Pessimists sound smart, optimists make money

In the first week of that conflict, they said that the world will see $200 oil and that will be Armageddon.

Maybe this is a new normal where we just have to get used to the idea that oil is gonna be like a 140, 150 and just get used to it. They mad men doing

mad things then which nobody can predict. I think unless we go below $10,000,000,000 of reserves there won't be any major devaluation in Pakistan because that's how decisions are taken over here. The only this three scenarios where an oil subsidy was given for a prolonged period of time and the global oil shock was turned into a macroeconomic instability event. Pessimist sound smart but optimist make money. You cannot become a journalist or a forcier in one month just by a colleague that developer understand this is the percentage of savings I should be investing. Decide an amount then just invest that in the market in good companies and then see it after six months. दालों ख़वातिनो आज़रात. Welcome back to another episode of Thought Behind Things. Today is the 04/07/2026.

A lot has happened in Pakistan and in the region starting off with the news. The बलूचिस्तान government has created a price cap for Iranian petrol at 280 rupees that is to be sold in बलूचिस्तान. For me, this news was interesting because I thought and I heard we all know about the smuggled Iranian oil and Iranian diesel. But to see it institutionalized this way, it makes me wonder though, can this fuel not be brought to the rest of Pakistan as well? I understand a lot of people would say there are sanctioned and there's a lot happening in the world. But, you know, recently we saw with the Ukraine Russia conflict as well, India had been getting the Russian oil. Pakistan, if it has such a great position where all of the international powers are seemingly Pakistan's friends and it is negotiating between US and Iran, maybe we can leverage some of that goodwill and potentially get some oil or petrol from Iran which is seemingly and clearly that cheap that it is being sold in बलूचिस्तान for 280 rupees. Almost half the price that was announced by the government. Separately, the State Bank of Pakistan has eased restrictions on IT exporters, which is an absolutely great news. I know a lot of people would would have heard this, would have seen this headline, but would not have realized how important this is. But nonetheless, the State Bank now says that you can actually keep 50% of your earnings or $5,000, whichever is higher in your foreign exchange currency account and you can remit that abroad if and when required. So what that effectively means is if you are a freelancer that is earning $5,000 previously if you would bring that money to Pakistan you had to convert that immediately into PKR and if you had to make payments outside of Pakistan, it was an absolute nightmare. Let's say you were earning $5,000, you can keep all of it in your forex account and you can send that back with no questions asked essentially. If you're earning more than that, let's say $50.70, $80,000, you can keep 50% of that in your forex account and you have complete freedom to move that money without any questions asked. There are bunch of other things that they've done as well, but these this is an absolutely great change and I expect a lot of big large scale IT companies to be able to remit more money back to Pakistan knowing the comfort that they can deploy that money in sales and in tools and so on and so forth if and when required. Separately, the government has announced the markets all across the country will be closed by 8PM to conserve fuel. This should show you the seriousness of the situation. The government is not playing around and this is also very interesting because there are two very different news items coming in. At some point, we're hearing about these peace negotiations and everything is gonna be fine very soon. But on the other hand, we are seeing a lot of seriousness from the government taking very drastic measures. One of them being that markets will be closed by 8PM every day all across the country. Separately, public transport in Islamabad is being made completely free for one month, and I think that is an absolutely great decision. And I think this needs to be brought to the rest of the cities as well and in cities where public transport does not exist and it I think more and more needs to be deployed on an emergency basis. If the government has to subsidize anything, it should be subsidizing public transport and encouraging more people to be utilizing public transport. Public transport inherently what it does is it is much more efficient in terms of the amount of energy used versus the amount of people transported. But separately, a lot of the new public transport buses specifically that Pakistan is deploying are electric buses and therefore they do not use a lot of the fossil fuels that we are unfortunately dependent on the dollar and imports. So there is an import substitution happening here and simultaneously we can increase the demand for electricity