Tuesday August 16, 2022

Divine help

July 07, 2022

LAHORE: Sanctions have not dented Russian income much, but have plunged the world into recession triggering a decline in world commodity rates. This is a welcome sign for countries like Pakistan.

Despite impassioned pledges to stop supplying funds to Putin’s war on Ukraine, many countries have found ending their dependence on Russian fossil fuels rather difficult. In Europe, where this desire was probably strongest, long-standing supply chains with Russia have also proven some of the hardest to break.

One country supplying more money to Russia by buying up discounted fuel shipments is India.

Between February-March and May, the country spent approximately $65 million more per day on Russian energy.

According to a report, the United States managed the biggest absolute reduction by cutting out Russian fossil fuels completely and reducing daily revenues for Russia by around $33 million between February-March and May 2022. Its imports from Russia remained zero during these three months.

However, the combined 16-percent reduction by European Union countries - despite smaller in relative terms - cut a much larger $114 million from daily Russian revenues over the same period.

Recession fears have sharply reduced the crude oil rates by over 22 percent to $102 per barrel from the peak of $125 per barrel a few weeks back. Other commodities like wheat and gas and coal are also showing signs of decline in rates.

This is a good omen for the battered Pakistani economy that also saw acceleration of hydroelectric power as Tarbela Dam is filling at a rapid speed. Hydropower this month is expected to touch 6,000MW mainly with generation from Tarbela, Ghazi-Brotha , and Neelam-Jehlum.

This would reduce the need to import a substantial quantity of fossil fuels.

Global recession would also impact Pakistan’s exports as during recession the first cut consumers make is on buying new clothing.

Textile, its main export sector might see a decline in exports up to $2 billion this fiscal if the expected recession fears materialise.

Some foreign buyers have already cancelled their order and some big brands have asked the Pakistani exporters to hold the shipments for the time being.

However, Pakistan could save up to $5 billion on fossil fuel imports alone or more if prices dipped further.

Some analysts see that the decline in crude oil rates could reach $70 per barrel or less. There are predictions in this regard from industry experts.

Lower commodity rates would hurt Russia badly particularly when it is obliged to sell all its commodities at discount. It is not yet clear how the developed world reacts to avoid recession.

It could let Russia annex Ukraine to normalise the global economy.

It is not yet clear how the policymakers in Pakistan act to this divine help. Will they protect the exporters by using the decline in crude oil rates?

It is also not certain how much of the benefit of decline in crude oil rates would be passed on to the consumers.

The government might adjust the petroleum levy agreed with the IMF instead of decreasing the retail rates of petroleum products.

Lower commodity rates would also reduce the pressure on rupee, which might appreciate substantially if the IMF deal is sealed.