Hope not a strategy to tame price volatility

These days, the Pakistan Tehreek-e-Insaf (PTI) ministers seem very ‘hopeful’ on various issues as they have claimed that inflation is temporary, falling rupee is merely speculative and even the recent price hike of drugs seems benign to them. This is definitely not in full compliance with what their leader Prime Minister Imran Khan taught them ie, to hope for the best but at the same time prepare for the worst. On one hand, despite various stern warnings from finance minister, there is no respite for the falling rupee against the dollar and on the other hand, looming fears of another lockdown due to the Omicron variant further intensified the supply chain disruptions.

In my article titled ‘Pak rupee – not out of the woods yet’ from September 2021, I shared my concerns that depreciation of the local currency will not stop at Rs169 and since then, it has touched the level of Rs178 with no end in sight.

Usually, PTI spokespersons compare the fuel price of Pakistan with different countries in dollars however they ignore the deteriorating purchasing power of common people in Pakistan who are usually left at the mercy of powerful cartels, mafias and pressure groups. Adviser to the Prime Minister on Finance and Revenue Shaukat Tarin reiterated in the recent National Price Monitoring Committee (NPMC) meeting that the government was taking all possible measures to ensure smooth supply of essential commodities throughout the country. However, on the implementation side there are several issues. For instance, there has always been usual bickering between Sindh and centre where the main objective of the government of Sindh is to appear independent (not necessarily prudent) in its decision making.

It is no-brainer that in a developing country like Pakistan, where there are many inefficiencies in the supply chain, building strategic storage for all the essential commodities including petroleum products should form the cornerstone of the policy to reduce price volatility. Recalling my article titled ‘US-Iran conflict, lessons learned for Pakistan’ published in January 2020, I highlighted the importance of building strategic petroleum reserves for crude oil to avoid possible volatility in the post Covid era due to supply disruptions. Many countries remained in advantage by filling their strategic reserves to the brim at that time when prices were low, and releasing them recently in a coordinated manner to provide much-needed relief to their people amid rising fuel prices.

In addition, it seems that importing liquefied natural gas (LNG) is now considered the main alternative to the rapidly depleting indigenous gas reserves located in Sindh and Balochistan. However, these LNG imports are subject to huge price volatilities at a time when the supplies are much needed globally for example during the winter season. Also, the brewing tension between Russia and Ukraine has further destabilised the gas market amid colder winter in Europe and reduced supply from renewables.

Therefore, the main focus should be to reduce dependency on spot purchases of LNG cargoes and revive the focus on building pipelines from Iran and/ or Central Asian Republics. In the past, construction of critical pipeline infrastructure projects was marred by the ever-changing geo-political landscape. However, with the softening instance of the west against Iran during the Biden administration, the Iran-Pakistan pipeline project should be back on the cards again.

The whole energy section is crippled with the ballooning circular debt which creates a liquidity crunch in the sector when it comes to carrying out capital expenditure such as the exploration activities or upgradation/ modernisation of the existing refining sector or building petroleum reserves. Therefore, the main focus of the government should be to resume the exploration activities on a priority basis as well as modernise the refining sector post-release of new refining policy to reduce price volatility and curtail the burgeoning import bill. Once we are done with our part, then we can be hopeful that with recent hawkish stance of the Federal Reserve (FED) will result in lower commodity prices as US dollar will get stronger.

The writer is a financial market enthusiast and is attached to Pakistan’s stocks, commodities and emerging technology

Published in The Express Tribune, December 20^th, 2021.

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