which reduces our bill for capacity payments. Separately, Pakistan is trying to finance the amount of money that they're giving out to The UAE and the Euro bonds by the end of April which is around $4,800,000,000. It is looking towards China and Saudi to finance that. This news came out earlier today and I was surprised to see it because that essentially means that we do not have an alternative to that money. A lot of people, a lot of analysts were saying if we have agreed to give UAE the money back, we probably have some other source of money coming in. But the fact that Pakistan is still aggressively talking to its friends and trying to figure out where it can get money to be able to pay this money back because that's how it happens. You take money, you give some money back and you roll it over and the cycle keeps on going on. But in the current economic crisis that obviously, countries all across the world are facing, I'd be curious to see which of these deals pans out. Having said that, the IMF has shown full confidence in Pakistan being able to meet its debt obligations. So there is not a lot of cause for concern. But yes it needs to be seen. We need to be looking at the markets particularly the forex reserves because that is going to reflect on potential currency devaluation. And then right before I end my news update I saw a very interesting analysis by अली खिज़र who spoke about diesel prices in Pakistan. Diesel prices are very important because every time we talk about the increase in fuel prices and how it increases the price for everything else, price for transportation, the price of all of the goods, there is an inflation effect in the economy every time fuel becomes more expensive. You have to differentiate that between petrol and diesel. Petrol is something that we use in our bikes, in our cars. And if petrol gets more expensive, yes, ordinary people find it difficult to move around, they find it difficult to go to jobs. It takes more of their paycheck to be able to pay for that, but it does not impact much else within the economy. Diesel is the primary fuel that impacts the entire economy because the large trucks that are transporting goods are all running on diesel. Large buses that are taking you from, let's say, स्नाहुबात to लोहौर, कराचीलू, हैदराबाद, all of them are running on diesel. A lot of heavy machinery runs on diesel. A lot of the wells that take ground water out for farming run on diesel. So diesel is the primary fuel that impacts your overall inflation in the economy. And in Pakistan even though we have reduced the rate for petrol selling for something around 380 rupees, but the price of diesel is over 500 rupees. And there was a very interesting analysis by अली किज़र that I read this morning. Currently, if you import diesel price per barrel directly, processed diesel into Pakistan, that is $322. If you import crude oil at the current rate, Pakistan is importing crude oil at $165 per barrel. Here is the interesting kicker. 75% of all diesel that Pakistan uses and consumes is refined in our local refineries. We do not import this diesel directly as processed from abroad. A lot of these companies that are getting crude oil, processing it, taking out the petrol, taking out the diesel and then selling the diesel in the market. Right now the government's pricing formula is driven by the price of diesel in the international markets and therefore right now according to अली खिज़र, these these refineries are making a profit of 275 rupees liter of diesel sold and that is absolutely insane. Keep this in mind. Ali Khiza says based on the current pricing formula, diesel will soon be sold at around 610 rupees per liter and again I want to remind you the price of diesel even though that does not directly impact you, you are always focused on the petrol price but the price of diesel is what's going to make your eggs, your bread, everything that you consume more expensive and there needs to be a better check and balance on that. I hope that government can look into this and if the data is absolutely correct would reconsider. But nonetheless to understand more about the impact of fuel in Pakistan's economy and पाक्स्तानी markets and the potential impact of devaluation, fuel, oil price shock and how you as an ordinary person can protect your money, can ensure that you don't suffer the worst of it we have with us today. अब्दुर रहमान नजम who is the CEO and founder of ARN Financial Advisors, one of the largest financial advisory for investments in Pakistan. He also runs his YouTube channel where he regularly shares insights and updates on the पाकिस्तानी markets as well as Pakistan's economy. He's here to unpack what's going on with the markets right now and where can we potentially see the stock market going in the near future. अब्दुल रहमान, मज़म साहब. Thank you so much for taking the time out and joining the show. Thank you so much. Sir, I'll start off just, you know, tickling your brain, trying to understand what's going on. Where is the economy today and where do you see it going in the short to medium term?

