Home / Economic Empowerment / Cheap oil can help foster economic growth
Cheap oil can help foster economic growth

Cheap oil can help foster economic growth

Although no quantitative study has yet been attempted to know the precise impact of cheap oil at the regional level, an analysis by the World Bank Group included in the “Global Economic Prospects” indicates, in general, that gains from low oil prices can be substantial for developing countries’ importers if supported by stronger global growth. According to the World Bank, soft oil prices were expected to persist in 2015 and would be accompanied by significant real income shifts from oil-exporting to oil-importing countries, contributing to their growth and reducing inflationary, external and fiscal pressures. The report also hinted that oil prices were expected to remain low during 2016, implying that their impact on inflation was expected to be mostly temporary and likely to dissipate by the close of 2016. On the other hand, weak oil prices present significant challenges for major oil-exporting countries, which would be adversely impacted by declining growth prospects, and fiscal and external weaknesses. If low oil prices persist, they could undermine investment in new exploration and development, putting at risk investment in some low-income countries, or in unconventional sources such as shale oil, tar sands, and deep sea oil fields. So far as the reasons for the decline in oil prices were concerned, fall reflects confluence of certain factors, including several years of upward surprises in oil supply, downward surprises in demand, receding geopolitical risks in some areas of the world, change in the policy objectives of the Opec and appreciation of the US dollar. Although the relative strength of these factors remains uncertain, yet supply-related factors appear to have played a more dominant role in driving down prices.

The prognosis of the World Bank Group with regard to the trend in oil prices in the medium-term and its impact on various categories of countries is not something out of the ordinary or vastly different from the analysis of other expert groups. One need not to be an economist to understand that external sector position of oil importing countries would improve along with better investment, growth and fiscal prospects. The bigger and the extended the dip in oil prices, the bigger would be the gains and vice versa. The position of oil exporting countries would be quite the reverse, with negative impact of falling oil prices on important economic variables. However, it may be noted that the forecast of the World Bank that weaknesses in oil prices would persist up to the fag end of 2016 may not turn out to be true because of so many imponderables and uncertainties, which cannot be foreseen at the moment. For instance, who could imagine a year ago that prices of oil would decline by almost half within a short span of few quarters. Economists generally take credit for the right projections but are quite smart in finding excuses when their forecasts turn out to be inaccurate. Nonetheless, there is no doubt that falling oil prices are bound to trigger real-income shifts between oil exporting and oil importing countries and both categories of countries would be obliged to take appropriate measures in various areas to manage their economies according to the unfolding situation. In particular, the life may not be the same again for oil exporting countries as they have to wear shorter coats due to reduced cloth. Cracks are already more than evident in the unity of Opec while oil importing countries are having a huge sigh of relief.

So far as Pakistan’s position is concerned, it is crystal clear. The country’s dependence on imported oil is almost total and about one-third of its imports consist of crude and oil products. High oil prices in the international market had forced Pakistan to borrow from the multilateral financial institutions and other lenders to maintain a reasonable level of foreign exchange reserves and keep the flow of imports uninterrupted. Inflationary and fiscal pressures were also hard to manage. With a plunge in oil prices, the fortunes of the country have of course improved significantly. While oil imports are estimated to be lower by dollar 4-5 billion, price pressures have already eased and exchange rate stabilised at around Rs 101 to a dollar. Low oil prices are also expected to revive industrial growth and promote economic activity. However, fiscal position is likely to be affected due to lower prices of oil products, which the government has sought to improve by levying an additional tax of 5 percent on oil products. Although the opposition parties have criticised this tax, yet it needs to be noted that oil prices in most of the other countries are not much lower than Pakistan due to high local tariffs in large parts of the world. Since the country cannot raise the amount of direct taxes substantially, it has to rely on indirect taxes like the levies on oil. Also, authorities at the helm need to be mindful of the fact that the drop in oil prices may be temporary and has provided the country an opportunity to restrict its external borrowings to the minimum and from sources which are concessional. As such, they must try to reduce the debt servicing obligations of the country and restrict imports to the present level to utilise the space provided by the fall in international oil prices to the maximum possible extent. Temptation to raise consumption and use the occasion for political expediency must be resisted at all costs.

Business Recorder

About Web Desk

Leave a Reply

Your email address will not be published. Required fields are marked *

*

burberry pas cher burberry soldes longchamp pas cher longchamp pas cher polo ralph lauren pas cher nike tn pas cher nike tn nike tn pas cher air max 90 pas cher air max pas cher roshe run pas cher nike huarache pas cher nike tn pas cher louboutin pas cher louboutin soldes mbt pas cher mbt pas cher hermes pas cher hollister pas cher hollister paris herve leger pas cher michael kors pas cher remy hair extensions clip in hair extensions mbt outlet vanessa bruno pas cher vanessa bruno pas cher vanessa bruno pas cher ralph lauren pas cher

Scroll To Top