Pakistan: Textile industry first casualty of absurd policies of incumbent government

Abdul Rahim Nasir, Chairman, All Pakistan Textile Mills Association (APTMA) claims that over 300 textile units have been closed due to the cut in gas supply. 

He urged the Government of Pakistan (GoP) to immediately restore gas supply to the textile industry. Explaining  gravity of the situation he said Pakistan has already lost almost US$1 billion of textiles and clothing exports.

Accompanied by APTMA, North Zone Chief, Hamid Zaman and Senior Vice-Chairman Kamran Arshad at a press conference, he said the 26% upsurge in the export of textiles during fiscal year 2021-22 was made possible only due to the supply of energy at a regionally competitive tariff.

He stated that the textile industry performed admirably, increasing textile exports from US$12.5 billion in 2020 to nearly US$20 billion in 2022, a 60% increase.

He claimed that the exponential growth in the textile sector has promoted investment of over US$5 billion and the establishment of 100 new textile units, which, after becoming operational, would result in fetching additional exports of US$6.0 billion per annum.

Nasir pointed out that gas supply to the industry was suspended for a week, almost halting production in the whole value-added industry and causing colossal losses to the economy.

He added that the large-scale closure of mills has resulted in massive layoffs and unemployment, spreading economic chaos.

He believes it is inexplicable that the exporting sector, which has pledged to increase textile exports to US$25 billion in 2022-23, is being denied energy and gas. He said that an uninterrupted supply of gas is a must for the industry to maintain momentum in exports.

Zaman said that the textile sector has repeatedly delivered on its commitment to enhance exports and proven that they are a viable and long-term solution provider for the economic stability of the country.

He warned that more than 50% of output would be lost this month, with a very high risk of permanent order loss and buyer diversion from Pakistan to its competitors.

He stated that the textile industry is currently producing goods for the upcoming Christmas, and any delay in the delivery schedule risks losing export markets for an indefinite period with little chance of recovery.

“If this momentum is lost due to energy supply and cost constraints, Pakistan will be forced to seek an additional US$6 billion in loans from abroad, which under the circumstances may not even be possible,” he said, stressing the immediate restoration of gas supply to the export-oriented industry.

Highlighting the importance of the textile sector in the mainstay of the country’s economy, Arshad said that textiles have a 61% share in the country’s exports and 40% of manufacturing sector employment. The fragile economy of the country cannot sustain the consequences of the closure of mills in the wake of non-supply of gas.

State Bank of Pakistan raises policy rate to 15%

State Bank of Pakistan (SBP) in its Monetary Policy Statement (MPS) has increased policy rate by 125bps to 13-year high of 15%.

As per SBP, inflation expectations have risen significantly due to local and international challenges. Inflation in June 2022 rose to a 14-year high of 21.3% as government removed energy subsidies.

Furthermore, external account concerns also increased as current account deficit was reported at US$1.4 billion in May 2022 which was higher than expected. As a result, foreign exchange reserves and rupee has remained under pressure further increasing inflation expectation.

SBP stressed the importance of monetary tightening and its impact on containing aggregate demand. Had the monetary tightening measures not been taken by the central bank, inflationary pressures and external account issues could have further worsened.

SBP also stressed the need to provide targeted subsidies where inflationary pressures and impact of higher utility prices must be absorbed by well-off segment of the society.  

The interest rates on LTFF and EFF loans are now being linked to the policy rate to strengthen monetary policy transmission, while continuing to incentivize exports by presently offering a discount of 500bps relative to the policy rate as per SBP. It is believe that the hike was in line with IMF’s key demand to reduce concessions given to industry and improve monetary policy transmission.    

SBP expects inflation to remain in the range of 18-20% in FY23. It is anticipated to fall in the range of the 5-7% target range by the end of FY24, driven by tight policies, normalization of global commodity prices, and beneficial base effects. GDP growth rate is likely to remain in range of 3-4% in FY23. SBP anticipates Current Account Deficit at 3% of GDP in FY23. 

Despite the impact of tight fiscal and monetary policy on demand-pull inflation, inflation is likely to remain elevated around current levels for much of FY23 due to the large supply shock associated with the reversal of fuel and electricity subsidies.

