by Javed Mahmood
The current trend of unabated spike in the international, domestic prices of oil (fuel & edible) and other essential commodities, especially flour and rice, is not only posing a serious challenge to the sustainability of the economy of the country, but also enraging the consumers, whose purchasing power is being eroded steadily with every passing day.
The international crude oil prices have renewed their upward journey after the statement of Iranian President Ahmedinejad, who had stunned the world by asserting that the oil prices were still far under-valued. In his statement published on April 20, 2008, Iranian President said that crude oil prices, although at record levels, were still below their true value. He also said the developed countries (not producing countries like Iran), were benefiting the most from the current high prices.
Iranian President has blamed the developed countries for unprecedented hike in oil prices said that the global oil price has not reached its real value yet and the products derived from crude oil are sold at prices dozens of times higher than those charged by oil-producing countries. A day before the statement of the Iranian President the international crude oil prices in the US markets were reported at 113 dollars a barrel, which quickly breached the mark of 120 dollars, but settled at $119/barrel on Friday amid fears that the prices would soon set the new benchmark of 125 dollars a barrel.
The energy sector analysts are predicting average crude oil prices around 101 dollars a barrel in 2008 as against average rate of 72.32 dollars/barrel in 2007. Like fuel oil, the price of edible oil too had shown an unprecedented growth during the last one year. In fact the edible oil producers and exporters, who gathered at an annual conference in Kuala Lumpur, Malaysia, last year in March or April, decided to follow the pattern of spike in fuel oil prices to multiply their earnings.
When the palm oil producers and exporters met in Malaysia in 2007 the price of palm oil was being traded exported at less than 500 dollars/ton. By March 2008 (within one year period) the export price of palm oil has hit the highest mark of 1500 dollars/ton, two times higher than a year old benchmark and the producers/exporters are expected to jack-up the price further to fulfil their ambition of amassing the wealth from the consumer countries.
Following the global path, the importers and manufacturers of cooking oil and ghee in Pakistan have passed on to consumers the impact of hike in the rate of this essential consumer item. For example in January 2007 the superior quality cooking oil and ghee (branded) was being sold at in the range of Rs 86-90 per litre/kg at retail outlets throughout the country. And by April 2008 the retail price of this most essential kitchen item had gone beyond Rs 130. Every week the price of cooking oil/ghee is being adjusted upward in line with increase in its international price that is causing a blow to the consumers, especially the lower middle class and those living beneath the poverty-line.
Impact on the economy
Some of the sound economic pillars of the national economy are steadily losing ground because of the external and domestic factors. Details gathered by Money Plus showed that the country had spent 2.5 billion dollars more on the import of fuel oil and edible oil mainly because of increase in their global prices. From July-March FY08 Pakistan had spent a total of 7.416 billion dollars on the import of petroleum group, compared to import of 5.277 billion dollars of this group in the corresponding period of last fiscal. Crude oil import had widened to 3.42 billion dollars in this fiscal, from 2.59 billion dollars in the same period of last fiscal, showing a growth of about one billion dollars in value.
In quantity the import of crude oil surged by only 5.61 per cent in nine months of this fiscal while in monetary term the growth stands at 32.23 per cent that reflects the margin of price-hike. Similarly, petroleum products import amounted to 3.99 billion dollars in the ongoing fiscal, from 2.68 billion dollars in last fiscal during July-March period. Import of petroleum products indicates 21 per cent quantitative increase and 48.52 per cent increase in value.
From July-March FY08 the country had imported edible oil worth 1.085 billion dollars as against 662 million dollars import in the corresponding period of previous fiscal, showing 2 per cent decline in quantity, but 64 per cent increase in value. In simple words the country had paid 423 million dollars more on account of hike in the prices of palm oil.
The import of wheat too had taken away 631 million dollars in this fiscal because of the artificial wheat crisis, triggered by the market manipulators and hoarders and the country is set to drain another 750 to 800 million dollars on the import of further 1.5 million tons of wheat that aimed at reigning in the flour crisis this year.
To gauge the impact of hike in international prices of various items on the national economy, one can easily understand it after seeing over 9.80 billion dollars current account deficit in nine months of the current financial year while the trade deficit had enlarged to 14.46 billion dollars from July-March FY08.
Worth noting is that in 2007-08 the country is going to endure a gigantic loss of around 30 billion dollars in just two areas (19-20 billion dollars trade deficit and about 10 billion dollars budgetary deficit. The twin deficits (that would be the highest-ever) are being seen equal to one third of the real GDP and same percentage (or little higher) than the entire debt of Pakistan.
The foreign exchange reserves of Pakistan have also depleted to 12.65 billion dollars in April 2008 from 16.40 billion dollars in October 2007 while the dollar-rupee exchange rate too had edged up to over Rs 66 last week from Rs 62.70 a month ago. The fiscal deficit had also shot up to Rs 365.32 billion from July-December FY08, showing a rapid growth of Rs 205.26 billion when matched with Rs 158.06 billion such deficit in the same period of FY07.
The rising international and domestic prices of essential consumer items have not only undermined the foundations of the economy of the country, but also opened a Pandora’s Box for the new government and the consumers as well. Because on the one hand the precious foreign exchange is being lost while on the other the food inflation is hitting the new benchmarks every week and every month.
The current critical and challenging economic situation of the country had landed the new coalition government into a serious trouble as the new government was in a fix and finding out a strategy to reign in erosion in the economy. So far the new government had been focusing on reduction in the subsidies as a result the POL products had been increased three times (two adjustments had been made by the caretakers and the third one by the newly-elected government.
The new government had also reduced subsidy on issue price of wheat and raised the price to Rs 1622 per 100-kg, as against previous price of Rs 1200/100-kg, thus making an increase of Rs 4.22 per kg that was now being passed on to the consumers in the shape of increase in flour price at retail stage. The recent increases incorporated in the POL prices and hike in wheat/flour prices have jacked up the food inflation to over 20 per cent in March 2008 and it may increase further as the government intend to make more adjustments in POL products to minimize subsidy and to mop up revenue.
Can the economy sustain the current phenomenon of rapid and steady deterioration in some of the key economic indicators for another couple of years is a question that is haunting all and sundry in the country?
by Javed Mahmood