Dealing with vulnerabilities |
EVERY crisis presents an opportunity to reflect upon underlying weaknesses and take corrective action. The current turmoil in the Gulf should be examined from this angle. It highlights long-existing vulnerabilities in Pakistan’s economic structure that haven’t always received adequate policy attention. The situation is particularly significant as it coincides with a broader transformation in the global economic environment.
For several decades, the world economy that functioned within a relatively liberal trading system has been giving way to rising protectionism, economic nationalism and inward-looking policies. For countries like Pakistan, which rely heavily on international trade, remittances and external financial flows, the shift brings a new layer of uncertainty. Since the war’s duration and reopening of the Strait of Hormuz are uncertain, any assessment must be tentative. However, there are at least five major channels through which the situation could affect our economy.
First, the most immediate impact is through higher oil prices. Disruptions to shipping routes, higher war-risk premiums and potential interruptions in oil and gas supplies have already pushed global energy prices upward. These increases have begun to be reflected in domestic petroleum pricing. Higher fuel prices translate into higher inflation — transportation costs rise and prices of imported inputs used in production and distribution also increase. Passing these higher costs on to consumers is politically unpopular but economically unavoidable. We simply don’t have the fiscal space to finance large subsidies to keep domestic prices artificially low. Such subsidies will widen the fiscal deficit and risk derailing the IMF programme, creating more economic instability.
Pakistan must move towards a fully deregulated petroleum pricing........