SBP is likely to continue to monitor developments and factors affecting medium term prospects for inflation, fiscal stability and growth. SBP is anticipated to take appropriate action to safeguard them.

SBP expects Pakistan to reach Staff Level agreement with IMF very soon as government has already taken the difficult decisions like reversal of petroleum subsidies and passage of budget in line with key objectives agreed with IMF.

Completion of the on-going IMF review will also catalyze additional funding which should help Pakistan meeting its external financing requirements. 

Both monetary and fiscal policies are now moving in same direction which should help address inflationary pressures going forward.

SBP has refrained from giving forward guidance recently due to a lot of uncertainty as SBP’s policy decisions will remain data driven.

Though, inflationary pressures are cost push in nature but monetary tightening helps contain core inflation which is also rising and needs to be contained as per SBP.

Global recoverable oil reserves fall

Oslo-based energy analyst Rystad's latest analysis of the world’s energy backdrop indicates a 9% fall in recoverable oil resources, adding more pressure to the planet’s energy security.

Rystad Energy estimates that the world has a total of 1,572 billion barrels of recoverable oil reserves, but only about 1,200 billion barrels are likely to be economically viable before 2100 and US$50 per barrel.

The fall is partly down to 30 million barrels of oil produced last year and also a substantial reduction of 120 billion barrels in undiscovered resources. Leasing bans on federal land in the US will mean that a further 20 billion barrels stay in the ground, Rystad said.

Commenting on the findings, the firm’s head of analysis, Per Magnus Nysveen said, “While the drop in oil availability is positive news for the environment, it may threaten to further destabilize an already precarious energy landscape.

Energy security is a matter of redundancy; we need more of everything to meet the growing demand for transport, and any action to curb supply will quickly backfire on pump prices worldwide, including large producers such as the US Politicians and investors can find success by targeting energy consumption, encouraging  electrification of the transport sector, and drastically improving fuel efficiency.”

Rystad has also updated its estimated of total undiscovered oil, with a sharp reduction from one trillion barrels in 2018, to 350 billion barrels. This, the firm explained, was due to a rapid collapse in investor appetite for exploration exposure, leading to fewer government leases.

This downward revision is good news for carbon compliance, Rystad said, but could have negative consequences for global energy security, particularly if electric vehicle adoption falls short of expectations.

Pakistan: Oil and gas production on the decline

According to a report by Pakistan’s leading brokerage house, Topline Securities, during FY22, oil production in the country declined by 3%YoY to 26.8 million barrels or 73,400 barrels per day (bpd). Oil production in the country during 4QFY22 was down by 6%YoY as against 17%YoY increase in 4QFY21. 

This was largely due to: 1) decline in production from Nashpa, Adhi, and Makori East oil fields, and 2) no addition of any sizable oil field. On a QoQ basis, the decline in oil production was due to annual turnaround at Meyal, Jhandial and Pariwali.

During FY22, Pakistan gas production has come down by 2% YoY to 3.38k mmcfd which is largely in line with last 5-year average production decline.

Gas production in 4QFY22 contracted by 2% YoY due to: 1) their association with lower oil production, and 2) lower offtakes due to annual turnaround and maintenance. 

During 4QFY22, gas production was almost flat or up by paltry 1%QoQ despite lower offtakes from MARI due to annual turnaround of Foundation Power Company Daharki Limited (FPCDL) and Dakhni and Maramzai fields during the quarter.

As new block auctions were held last year, exploration activity in the new awarded blocks is likely to increase. Production flows in FY23 could also be higher due to the recent discoveries in FY22.

In FY22, Geological and Geophysical (G&G) activities remained on a higher side where 3D seismic acquisition rose to 1,913 Sq. Kms. However, 2D seismic activities decline to 2,507 Sq. Kms.

During 4QFY22, Geological and Geophysical activities showed an increase, with 3D seismic acquisition increasing to 1,132 Sq. Kms, while 2D declined to 577 Sq. Kms. Moving forward, there are 7 seismic surveys of 2D and 3D which are going to be conducted during 1QFY23.

In FY22, meterage drilling increased by 43%YoY as the numbers of well spudded were reported at 58 as compared to 50 in the same period last year. Drilling activities (meterage) rose by 20%YoY, but fell by 19%QoQ to 44,500 meters during 4QFY22.

