Increase in oil prices — after-effects

There is no doubt that Pakistan has benefited immensely from the fall in crude oil prices, easing off pressure on its trade deficit through a lower import bill, while remittances have continued to be a pillar supporting foreign exchange reserves. What could have hurt the country would have been falling tax revenues, but that too, was tackled when the government raised tax rates to unprecedented levels. This meant that the full benefit of the fall in oil prices was never passed on to the public, but a country where paying taxes is rare, the government obviously felt that it did not have a choice but to increase the tax rate. Increasing tax revenue through indirect taxation and withholding taxes is a simple, if not an effective long-term strategy, put to good effect by Ishaq Dar and his men. But since January 20, oil prices have risen as much as 60 per cent and analysts are already sweating over the effects it might have on the country’s economy.



The IMF programme is to be completed by the end of September and pressure would be felt on foreign exchange reserves given that exports are nowhere near where the country wants them to be. In such a scenario, an increasing pace of inflation and falling remittances could be the blow that might push Pakistan towards another bailout. But this is where analysts and experts differ in opinion. It was feared that falling oil prices would lead to spending cuts in the Gulf and the Middle East — where most remittances flow in from — and could lead to layoffs. Overseas Pakistanis, hence, it was feared, would not be able to send as much back as they used to. But almost two years after the oil glut began, remittances have not shown the kind of dreaded fall analysts predicted. Additionally, inflation has not picked up since the prices of commodities remain depressed. Falling oil prices are not the sole cause of the falling inflation rate. With exports yet to pick up, external factors are aiding Pakistan’s economy. The fear that one day these aids will be gone has given birth to a new set of worries. Maybe now is the time to focus on increasing exports and strengthening the economy without being dependent on factors beyond our control.

Published in The Express Tribune, April 18^th,  2016.

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