I actually have been really busy trying to understand this whole oil shock and the whole work I have done in the last couple of weeks. I have come to the conclusion both in terms of the oil markets as well as the investment side of Pakistan. So the Pakistan stock exchange I actually believe the worst has already been priced in and I say this with a couple of you know frameworks and that is built on first understanding the relevance that was happening in the conflict. Then the second step is understanding how the oil economy works in that we think of the demand destruction and how world responds. And the third aspect is what is double checking our understanding with past examples, relevant examples. So the first thing is remember when the conflict started and in the first week of that conflict there was a tweet by I think Iranian government or may be IRGC and they said that the world will see $200 oil and that will be Armageddon. So that was like they were predicting the worst case scenario. If this continues, we will see this and I believe we have already seen this. People who are not that familiar with the oil markets, they might say that oil has only been to $120. So what are you saying? We haven't seen the $200 yet and there is still worse to come. But remember crude oil, the largest product which is refined and used in the global economy, which is very inelastic in its use and affects a lot of inflation is diesel. Almost thirty-thirty 5% crude oil is actually used as diesel by the global world. Last week, when Pakistan set prices of diesel at Rs. $5.20, The international price including everything was around Rs. $2.60 per barrel and usually diesel trades around Rs. Thirty-forty above crude oil. In conflicts or when crude oil price is high, this margin can increase to 50 and I remember in the Russian conflict it maxed out at 70 to $80. So when I say we have already seen $200 crude oil is because people have bought for one week or I think the week before that as well diesel around $250 and Pakistan fortunately for us straight of Hermose is open So the freight charges in these are also very minimal or the lowest that are possible in this conflict. So combining this with the fact the kind of Armageddon situation that was predicted, by one of the players in the conflict that has already happened. Second aspect is the level of demand destruction that happens and beyond $120 crude oil, the demand destruction which happens, that is an automatic stabilizer in the oil market. And examples which I am gonna share the three examples in all of them conflict lasted more than years. But crude oil only stayed above $120 or whatever that was if it was a while back it doubled and then it stayed in that range for only around six months. And one more aspect is, if you listen to the oil experts, they tell you that institutions like IMF, World Bank or all the big banks in the global economy. They have a whole model for the global economy just to see the interlinkages and to understand where their whole credit risk that falls apart and where the global economy can actually shut down. For them that price of oil is $150. So we have to understand that beyond a certain point global economy does not function and when it starts to affect everyone, even the countries which are positively affected by this event geopolitically, let's say China, when crude oil prices goes beyond $150 they also become a loser because of the economy, because of people suffering, because of the job losses and the industry getting affected. So when you combine these two points and then bring in the relevance aspect. Now I bring in three past examples of oil shocks which have happened in the world and these three are the most relevant because these are the only three instances in the last forty years where crude oil has increased by more than 100% within two months and the reason was a war. The first example is the Iraq war in 1990, then the second example is the two thousand and three Iraq and US war and the last one most recent and we all remember that the Russia Ukraine war in 2022. In all three instances, crude oil only stayed at a very high price for maximum six months even though these conflicts the Russia Ukraine one is still going on and Iraq Kuwait war that also lasted for almost eight to nine months because first the conflict was between Iraq and Kuwait then the western parties they prepared themselves for an invasion, then they attacked. So the whole time period for this conflict was more than six months when the conflict was at its peak. So we have to understand that after a certain point there is a lot of demand destruction and oil prices have to come down. And the Armageddon situation which was being pictured by Iran has already been priced in or is we are very close to the highs. And in all three instances, what we saw and we see this in other instances as well that markets are forward looking. This is one of the pillars of financial markets, both stock markets and commodity markets as well. In all three instances, if we look at the Pakistan stock exchange data, the low of the index came within twenty five days of the event happening. So a lot of things are priced in before the event, a lot of worst case scenarios are priced in-in the first thirty days even though these conflicts last for in the US Iraq war, it lasted for eight years, the Russia Ukraine war is going on for four years but the worst impact is already priced in the first month and if the पाकिस्तानी macro indicators survive this shock and I will tell you what are the two most important things which the government has to do to make sure we survive this shock then the results of investing are really good. If we take example, if we take sorry the averages of these three instances, if you invested in the Pakistan Stock Market Index after twenty five days of the event happening which we made a very special video of this on our YouTube channel as well. So that was the recording date of that video. The average return you would get in the next one year is around thirty-forty percent. For the next two years, it is around 100% and the average for next three years is around 150%. And the two most important things which the government of Pakistan has to do, first is they should not think of giving an oil subsidy. The only instance in these three scenarios where an oil subsidy was given for a prolonged period of time and the global oil shock was turned into a macroeconomic instability event and only in that instance the results of investing for the first one year were kind of like around 0%. So market went sideways and you turned an oil shock into a macroeconomic instability event and then devaluation happened in all the other two instances. Government of Pakistan passed on the price. I remember in 1990 when I was doing my research, petrol used to be around 9 rupees per litre and it was increased to 23 because crude oil also increased from around $15 to $35. So if you pass on the price to the consumer which is which increases inflation is very difficult for the people but you turn on that automatic stabilizer of the economy and then your demand of oil decreases, your import bill does not increase as much as it would if you were selling cheap oil and then after a few months when the oil markets also slide-slide down because of the demand destruction then automatically your reserves improve, your current account deficit stays in shape and your macro economy gets stabilized And when everything this happens, then the investing results, they show the positive trajectory.