Overall, 8 wells were abandoned in FY22 as against 6 in the same period last year. During 4QFY22, the exploration and production companies encountered 3 abandoned wells which were Exploratory (Mian Miro Deep -1, Surghar X-1 and Bewato-1.

For 1QFY23 3 exploratory and 4 development wells have been planned for.

Oil likely to fall to US$65 a barrel by end 2022

As the Bloomberg recession tracker rose to 38%, the price of oil has plummeted below US$100 a barrel, the first time since early May this year.

Citigroup is predicting that crude, which has soared as a direct result of Russia-Ukraine conflict, could fall to US$65 a barrel by year end.

While lower crude prices (theoretically) will lead to less pain at the pump, the surge in cost for natural gas (also made worse by the war) may do lasting damage to the global economy.

The fossil fuel has skyrocketed by 700% in Europe since the start of 2021. All of this is not helping when it comes to keeping Wall Street from panicking. But Mohamed A. El-Erian writes in Bloomberg Opinion that, while the first half of 2022 was excruciating for investors in stocks, corporate bonds, crypto and lots of other assets, there are a few silver linings to make you feel a little better.

Oil posted its worst trading day (July 05, 2022) in almost three months as recession fears gripped markets, outweighing a fundamentally tight supply market. 

West Texas Intermediate crude futures settled below U$$100 on Tuesday after falling more than 8%, the most since March 09, 2022.

Risk-off sentiment spread throughout markets on escalating concerns that a global economic slowdown will ultimately hobble demand.

Oil prices have been prone to violent swings as traders fled to the exits after Russia-Ukraine conflict started, drying up liquidity. The latest plunge came as equities slid and the US$ surged. Citigroup said that crude could fall to US$65 this year in the event of a recession.

Oil prices have been under pressure in the past month as central banks aggressively raise interest rates. Still, physical barrels are fetching enormous premiums.

Saudi Arabia hiked its official selling prices to Asia on Tuesday. Its flagship Arab Light crude price will be US$9.30 above its regional benchmark in August, an increase of US$2.80. 

“Crude oil prices have slumped as weakening demand concerns are starting to outweigh fears about tight supply,” said Fawad Razaqzada, market analyst at City Index.

“A growing number of analysts are expecting that many of the world’s leading economies will suffer negative growth in the next few months, and this will drag the US into a recession.”

While futures have been pressured by the threat of a global economic slowdown, key market time-spreads remain robust, indicating that there’s solid demand for near-term supplies. A strike in Norway and supply disruption in Libya has exacerbated that strength of late.

Pakistan: Perfect example of putting cart before the horse

It may not be possible for me to recap the history of ‘energy crises’ in Pakistan spread over 75 years in a few hundred words. Since the country is dependent on funds extended by the multilateral lenders, the country has remained a ‘Guinea Pig’. 

The donors have done all sorts of experimentation. I am refraining from talking about other policies imposed on Pakistan and confine my narrative to just one issue ‘Energy Stigma’.

It is known to all and sundry that Pakistan is capable of producing 50,000MW hydel energy. However, during the last 75 years the aggregate installed dependable capacity has remained below 10,000MW. It may be recalled that at one stage multilateral lenders refused to provide funds to WAPDA for the construction of dams/hydel power plants.

Pakistan’s energy dynamics were completely ruined in nineties when multilateral lenders started playing ‘deregulation, liberalization and privatization’ mantra. Under this theme the first Independent Power Plant (IPP) was initiated under the banner of The Hub Power Company based on furnace oil in the private sector. 

Then the floodgates were opened and all sorts of plants were established using a variety of fuels, including natural gas.

The managers of energy sector in the government as well as lenders knew very well the factors responsible for the technical bankruptcy of WAPDA: rampant theft of electricity and poor recovery. However, distribution of electricity remained the sole prerogative of state owned distribution companies. At that time I had termed the policy of creations of power plants in the private sector “Putting cart before the horse”.

It is on record that dozens of power plants have been established in Pakistan but all the distribution companies are still operating in the public sector. Track record of these entities is pathetic because of electricity theft and non-recovery of outstanding dues. These entities have also failed in revamping their infrastructure which is highly depleted and incapable of handling additional load.

