Since Pakistan is not a self-sufficient country in energy production and mainly depends on oil imports from international markets, macroeconomic variables in Pakistan fluctuate due to international oil price fluctuations. Over time, as the oil demand is increasing, Pakistan’s dependency on the international market is also increasing. From 1980 to 2017, oil consumption increased while oil production remained almost constant, with only slight increases compared to consumption.
From 2002 to 2004, there was a reduction in oil consumption, but after that, consumption has continuously risen. On the other hand, production is not increasing in Pakistan, and the remaining gap between production and consumption has been filled by importing oil from the international market. Importantly, oil is a significant determinant of economic and sectoral growth. Fluctuations in international oil prices have a great impact on Pakistan’s economy.
Pakistan is a developing country facing many development problems, and international oil price fluctuation is one of them. Examining the energy usage in Pakistan, nearly half of the energy consumed is oil, 28 percent is used as gas, 16 percent for electricity, 11 percent for coal, and two percent for LPG.
Oil is a significant determinant of economic and sectoral growth.
Oil prices affect the economy in two ways, impacting both aggregate supply and aggregate demand. The mechanism of oil price effects on aggregate demand and supply is different. From the aggregate supply perspective, any change in oil prices affects savings, investments, tax revenue, trade, and production costs, and leads to economic fluctuations. Secondly, oil prices affect aggregate demand by influencing consumption demand, exports, investment demand, and government expenditure. This dependency of oil prices on aggregate demand and aggregate supply shows that oil prices play an important role in economic stabilization.
As international oil prices fluctuate, manufacturing costs are affected because oil prices are a major input in the manufacturing sector. Any positive or negative oil shock or price change affects profit margins, leading to changes in production in the manufacturing sector. A negative shock and high oil prices reduce production in the manufacturing sector by decreasing investment, ultimately leading to a shrinking GDP.
Policies related to raw materials, export subsidies, and import tariffs, among others, play a role in the manufacturing sector’s performance. Additionally, incentives like enhanced reduction allowances have been arranged for several investors to boost investment in the economy. Temporarily, during the 1970s, the growth of the manufacturing sector dropped significantly to a level of 5.03 percent. This reduction was due to government nationalization strategies at that time.
The annual growth rate of manufacturing, including construction, seems to have a declining trend after 2003. The growth rate was recorded as the lowest annual growth from 1960 to 2018, at -4.17 percent in 2008. In 2003, the growth rate was 16.02 percent, the highest growth rate of the manufacturing sector since 1960. The average growth rate from 1960 to 2018 is around six percent and seems to be constant over time. This indicates that the government needs to improve the manufacturing sector.
Pakistan is one of the oil-importing countries that import oil from oil-exporting countries. Therefore, the increase in oil prices has an impact on production and consumption.
The writer is a freelance columnist