Yes. There's there's a lot to unpack there, I'll just start off with a few points that I noted. First, I wanna get a sense of you said that you expect this to be short term in terms of the the the the hike in price for two reasons. First, you you you you're saying that a lot of that has already a lot of the sort of instability has already been priced in. Yes, we are seeing the, let's say, the Brent price for at, like, $109,110 on the current in the in the markets. But, I mean, CNBC was reporting 141 on the spot market. So, essentially, people were buying it at a higher price because of obviously, everybody's desperate for to make sure that they have the the reserves. The second thing that you mentioned was, you know, it's short term because demand destruction comes into play, and, therefore, eventually, the markets will sort of normalize. What I'm curious about here, though, is with most of those conflicts, for with Russia, for example, Russia had, like, 10% of the global oil and gas supplies. Even with the when the war started, those supplies did not go offline. And so even with the sanctions, they were going to India, they were going here. And there's this one way or the other, they were still part of the markets. And then secondly, even with other, let's say, the the the embargo that the Arab world put in or Iran or Iraq war, there was not a lot of infrastructure destruction. So what a lot of people are saying now is that the fear is this is unprecedented because a lot of this infrastructure that has already been destroyed and potentially might be destroyed because we did see last night Iran bombing in Saudi, one of the largest sort of petrochemical plant in the world, and that has implications on plastics and so on and so forth. A lot of these plants would take four to five years just to come back to just to start producing again. Right? So a lot of people expect, oh, there's a there's a conflict. There might be a pause, but let's get to a ceasefire. Let's get to, you know, stability coming again, and everything will be back to normal, which, in my opinion, is not happening. Like, people are also at least the average Joe is not really pricing in that instability that has happened. This is systemic, and this would last at least a a few months, if not a few years. And so, in that context, now that, let's say, 20%, 30% of of of oil and gas is off the market for the next foreseeable future, do you still think that the price would still hover around or reduce backward demand destruction or otherwise to, let's say, dollars $80.90 a barrel? Or do you think we're at a new normal where, you know, with all of the money printing in the I mean, you mentioned in nineteen nineties, oh, it was at $9. Right? Or something like that. Right. 9 rupees per liter. 9 rupees. So there is an inflation effect. And and maybe this is a new normal where we just have to get used to the idea that oil is gonna be, like, a 140, 150, that's the new normal and, you know, we'll we'll just get used to it. What are your thoughts on on that?