It is also known to all that thermal power plants are not cost effective and cost of generation was bound to increase with the hike in crude oil prices, mainly due to geopolitics. However, no credible efforts were made to increase indigenous production of oil and gas as well as refining capacity.

Then the ruling junta started playing imported LNG mantra. Nobody objected on this ‘make shift arrangement’. However, groups having ‘vested interest’ made this a prime source of energy. After the imposition of economic sanction on Russia, LNG prices rose to historic level. Since Pakistan has no ‘long term’ agreements with suppliers now it is buying gas at the most expensive cost in the spot market.

To cover up its inefficiency to procure LNG, the government has resorted to load shedding of electricity. Some analysts go to the extent of saying that the Government of Pakistan (GoP) does not have foreign exchange for the import of energy. To save the face it is talking about high price and non-availability.

I can bet that local refineries have the surplus capacity to produce furnace oil and almost all the thermal power plants operating in the country are dual-fired (capable of use furnace oil as well as gas). That means if LNG is not available plants can be run on furnace oil.

Iran: Neighborhood policy neutralizes impact of US sanctions

A year into his administration, Iranian President Ayatollah Seyed Ebrahim Raisi succeeded in diversifying Iran’s foreign policy options through the nascent neighborhood policy he set out last year.

When he assumed office last year in August, Ayatollah Raisi made it clear that he had a new agenda for Iran’s foreign policy. He outlined his foreign policy goals within what came to be known as the Neighborhood Policy, which rests on fostering mainly economic relations with neighboring countries and non-Western powers. 

The new policy orientation soon yielded results, leading to Iran’s membership in the Shanghai Cooperation Organization (SCO) in the first weeks of Raisi’s presidency. Since then, the President traveled to many countries in a bid to advance his foreign policy goals. This included visits to Russia, Turkmenistan, Tajikistan, Oman, and Qatar, to name a few. 

A senior Iranian lawmaker has said that the neighborhood policy of Raisi played in a major role in Iran’s efforts to neutralize US sanctions. The lawmaker, Javad Karimi Quddousi, who is a member of the Iranian parliament’s National Security and Foreign Policy Committee, said the Raisi presidency marked a shift in Iranian foreign policy.

According to the lawmaker, one reason that why the US sanctions had negative impact on Iran’s economy was that the previous government failed to prioritize enhancing economic relations with neighboring countries and focused its time and energy on boosting Iran’s relations with Europe, which has been seeking to sow divisions among Muslim states. 

“Sanctions were also effective in cases where our relations with neighboring countries were strained in the previous government. When I asked Saif (Valiullah Saif, the former governor of the Central Bank) to make bilateral agreements for the exchange of national currencies between other countries, his answer was that this issue was not realized. While diplomacy and many trips between countries are for the realization of this goal,” he told Iran’s state news agency IRNA. 

Qoddousi added, “The 13th government created a unique and unprecedented transformation in foreign relations with neighboring countries in the shortest time. Membership in unions such as Shanghai [SCO], Eurasia, (and possibly) BRICS, etc., signing important agreements with countries in the region and the world in various fields are among the successful goals of the 13th government that have been achieved.”

The Raisi administration is continuing the neighborhood policy. On Monday, President Raisi received Azerbaijani Foreign Minister Jeyhun Bayramov, who also met his Iranian counterpart Hossein Amir Abdollahian. The visit came amid diplomatic efforts to upgrade relations between Tehran and Baku. 

It also came against a backdrop of broader diplomatic efforts by Iran in the region to improve ties with regional heavyweights such as Turkey and Saudi Arabia. Amir Abdollahian recently paid a visit to Turkey where he met Turkish President Recep Tayyip Erdogan and Foreign Minister Mevlut Cavusoglu.

In parallel, Iran and Saudi Arabia seem to be on the verge of restoring ties as a result of mediatory efforts by Iraqi Prime Minister Mustafa al-Kadhimi. The Iraqi premier visited Iran and Saudi Arabia in the past week. According to Arab press reports, Iran and Saudi Arabia could soon announce the restoration of diplomatic ties in a meeting in Baghdad.