Rising oil, falling remittances may trigger BoP crisis

ISLAMABAD: The rise of Brent Crude Oil to $95.18/barrel in the international market and a fall in remittances by around $450 million just in January 2022 are the two most worrying developments on Pakistan’s macroeconomic front, analysts said.

These conundrums have struck at a time when political mercury is peaking in Islamabad as opposition parties are planning a motion of no confidence against Prime Minister Imran Khan in the Parliament.

These threats are feared to trigger a balance of payment crisis, thus worsening the country’s economic woes manifold.

First off, they could mount the inflationary pressures to a backbreaking levels.

The high domestic oil prices, as well as increase in power prices, through fuel price adjustments, will make the lives of people at large miserable beyond imagination. At the existing pace, these two events could add a burden of over $4-5 billion on the external account in the second half (January-June period) of fiscal year 2021-22.

“The oil prices in the international market are heading towards $100/barrel,” a top official said and added that a rise of only $10/barrel more could easily increase Pakistan’s import bill by $1 billion. In a background discussion, one of the top members of the country’s economic team told The News that rising global oil and commodities’ prices would increase the import bill by 60-70 percent, which was why external account projections went through the roof.

During the budget-making exercise, it was estimated oil would not go beyond $70-75/barrel, but now it’s hovering around $95/barrel and moving towards $100/barrel, so the oil import bill was bound to go up by $2 billion on annual basis.

The only solution to this problem is the whole nation adopt a strategy to reduce oil consumption through an effective conservation strategy, but without wasting a single moment. There is no workaround.

Fortunately, one sigh of relief is Saudi Arabia’s $1.5 billion oil facility on deferred payment that will start from next month, providing support of $150 million on a monthly basis for the next year.

Remittances fell down from $2.52 billion in December 2021 to $2.1 billion in January 2022. If this trend stays the course till June 2022, it will cause an impact of $2.4 billion.

“Alarms bells must have rung at Q Block (Ministry of Finance) and SBP (State Bank of Pakistan). So there is need of an SOS strategy to handle the emerging crisis,” the official sources said.

Although, Pakistan’s remittances stood at $18 billion in the first seven months, 9.1 percent higher than the same period last year, they

fell 5 percent compared to January 2021, partly reflecting easing travel restrictions.

Compared to the previous month, they fell 14.9 percent due to seasonality, the SBP conceded in its official press statement.

Remittance inflows during January 2022 were mainly sourced from Saudi Arabia ($540 million), the United Arab Emirates ($374 million), the United Kingdom ($320 million), and the United States of America ($208 million).

Mohammad Sohail, Head of Research at Topline Securities, told The News that increasing oil prices usually had a negative impact on Pakistan’s balance of payments.

“With forex reserves on the lower side, rising oil prices will continue to weigh down on rupee against dollar,” he added. Talking to The News, Dr Khaqan Najeeb, former adviser Ministry of Finance, said the current account deficit (CAD) had grown way beyond initial forecasts.

“The widening of CAD has been fuelled by an accommodative monetary-fiscal policy mix and rising international commodity prices since July 2022,” Dr Najeeb said.

Six months (July-Dec FY22) CAD at $9.09 billion is much higher than the initial forecasts of authorities, which were as low as $2.6 billion in National Economic Council for the entire FY22, according to the economist.

“The CAD remains a key cause of macroeconomic instability for a country like Pakistan with scarce foreign exchange,” Dr Najeeb emphasised.

Pakistan's remittances were a major source of financing the inflating CAD, the economist said.

“However, a 15 percent month-on-month decline in January remittances is a cause of concern and interestingly Bangladesh’s remittances rose by 5 percent month-on-month to $1.70 billion in January.” According to Dr Najeeb, receding remittances and strong imports growth are vulnerable to the oil price as reflected in the US oil benchmark, hitting $94.66/barrel, its highest level since September 30, 2014.

“It can mean the new forecast of CAD could be closer to 5 percent of GDP in FY 2022 and this surpasses recent estimates of 4 percent of GDP, reflected in IMF documents.”

The CAD puts pressure on the exchange rate and the need for higher financing, according to the economist.

He said corrective measures taken by authorities must be strengthened if required.