Let's unpack this, and I'm sure people who are following the, especially the oil market, they might have listened to these numbers as well. So right now people say 20% of the global oil supply passes through the Strait Of Formos. But there are some like you can go the other way around as well. For example Saudi Arabia 5,000,000 barrels of oil almost is now being exported through I think the Red Sea. So, five percent gets diverted through that cause. Then remember, the level of escalation has to come down. Because if China does not get oil supplies for two months, remember what will happen to their industry? If India does not get oil supplies, what will happen to their industry? And slowly slowly as the stocks come down, all the industrialist they reach their prime minister or president and then the whole global leaders have to kind of converge and find out a solution. So the event may last for years. There are instances where wars have lasted for even ten years, twenty years but level of escalation has to come down and then another possibility could be Iran opens the strait for China. Iran opens the strait for Pakistan. Iran opens the strait for let's say Japan says we are supporting you and we are in this conflict with you. So it opens for Japan. Already it has opened for some European countries as well. So that 20,000,000 barrels may be it the shock will reduce to 10% of the global supply instead of 20% and the supply shock in 1990 was also 10%. In barrels it was less but at that time global demand was around 55,000,000 barrels and the countries involved in that conflict and that conflict lasted more than six months because first Iraq attacked Kuwait and captured that country then the whole western parties they weren't expecting that attack. They thought it was just regular military exercise. So they took two to three months to align their forces and then they attacked Kuwait again to liberate them. So this whole thing lasted for six months and for people who remember that conflict throughout that time there were risks that there would be attacks on Saudi Arabia and other Gulf countries as well. So the entire oil production of Middle East was at risk. So the number I am telling about 10% of oil supply back then that is only Kuwait and Iraq. So indirect risk was already there. So that's why if even if you have to think about the worst case scenario, the 1990 example is very relevant because the the level of escalation was high and it lasted for more than six to eight months. So even in that scenario, if you pass on the oil shock, then your macro indicators do not suffer that much. If I tell you the numbers, they are so resembling to this this time as well. Even back then, our inflation was around 7% and when the oil price doubled more than doubled actually 9 rupees to 23 rupees, it increased to 14 to 15% and these are the same projections which people are telling if the current prices stay in the global market for the next three months. The full impact is passed on to like every product which has some element of diesel usage in it or other oil linked commodity. The inflation we will see in Pakistan is around 13 to 15%. But the most important thing in that scenario was that State Bank of Pakistan did not increase the interest rates. They were stable at 11%. Mostly people think when inflation increase, state bank has to match that with the interest rate but that's not always true. We remember almost a year ago we were seeing inflation numbers of three to 4% as well but state bank did not decrease the interest rates. So there are lot of dynamics they see the long lastingness of that shock then they see whether that is supply driven or demand driven. They also look at other factors So it's not like Pakistan interest rates are going to fifteen-sixteen percent because inflation might go over there and as you know like markets are very efficient. So this diesel has been more than $200 per barrel. Every participant in the पाकिस्तानी bond market knows that government of Pakistan has to increase the price and inflation is coming. But still the latest auction which has happened for T bills and PIBs, they are still indicating that interest rate should be around 12%. So these are the few things which people don't understand first is that the level of escalation cannot continue for this much longer like obviously when you are investing you have to believe that the world economy will continue to function. So for that beyond three months, four months, then If you have mad men doing mad things then nobody You have can predict just sit in your mind.

Of course, of course I understand. Look I wanna I wanna dive deeper into 1990 if you sort of study that. What do you know do you have a sense of what what impact was there for Pakistan? I understand, obviously, it wasn't as globally connected. It wasn't as sort of as vibrant as an economy. The more vibrant you are, the more these sort of incidents hurt you as well. But there might be similarities in terms of short term, medium term, what the country went through. I'm curious, what were the impacts on on on Pakistan as I mean, you said that the the the the government actually increased the price of petrol from 9 rupee to 23 rupees. 23 rupees. Right? So that was, I mean, that was more than double, which in today's case would be, I think the last price was $2.65. So that would be, like, 600 rupees of But diesel diesel is already at $5.20

with zero tax. Yeah yeah of course. So yeah like again the resemblance with that event is

like really uncanny. Is very much there. Yeah. And what were the other effects like how did these sort of society and economy overall respond to this shock?

तो I have it's very difficult to study 1990. The numbers are really difficult to find. There not a lot of material available. Yeah, not a lot of material but still I the macroeconomic side of the economy and I think we were linked with the global economy as much as we are today. Even I remember back then in 1991 there was a whole privatization theme going on in Pakistan, a few banks were privatized and our stock market again was trading around 8P ratio and we were again trading at 8.5P ratio when this event happened a few-a few months before the event happened and then when this oil shock happened government of Pakistan increase the price but then it was reduced again after six months it was back to 14 to 15 rupees per litre because oil prices they went to 30 and $35 for six to seven months then they also started declining and in all that time for six to seven months inflation increased to 13 to 14% then that also started declining and exchange rate was stable no devaluation occurred and I think this we should discuss as well a lot of people are thinking whether devaluation

will happen or not, especially with the repayment of the UAE loan. That was gonna be my second question. And and I'm I'm not sure what the the the macro in terms of forex reserves was at the time. Because more often than not, you know, we've had our uptimes. We have our we've had our downtimes. I feel like right now the the biggest fear, at least to me, is that we're already at our downtime or medium time. We we have a semblance of prosperity, but not necessarily a lot of stability. And then you have an oil shock, and then you potentially have this forex shock, like the whole UAE asking for the money back. We don't know if the Saudis might just ask for the for the money back as well. How do you see that sort of playing in? Because, yes, oil is already high. But if we can if we suddenly start to look at, like, 25% sort of forex devaluation, that I think, in my understanding, is going to be a double whammy for us.

