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After the ‘oil price closet of anxieties’

Finance Minister Ishaq Dar sure looked pretty and no doubt also felt very good as he cut oil prices to announce his return to the ministry. He also plans to adjust taxes, strengthen the rupee to somewhere below 200 to the dollar and force a dovish monetary policy out of the SBP (State Bank of Pakistan) as PML-N (Pakistan Muslim League-Nawaz) pins all hope on his Darnomics wizardry to turn the economy and win back its depleted political capital ahead of next year’s general election.

But controlling energy prices will seemingly be his major policy thrust as he negotiates the remainder of the EFF (Extended Fund Facility) with the IMF (International Monetary Fund).

How the Fund reacts to his crossing what is in no uncertain terms a “red line” by fiddling with oil prices, as his predecessor Miftah Ismail dared to point out, remains to be seen. Yet Dar is confident, counting on increasing fiscal room – Thank you Miftah! – and the fact that oil prices have gone soft in the international market; from north of $120 to around $85 since roughly the time that the US administration tapped its SPR (Strategic Petroleum Reserve) to put excess oil in the market.

He has a point. Much of this year has been traumatic for Black Gold, which has had an imminent recession, frantic Fed tightening, dollar strength, fizzling of Chinese demand, inventory buildups, etc., thrown at it one after the other. But what if the music suddenly stops and the party doesn’t go on anymore? Because there’s plenty to suggest that this “oil price closet of anxieties”, in the words of oilfield veteran and columnist David Messler, is already pretty much in the rear-view mirror.

OPEC+ is expected (till the time of writing) to deliver very harsh production cuts, followed by the end of the US SPR and then new sanctions against Russia will come into effect just when Chinese demand returns to the market. There’s also “bad data” coming out of the US as weaker-than-expected ISM manufacturing and job openings in September caused Treasuries to rally this week, pushing yields and the dollar lower while equities also pared losses. There’s already talk of the Fed using this data feed as proof of the US economy cooling and pivoting away from its uber-hawkish squeeze; a definite oil-positive.

That’s enough for oil traders sitting on the sidelines – trading volume in the futures market has been down 30-40pc this year because of increased volatility – to renew their long positions; making the options market hint at oil possibly at $100, perhaps around $120, around Q1 of next year. If this script indeed plays out, Dar’s finance ministry will have to burn more reserves in the commodities market, especially if the government’s PR drive continues to take precedence and petroleum prices remain capped; or are cut more. Couple that with the extra burden on the current account because of forced imports and reduced exports caused by the floods, and you’ll see why the dollar index plateauing might not suffice to keep the wind in the rupee’s sails and Dar’s reputation intact.

If, at the end of the day, his jugglery breathes some life into the rupee but runs foul of the IMF and then runs into serious market headwinds, he’ll have no option but to do what each of his three immediate predecessors have done; go back hat-in-hand to the Fund and accept even stricter structural adjustment conditions. Perhaps that explains why a Bloomberg Economics risk model is warning that the odds of Pakistan facing a currency crisis in the next 12 months now exceed 50pc.

“The probability of a currency crisis episode involving a very large depreciation of the nominal exchange rate and extensive depletion of foreign exchange reserves could climb to about 59pc in 2023 from 29pc in August”, it said. “Crop damage and a host of other problems stemming from the disaster all but erase any progress towards stability that came with the IMF’s aid”.

That’s when PML-N’s leadership will realise that it was far better to let Miftah follow his painful surgery with a gradual recovery than trigger political and economic blowback by bringing Dar and Darnomics back into play.

Shahab Jafry, "After the ‘oil price closet of anxieties’," Business recorder. 2022-10-06.
Keywords: Economics , State Bank , Oil prices , Monetary policy , Fund Facility , Economy , Ishaq Dar , Miftah Ismail , OPEC , IMF , PMLN , EFF , SBP

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