Of rising oil prices and the devaluing rupee
KARACHI: There’s an old adage that goes, “Prepare for the worst and hope for the best.” As Pakistan faces the twin challenges of rising oil prices and falling rupee, this wisdom couldn’t be more relevant. As an energy-importing country.
Pakistan incurs significant annual costs, which amounted to $17 billion in the last financial year, to meet its demand for crude oil, liquefied natural gas (LNG) and fuels such as gasoline and diesel. The depreciation of the rupee further aggravates the situation and makes it more expensive to import these goods in terms of PKR.
Despite a brief rise in the Pakistani rupee against the US dollar following an International Monetary Fund (IMF) deal and capital inflows from friendly countries, the currency weakened again and stabilized at a provisional level between 285 and 290 rupees to the dollar.
The drop came even as the State Bank’s foreign exchange reserves doubled in a month, indicating that these factors alone were not enough to bolster the rupee. The easing of import restrictions has boosted demand for the dollar, which should put pressure on the local currency.
Furthermore, the rupee’s interbank rate is approaching the free market rate, suggesting that market forces are playing an increasingly important role in determining the value of the rupee, a change in line with IMF requirements. . At the same time, the price of oil has increased, Brent crude oil, the international benchmark, has risen from less than 75 dollars a barrel at the beginning of May to 84 dollars currently. Given the high demand and tight supply, prices may continue to rise in the future. The United States and China, two of the largest oil markets in the world, are seeing increased demand.
The United States recently reported a sharp drop of 17 million barrels in crude inventories in a week as refiners in the country ramped up oil processing to meet strong domestic and international fuel demand. Crude oil inventories also fell in other regions, indicating that demand is outstripping supply. At the same time, China’s efforts to stimulate its economy could further increase demand for oil. On the other hand, oil supply has been constrained by OPEC production cuts. Oil production by the Organization of the Petroleum Exporting Countries (OPEC) fell 900,000 barrels a day in July, according to a Bloomberg survey, marking the biggest drop in three years.
Published in EDP BLOGS on August 15,2023.