If you study economics and understand that if your imports are getting expensive and you are expecting a current account deficit, the perfect solution for that is to devalue your currency. But we also have to see how the decisions are made in Pakistan. I don't remember in last thirty years any devaluation where our dollar reserves were below two months import cover. So we are kind of of a habit that we only devalue and we have to devalue and we have no other option. So even if we have to repay the UAE loan and we don't get any additional funding from China or Saudi Arabia still we will be at 2.5 months import cover including the Eurobond repayment as well. And the interesting fact is, like people are analysing what will be the impact of remittances from the Gulf area. A few months back, The UAE Dirham was around INR77 in the interbank market and the हवाला rate was around 80. Right now, both of these are trading around 77. So, a lot of things happen like may be it's lack of flights or a lot of people are sending in a lot of remittances because of the uncertainty. The actual inflow of remittances has increased. So lot of these things when these happen in these shock like in COVID as well. We remember, we thought there will be a lot of job losses in the Gulf area, oil is down into the negative territory. So we will be experiencing lower remittances but the opposite happened because of the lack of flights, all the informal channels converted to the formal channels and we actually experienced appreciation of the currency in that time. So these are a lot of intricacies in the markets which we have to look at and looking at everything I I think unless we go below $10,000,000,000 of reserves there won't be any major devaluation in Pakistan because that's how decisions are taken over here.

You think, Joe, अगर मैं I mean, if I were to sort of make a visual view of why a lot of people are saying there might be devaluation is because on one end, there's an oil shock, which basically means in COVID, your oil prices actually decreased. Right? So for a country that was for for Pakistan, I mean, if one third of all our imports are oil, effectively, you got space over there. The the entire world sort of banded together, and they sort of there was a moratorium on loan repayments, if you remember. So, suddenly, we got that fiscal space as well. You're absolutely right in terms of the potential job losses and the remittance drop, but I feel like remittance is a lagging indicator as well. So right now, there's a lot of people who are fleeing the the the The UAE market as well, and so they're sending whether it's through हवाला, whether it's through formal channels, the availability of dollar in the shorter term is going to be high because people are just they're leaving conflict zone. They're like, okay. Let's go back first, and then we'll see what we what we do with that data. I think the real remittance, you know, eventuality is going to start playing out in three to six to nine months when, really, these economies and the whatever suffering these economies have gone through, they will trickle down to, you know, overall in terms of jobs and in terms of potential joblessness. But in terms of oil prices and the import bill, and I'm not sure how that impacts considering we have increased prices this time around. Does that kill the demand for oil and potentially our overall net imports? The idea that, yes, on some level short term or or or immediate term, their remittances are fine, but they might just sort of drop out. And then the loan repayment. Do you think there is pressure? At least I'm not saying the evaluation is gonna happen or not. I'm not I'm not gonna say whether the government that's a decision that the government is gonna gonna take. And there are a couple of signals, by the way. Because what the government has told the IMF recently with the new staff level agreement are two things. They said we are potentially going to increase the interest rate. So that was a signal for me. And the second thing that they said was we are going to stop playing with the currency markets. And so the both of those things suggest an increase in interest rates and a potential devaluation, and that might have very real impacts on on on the markets. What are your thoughts on that? I think the way I'm following this situation is I'm looking at the reserves. Because, you know,

