The ongoing decline in global oil price “benefits Pakistan” and will help its trade balance and inflation figures, said brokerage house JS Global in a report on Thursday.
“Pakistan, being a net oil importer, is on the favourable end of the ongoing oil price correction,” the report stated.
JS Global was of the view that the commodity price plays a pivotal role in Pakistan’s trade balance and inflation.
“Petroleum imports account for ~30% of total imports and ~55% of total export proceeds, making them a significant driver of the trade deficit, and oil prices directly impact the 6%-weighted transport segment of the inflation basket,” read the report.
The assessment comes as global oil prices have declined by approximately 20% i.e. $17 per barrel in the past 5 months, reaching their lowest point in 15 months at $72.9 per barrel, the brokerage house said owing to increased supply, built-up inventory, and reduced demand has pushed oil prices.
Meanwhile, “OPEC+ production cuts, coupled with concerns over China’s economic growth and the potential for a global recession are some of the key factors,” behind the price drop, it added.
Citing the latest Pakistan Bureau of Statistics (PBS) data, the brokerage house said trade data for Jul-2024 indicates that crude oil and petroleum product prices were purchased at an average of ~$83 per barrel, where global oil prices have reduced 12% i.e. $10 per barrel from those levels.
“Decrease in realized oil import prices would positively impact the import bill, potentially reducing our CAD (Current Account Deficit) estimate for FY25 by around $800 million (0.2% of GDP),” it said.
Moreover, a drop of $5 per barrel reduces the annual import bill by around $900 million i.e. 0.25% of GDP, read the report.
The brokerage house noted that there could be a potential counterbalancing effect of lower oil prices on remittances.
“Since 55% of Pakistan’s remittances originate from Middle East – a region heavily reliant on oil income, any prolonged decline in oil prices could negatively impact economies of these countries and hence, weaken remittance flows from current levels,” it said.
“However, historical data suggests a weaker correlation between oil prices and remittances, reducing possibility of any notable impact,” it noted.
Moreover, the decline in oil price will also slightly push the ongoing disinflation trend in Pakistan, it said.
“While we expect FY25F average CPI to clock in at 9%, lower oil prices may slightly revise our estimates as transportation segment is only 6% of the CPI basket,” read the report.
It said “a $5 per barrel i.e. 7% drop in oil prices, would trim 35bps from our headline inflation estimates for FY25E”.
On the other hand, lower oil price also provides room for the government to increase the Petroleum Development Levy (PDL) to meet its fiscal target, JS Global said.
“The government may seize this opportunity to increase the PDL by Rs10 per litre (~4% of present POL product price level) to its revised cap of Rs70 per litre, helping to offset the shortfall in PDL collection due to sluggish OMC sales,” it said.
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