_akhbar.jpg)
On Monday, the Monetary Policy Committee (MPC) of the SBP decided to hold the key rate unchanged at 11.5 per cent, in line with the expectations of most market participants. The decision mirrors the one taken at the previous MPC meeting in July. With the situation in the Middle East escalating once again, driving global fuel prices back to over $100 per barrel, and inflation spiking back into the double digits at 11.1 per cent year-on-year in August, it was not have been unreasonable for some to expect that rates would be hiked this time around. However, the MPC statement, while acknowledging the price pressures and supply chains disruptions from the Middle East conflict, noted that recent domestic macroeconomic data turned out broadly in line with the committee’s expectations. External account pressures remained contained, supported by robust workers’ remittances and higher financial inflows. Economic activity, after witnessing a slowdown in in the last quarter of the previous fiscal year, had started to pick up gradually. As such, while the MPC believes that the current monetary policy is stance remains appropriate to guide inflation towards the target range of 5.0-7.0 per cent over the medium term, uncertainty regarding the outlook has increased due in large part to the worsening geopolitical environment.
One could argue that the main uncertainty facing Pakistan and the other Asian economies bearing the brunt of the ongoing fuel crisis is just how far petrol prices will go up. Economists who have studied fuel prices know that when they do rise they tend to go up like a rocket but, once things calm down, they decline like a feather. This is what is known as the ‘rocket and feather effect’ and it suggests that the country may well be putting up with elevated fuel prices for some time to come, no matter how efficacious its efforts on the diplomatic front prove to be. In this context, the petrol relief efforts currently being undertaken by the government can largely be seen as a stop-gap measure. A Rs100 per litre relief on 20 litres of petrol per month for two-wheelers and three-wheelers and 30 litres per month for vehicles up to 800cc are not much of a shield under the current circumstances. Petroleum levy collection also hit record levels in the previous fiscal, with the levy seeming to have become one of the government’s favourite tax tools amidst the fiscal consolidation imperative Pakistan is still under.
With the government’s ability to resolve the Middle East situation rather constrained, Pakistan must move to become more resilient to fuel shocks. Paying well over $1 billion a month for fuel imports, which the country did in both July and June, is simply not sustainable. Greater resilience will likely require moving in a dual direction, both improving the country’s fuel supply chain and smoothing out any bottle necks while also aggressively moving towards alternative energy sources like solar and electric vehicles. In this context, the delays in the signing of agreements for the upgradation of Pakistan’s local refineries are rather worrying. More encouraging is the country’s New Energy Vehicles (NEV) Policy 2025-30, which envisions a 30 per cent share for electric vehicles by 2030. However, as with all policies in the country, execution here will be crucial. Pakistan’s solar boom is also a step in the right direction and the government should continue to explore how it can make renewable energy more viable for ordinary consumers without punishing those who happen to remain on the grid. The days of relatively cheaper fuel appear to be fading and Pakistan will have to adapt if it is to give relief to its people and thrive in the long run.