first assumption we are making for a case of devaluation is that this conflict will last for six to seven months. What are the probabilities? Even if you ask the I think the polymath is a website even they would give a probability of maybe around 25% not more than that. So first we are stepping into an assumption which is already like 25% chance. Then we are expecting when we pay back the UAE loan we won't get any additional funding from China or Saudi Arabia. I think that is that also has a probability attached to it because we have really good relations with Saudi and I think we are playing a very major role for their economy and their security as well. If you see the level of targeting being done by by Iran to Saudi Arabia that is very less compared to other Gulf countries. So, may be that has a role of Pakistan's military pact and that kind of thing as well and all the diplomats they are saying the relations with सऊदी are good at the moment. So there is no chance of those $5,000,000,000 being called back. Then we also have to understand other I will actually put it like this that instead of thinking of all these things and predicting what will happen six months down the line, reserve numbers are printed every week. So when you have something which is coming to you every week, it's much better to stay in touch and see the level reserves are being followed. You will see whether we get additional loans or not. The biggest indicator of foreign reserves is actually your relationships with IMF. If your relationship with IMF is good, your relationship with The USA is good, there is a lot of funding out there in the world which will come to Pakistan and remember मुज़मिल this time we remember in 2022, 2023 it was such a task to get a staff level agreement out of IMF and this time staff level agreement was announced when we were giving an oil subsidy. So from this instance you can understand the level of relationship that is going on. The safety net, essentially there is a safety from the global institute If of you combine all the things, there is a probability of each thing. So it's much better to look at the reserves number, how the developments are unfolding and in case we reach reserves level of around $10,000,000,000 then I would say that the chances of devaluation are more than 50. You start to price increase. I actually last weekend I did this exercise with AI as well. I asked them what is the telling them that The UAE repayment is happening, Euro bond repayment is happening. So what are the chances of import restrictions and devaluation in the next six months? So it said right now it is around 25% but if the reserves level go below $10,000,000,000 then it will increase to 50%.

That makes sense. And I think another thing that normally governments tend to go for devaluation when they're trying to manufacture demand destruction. Yeah. In terms of imports, I feel like that demand destruction is already here. Most of Pakistan really used to import stuff via Dubai. And I think even if they want to, even if they have dollars in hand, there are no items coming in from Dubai. And so I understand the the the the the case for no immediate devaluation. In terms of the inflation, and you mentioned 13 to 15% potentially hitting Pakistan. I was actually following a couple of economists, and they've done a very deep dive into the oil the the petrol and diesel pricing for Pakistan. Petrol pricing, everybody agrees. You know, you have to it is, at the end of the day, a consumption item, and it definitely hits the masses. We have to figure out how do we sort of do targeted potentially cash subsidies and so on. But diesel is sort of the lifeline of any economy. And when people say, oh, you know, fuel prices is going to increase the overall prices of all other products, they're primarily talking about diesel because diesel is what's used in transport. Diesel is what's used in heavy machinery, so on and so forth. For Pakistan, a lot of economists are saying that 70% of our current diesel, you know, consumption is being is being produced in Pakistan while being priced at global rates. And so they're saying there's a windfall profits that the refineries are making even though the actual price of the commodity is not that much. And my understanding is what the government has done is they've they've kept the tax on petrol high. They've taken out the tax on diesel just to ensure that there is as little impact on the sort of,

you know Yeah. Otherwise, diesel would have increased to 600 rupees per liter if they tax the PDL.

But do you if those economics numbers are correct, economists' numbers are correct, don't you think that we should be then inheriting? I don't I I hate to say it, but subsidizing in any way, shape, and form diesel so that the impact on the overall macro economy is is minimized.

Yeah. So, one short comment about the IMF language about the interest rates and the devaluation. Both of these statements are typical. They are in every like every you know the every review and even in 2024 when we started this program there was a line that there won't be more than I think one to 3% difference between the open market and the and the central bank exchange rate and at that time open market rate was around 300 rupees per dollar So we like kind of know how to manage this thing and instead of devaluation we went for bringing down the open market rate. So these are very typical and for interest rate there is definitely a kind of scenario where interest rates will increase but they won't go as high as 15%. They will go to around 12 to 13% if the situation prolongs. So now now we come to the diesel. अच्छा, right now we are not subsidising diesel and what determines your contraction in volume is not the amount of tax you are collecting but the actual price at the pump because people think I was buying diesel at $2.50 now it's at $5.20. So it doesn't matter if PDL is zero but as long as people know that price is not increasing a lot in the future because of the subsidy and the price has increased substantially that now I have to cut back my usage, the volumes decline. The good part of this conflict is in terms of the import bill. You are right that 70 to 75% of the diesel we use is actually refined locally and this might actually increase now because we will be using less diesel. So the, the current account impact will be reduced because we are not importing diesel actually at $250. We are importing crude at $150 and then refining it locally and petrol has become a negative margin product. Like petrol used to trade $15 above crude so it should have been priced around $155 right now but is it is actually being priced $130. So the thing we import more has actually not increased as much as it should have and the thing we can make locally has increased more in price. So that is actually if we look at from an investing angle a very good scenario for the refineries because their profits are gonna increase a lot. They are actually one of the beneficiaries and other than one all the refineries are listed on the Pakistan Stock Exchange as well. But then there has been an argument lately that we should regularize these margins and making $100 on diesel is a lot these days. I agree with that. But instead of fixing margins, I am more often advocate that you should use your wartime economics hat and maybe cap this margin to around 60 to $70 and that way we can bring down the diesel prices as well. Refineries might be happy as well because we also have to think that right now if they are making $100 on the diesel, they are losing $20.30 dollars on petrol, $40.50 dollars on furnace oil. So we instead of like trying to reduce the price of diesel if we twist their arm a lot they might actually shut down their production if they are going into negative margin then we have to import that $250 diesel and then the import bill will increase as well. So, it's a good idea to analyse the fact that we are producing this diesel locally and this is a war time scenario. This is not a normal situation and to protect the consumers and to make sure the businesses function better as well, we can have a conversation with them, maybe reduce or cap the diesel margins for the next two to three months. That's a better solution than going to the IPP model.

