34 billion, or 24.3 per cent of the overall imports. Oil imports, at $7.34 billion in fiscal 2007 were 9.96 perc ent higher compared to $ 6.675 billion in 2006, Federal Bureau of Statistics (FBS) reported this week. The increase was more pronounced because of 'the surge in quantity' of imported oil and petroleum products, besides the rising oil prices, the FBS said. Saudi Arabia, UAE, kuwait and the Gulf are the key sources of crude oil and petroleum products imported by Pakistan.

Fiscal 2007 saw overall imports surpassing all targets and rising to $ 30.5 billion. The value may rise close to $ 35 billion during the current 2008 fiscal. Overall exports in 2007 were $ 17.01 billion, falling short of the target of $ 18.7 billion. The export target for 2008 is $ 19.2 billion. The trade deficit widened to a record $ 13.49 billion in 2007. Among the oil group, imports of petroleum products alone were $ 3.733 billion in 2007, up from $ 2.88 billion in 2006 — an increase of 29.59 per cent. But, the crude oil import showed a decline of 4.94 per cent to $ 3.61 billion in 2007, compared to 2006.

While the government is worried about the rising energy cost, oil imports and the domestic production is a key source of its revenue collection. The collection from the oil and gas sector was a record Rs72 billion in the first nine months of 2007. The amount surpassed the government’s own target of Rs42 billion for 2007. The amount in 2006 was Rs46 billion. According to the Ministry of Finance, the above collection is besides the indirect taxes, the government receives from petroleum products and gas as 15 per cent General Sales Tax (GST), Excise Duty, surcharges and other levies. The oil and gas surcharges rose to Rs51 billion in the first nine months of 2007, up from Rs 31.6 billion in 2006.

The Ministry says, it collected Rs23 billion in the form of surcharge on oil in the first sixth months of 2007 on the back of higher international prices. Although the Ministry made this collection, the Oil Marketing Companies (OMCs), importing and marketing petroleum and oil products in Pakistan, complain that the government has not paid them their Price Differential Claims (PDCs) which they insist totaled Rs18 billion as of May 31. The Ministry had also decided to grant a Rs10 billion subsidy on oil prices in the National Budget-2007 covering PDC of diesel.

The PDC, OMCs claims rose to Rs18.4 billion as of July 15.Trouble now is brewing on the oil front. It may add to the list of several domestic problems, ranging from judicial crisis to militancy, if OMCs are not paid their claimed amount of PDC. The OMCs, this week, threatened to "disrupt the oil supply chain in Pakistan in case the government does not pay them the Petroleum Differential Claim." In case the OMCs carry out the threat, the country and its economy may experience a jolt. The country already is facing bad news from the global market as the oil price is moving around $ 75 a barrel.

Again, Pakistani consumers, already hard hit by a 16 per cent food inflation, in an election year, will encounter a bad news from the oil front. Dr. Salman Shah, Adviser to Prime Minister Shaukat Aziz on Finance and Economic affairs, says the government may increase domestic oil prices in future, in case its prices continue moving around $ 75-78 a barrel in the international market. If the government does not increase the domestic prices, the PDC of OMCs will rise further to Rs 22 to 23 billion by August 10, from the July 15 amount of Rs18.4 billion.

OMCs point out that motor gasoline in the international market has recently declined, while diesel has risen by Rs6.38 a litre. The OMCs say, they will not be in a position to continue supplying diesel at the present domestic rate as its international price has gone up.

Indications are that the government is not raising the domestic oil prices for political considerations in this year of national elections, in which the ruling party and the President of the country are facing considerable opposition. In view of this, the government is absorbing a Rs5 billion hit a month in order not to raise prices. But after a few months it may have to raise prices and stop absorbing this loss, as Dr Shah has indicated.