Falling oil prices - opportunity or threat

Published: February 1, 2016
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It provides chance to boost economy by passing benefits on to consumers. PHOTO: REUTERS

It provides chance to boost economy by passing benefits on to consumers. PHOTO: REUTERS

KARACHI: 

The downward spiral of oil prices in the international market should be seen as a blessing for a country like Pakistan that is energy-starved and banks heavily on oil imports from global markets.

It has, however, created nervousness in the government that sees the fall in global oil prices and other commodities as a threat to its revenue efforts as the country heavily relies on taxes on international trade for revenue generation. Pakistan collects 48% of its total revenue by levying customs duties and other taxes on imports.

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In the last one and a half year, prices of oil in the international market have gone down by 75%, falling from $110 per barrel to below $28. At present, they are hovering around $30.

With sanctions from Iran being lifted, an addition of four million barrels per day is expected, which will further put pressure on oil prices. Some analysts predict that prices can go down to $15 as soon as Iran starts pumping crude into the international market.

In the policy circles of Islamabad, heated debates are going on about how much of the reduction in world crude prices should be passed on to end-consumers. Pakistan is under the International Monetary Fund’s (IMF) programme, where it has to achieve stringent revenue collection targets.

It has shrunk the policy space for the government, which sees taxes on international trade as an easy and less costly means to achieve the revenue targets.

To meet the targets of the second quarter of the current fiscal year, the government introduced a mini-budget by raising import tariffs that included an increase in customs duty and imposition of regulatory duty on a large number of items.

On the import of petroleum products, the government is continuously increasing sales tax to meet the revenue targets. At present, sales tax on certain petroleum products is at its historic peak. Some analysts believe this rate of tax is unprecedented and equivalent to anti-consumption and luxury tax imposed to discourage consumption of certain products.

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Pakistan’s economy has suffered due to increasing costs of energy and petroleum products. This has created challenges, especially for the export sector, in the global markets despite the country’s competitive advantage in certain textile products and agricultural commodities.

The industry would definitely like the government to pass on the benefit of lower oil prices to be able to reduce production costs and enhance competitiveness.

Price crash study

A number of economists have empirically proved that the fall in oil prices is good for economic growth. They developed their models by analysing the substantial reduction in oil prices in the mid-80s due to the supply glut.

Economic scholars concluded that a 10% reduction in oil prices could enhance economic growth by 0.5 percentage point.

As global crude prices continue to fall, it is unclear as to what extent the government would keep increasing import tariffs, especially sales tax, on oil products. In the short run, there may not be many policy options, other than raising import tariffs, due to lack of capacity and a narrow space for collecting direct taxes.

However, one thing is clear that as the import tariff rises, revenues increase to a certain extent. Beyond that, further increase will bring the revenues down as economists explain this as “tax elasticity” and its impact on consumption.

The higher import tariffs will also create economic incentive for smuggling and may divert imports to the Afghan transit trade. There are already persistent complaints of diversion of transit goods to the domestic economy due to porous borders. Oil smuggling from Iran is also rampant and is meeting domestic needs in areas bordering Afghanistan and Iran.

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Compelling reasons

The private sector, as well as domestic households, is looking at the government to pass on benefits of lower oil prices. There are sufficient compelling reasons for this, as it would benefit the domestic economy.

According to a recent survey by The Economist, countries that have enjoyed strong GDP growth last year are the ones importing oil. On the other hand, economies that are producers and exporters of oil such as Saudi Arabia, Russia, Brazil and Nigeria are under severe strain.

Saudi Arabia is contemplating selling 10% of shares in Aramco, one of the most valuable companies in the world, as well as cutting expenditure. Russia has already announced a 10% reduction in public spending.

The plunge in oil prices is an opportunity for Pakistan to boost the domestic economy by passing the benefit on to the end-consumers. It would improve competitiveness of the industry and increase consumer welfare, which would have lasting benefits. In the short term, the loss of revenue will be the price worth paying.

