As oil, gold and cur­rency prices change, are we pre­pared?

The Pak Banker - - FRONT PAGE - Rahim Sheikh

AS the rise and rise of the dol­lar halts, and with im­prov­ing eco­nomic con­di­tions, mar­ginal that they are for the time be­ing, of the world's lead­ing economies, we see that as oil prices ' bot­tomed out' and sta­bilised, gold started to fall.

If ever there is a com­mod­ity that re­flects the true state of the econ­omy, it is the price of gold. From a dizzy­ing peak of Rs. 70,720 for ten grams it has now moved into the Rs. 40,000 range. For the last one week it has, on a daily ba­sis, been fall­ing. If we as­sume that the price of oil in re­la­tion to that of gold moves ac­cord­ing to the true con­di­tion of our econ­omy, we, af­ter 27 months, have seen oil sta­bilise and over the last one week has been mov­ing up, very slowly.

On Tues­day even with news of a bomb blast at Brus­sels Air­port, the oil mar­ket did not panic. For gold the im­me­di­ate re­ac­tion was a very slight price in­crease out of fear of more blasts. Ex­perts are of the opinion that within a week prices will start to fall again. Such is the long-term outlook for gold. But then as oil is a time-lapse com­mod­ity, its price is much less prone to shock­ing in­ci­dents, which is now the new ac­cepted norm. The 'fight­back' has to come within this new norm.

We no­tice that af­ter a low of US$35 a bar­rel, oil has been, rather very slowly, ris­ing. But ris­ing it will re­main. On Mon­day it was firmly above the US$41 a bar­rel mark. Brent de­liv­er­ies for May 2016 rose to US$41.71, and it seems that with OPEC meet­ing, fi­nally, on April 17, 2016, in Doha, the one-point agenda of cap­ping out­puts could come about, even if it is con­di­tional. The steady rise and rise of oil prices seem al­most sure.

So we have three in­di­ca­tors. The value of the dol­lar, the price of gold and the price of oil. These are the three in­di­ca­tors that show us, and ev­ery­one in­ter­ested in study­ing the econ­omy, of which way the trend is. We have the dol­lar grow­ing in strength and moves to sta­bilise and let it re­cede. We have the price of gold, slowly, fall­ing. And then we have the price of oil, as de­mand rises, in­creas­ing.

In such a situation we see the fall­ing dol­lar, mar­ginal that it is, be­ing held re­spon­si­ble for the price in­crease.

But then a strong dol­lar sharply hits oil prices be­cause oil is quoted in dol­lars. Could the now ' calmer' Iran be a strong tool in the hands of the USA to keep oil prices in check, given that their prime con­cern is the US econ­omy, which is un­der Obama on the rise?

That is why most po­lit­i­cal econ­o­mists fear that if Trump makes it to the White House, which is a pos­si­bil­ity given the "fear fac­tor" he so ef­fec­tively in­stils in the con­ser­va­tive Amer­i­can voter, we could see US deficits soar and the econ­omy, re­built so care­fully by Obama, tum­ble.

If we ex­am­ine re­cent his­tory through the 'but­ter and guns' lens, we can well see a re­turn to a more ag­gres­sive USA, and oil prices might soar faster than we imag­ine. The Ye­men War could well be part of the same scene. No marks for guess­ing where Pak­istan stands.

The ques­tion now is will Iran play its "promised part" in the cap­ping of out­puts to help oil prices to rise? The Ira­ni­ans are mas­ter diplo­mats, and they have an­nounced yet again that their in­ter­est in OPEC will be­gin once they re­turn to pre-sanc­tion lev­els. They have an ar­gu­ment, for the Saudi lev­els have not fallen. So the suc­cess of the Doha meet­ing in three weeks' time will de­pend on how ef­fec­tively the Amer­i­cans have cor­nered the Ira­ni­ans.

So for the time be­ing we have oil prices ris­ing slowly, the dol­lar weak­en­ing slightly and gold prices fall­ing, again slowly. Then en­tire eco­nomic orches­tra is in per­fect tune. We also have the Gulf oil economies, Rus­sia and even Venezuela all bent on an out­put freeze. The scene is set and oil prices have started to move up.

Oil an­a­lysts are of the opinion, and for good rea­son, that the po­lit­i­cal jig­saw will not fit, and that out­put freeze is, for this rea­son, un­likely. My own opinion is that even if the 'out­put freeze' is not agreed, the Ira­ni­ans will come up with a 'time barred' so­lu­tion. This will al­low for prices to keep, very slowly, ris­ing.

But our con­cern in Pak­istan is to see how will our econ­omy fare? Given the dan­ger­ous level of do­mes­tic bor­row­ing, which added to our for­eign debt, is more than our to­tal na­tional Bud­get, and the speed with which bor­row­ing is from com­mer­cial banks, with a de­lib­er­ate pol­icy not to lend to Pak­istani en­trepreneurs, just where are we headed?

Do we want to see our man­u­fac­tur­ing rise, and hence ex­ports to rise? The re­al­ity is that both man­u­fac­tur­ing and ex­ports have been fall­ing.

The of­fi­cial ver­sion is that it is also fall­ing in other coun­tries as the lag ef­fect of the 2008 Re­ces­sion leaves a 'weak­ness fever' on the world econ­omy. This is fac­tu­ally in­cor­rect. Just ex­am­ine the de­gree of the de­cline and it speaks for it­self.

That is why Pak­istan must be care­ful while plan­ning its eco­nomic poli­cies. Af­ter months of pon­der­ing (just who was pon­der­ing??) the Prime Min­is­ter's Of­fice has re­leased the Strate­gic Trade Pol­icy right up to the year 2018. It states that mar­ket ac­ces­si­bil­ity, our fall­ing man­u­fac­tur­ing ca­pa­bil­ity, the ter­ror threat, the lack of in­fra­struc­ture, and very lit­tle elec­tric­ity avail­able for in­dus­try are the rea­sons we are in the de­cline in real terms. Imag­ine!

The point is who is to blame for this state of af­fairs. Ev­ery per­son has his own set of the­o­ries. Some blame cor­rup­tion, and rightly so. Some blame ex­ces­sive bor­row­ing, and rightly so. Most blame our en­ergy cri­sis, and rightly so. There is a lot of fin­ger-point­ing pos­si­ble. The point is we need a sound long-term plan with enough flex­i­bil­ity to counter oil, gold and cur­rency fluc­tu­a­tions, with man­u­fac­tur­ing be­ing en­cour­aged and fancy trans­port schemes be­ing avoided. In short, we need a lot of com­mon sense in­jected into our gover­nance, which just seems to be col­laps­ing.

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