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The writer is a development professional with over 20 years of experience in public and development sectors 

Published in The Express Tribune, February 1st,  2016.

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Reader Comments (13)

  • Sumit Sharma
    Feb 1, 2016 - 12:04PM

    Well everything is not bright… falling Oil prices have darker side too….
    pressure on oil prices, will bring slowdown in economy of gulf countries,, which may lead unemployment of millions of Indians, Pakistanis working in Gulf…and also loss of million dollars remittances which sent from these workers…..
    plus slowdown in gulf countries will badly impact export of ind pak to gulf countriesRecommend

  • Naveed
    Feb 1, 2016 - 1:30PM

    Sumit Sharma your assessment is right man Recommend

  • Sam
    Feb 1, 2016 - 1:33PM

    Oil prices are at low as water bottle’s price, but still govt is not passing benefits to public Recommend

  • Anon
    Feb 1, 2016 - 2:14PM

    But why govt is not reducing oil prices according to global reduction in oil pricesRecommend

  • Junaid
    Feb 1, 2016 - 2:18PM

    Well i don’t know what will be the impact of low oil prices, but surely this will bring arab sheikhs down on road …Recommend

  • Feb 1, 2016 - 2:18PM

    Government cannot introduce tax reforms to tax rich people in society. They just want to tax poor people of the country by taxing oil products. For rich person it does not matter if it is 100 rs/l or 150 rs/l. But for poor people it can be huge burden. Recommend

  • abdullah
    Feb 1, 2016 - 3:53PM

    15 dollars is not possible because iran canot go below its production cost .Secondly the petrol price is 36 $ as of today.Thirdly when it was 110$ the gov had subsidised it heavily which the writer has failed to consider.Now a days the gov is reducing the subisdy on it thats the reason we dont see much diff in oil prices compared to 2 years ago. in pakistan oil prices are the lowest in asia.Recommend

  • raider
    Feb 1, 2016 - 7:12PM

    @abdullah:
    in pakistan oil prices are the lowest in asia.
    definitely you will have come across figures of oil prices in all Asian countries or searched out somewhere else while giving this sweeping statement, plz, do share oil prices in some south and central Asian countries or plz do share reference/link otherwise, your response will be appreciated with the request to ET PLZ allow responding to addressed comment.Recommend

  • curious2
    Feb 1, 2016 - 7:56PM

    Lower oil prices is a win-win to Pakistan even if it doesn’t all get passed down to the consumers. High taxes on fuel isn’t unique to Pakistan and overall Pakistan needs to increase taxes across the board to mitigate debt which will ultimately be the demise of the country. Lower oil prices should stimulate the economies of your largest export customers which might increase demand which should also benefit Pakistan. Recommend

  • AMR
    Feb 1, 2016 - 8:41PM

    An opportunity for the government to build their fuel reserves and pass on the benefit to the people of Pakistan. Recommend

  • Pukhtoon
    Feb 2, 2016 - 12:24AM

    I can comment with respect to Pakistan. This is a very bad news as the royalty of Oil and Gas from small provinces will decrease and Punjab will enjoy more cheap oil in the future. This could create more opportunities in Punjab and economic disparity will increase among smaller provinces. Higher prices can control Punjab. Lower prices can make it more powerful.Recommend

  • Saad
    Feb 2, 2016 - 9:52AM

    @pukhtoon.Come out of the punjab phobia.KPK does not produce so much oil that punjab buys from KPK.Secondly KPK can only move forward if you shed the victim mentality and start working on your goals.Sadly the chief minister of KPK is very lazy and only good at giving statements.Does nothing for his people.Punjab is moving ahead not because of its politicians but because of the people of punjab.Change comes form the bottom never from the top so ppl in KPK need to start working instead of expecting things from politicians.Recommend

  • touseef
    Feb 2, 2016 - 8:49PM

    @Sumit Sharma:
    you are right but threats also being opportunitiesRecommend

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