That makes sense. We focus a lot on it, and I I think it's the easiest. But globally, all analysts and all news folks focus a lot on energy. Energy's obviously the lifeline of the global economy, and whatever happens to energy tends to happen to across the the global economy or the, you know, different, countries. But with this current conflict, there is a lot of impact on a lot of wide range of commodities. Right? Aluminum is down 30%. It's off the market. Helium is almost for 30 to 40% is off the market. Plastics, I was seeing yesterday. And, again, this was before the strike on in Saudi, which is, I think, the third or fourth largest petrochemical plant plant. What impact do you think a lot of these commodities? Because Pakistan is inherently I mean, even the plastics that we produce, we, let's say, we produce shopping bags or, bottles for ketchup or anything for that matter. Right? The pallets are being imported. Yes, they might be produced by some refineries here or there, but we don't a bulk of that pallet, the the raw material that goes into any plastic manufacturing is being imported. And that is off the market right now because it was coming in from The Middle East, and therefore, the prices have almost increased 50 to 70%. And that's just across all sorts of potential commodities. How does that then impact the economy at large?

So definitely there are second order shocks as well with the oil price shock and for Pakistan the most relevant first is your medicines because a lot of APIs are also linked to oil prices then as you said plastics, coal-after sometime coal also gets affected because a lot of countries are making electricity from LNG or some from furnace oil as well and when then that gets a lot more expensive they switch to coal for the time being as well. So we haven't seen a price shock in coal as yet but if that increases, that will have some impact on the current account as well but not as large as the oil because all these commodities combined are around $5,000,000,000. The API is the coal and everything. Another thing which luckily we produce locally and has a lot of linkage with the oil shock is urea, the fertilizers. And because we have a population of two fifty million, I think we are one of the largest users of Furia globally as well around 6,500,000 tons but luckily we have a gas field in Pakistan which keeps on producing and producing and producing for last seventy years the reserves are still so high and the price of that field is really low that we won't be experiencing that shock. The supply is good, the price is fixed so I think that's a breath of fresh air for our farmers that urea won't be getting that much expensive only the transportation element because of the diesel price hike the fertilizer bag of urea

will increase by 200 to 300 rupees per bag so this is a big saving. Is you because is the is the urea price is the urea I apologize for stopping you. Is the urea price linked to the global prices? Because my understanding is urea prices globally have sort of More than double. Risen up quite a lot. Yeah. And so are the local prices, are they capped by the government or is it that the local producers do not increase it with the fear of, let's say, demand destruction?

There is an unwritten contract that because we are giving you gas at a particular price that is not linked to the international LNG price then you should keep your margin and only increase your bag price if there is a cost escalation. Whenever local prices of gas, let's say due to devaluation or any other reason are increased then the urea bag is increased in price in Pakistan. Luckily because we have almost all of these fertilizer plants connected to the local field the supply is really good and right now I think urea prices are around $900 per ton but in Pakistan if we convert it into dollars that would be somewhere around $350 per ton. Yeah, this is around at a 53% discount according to profit maximum. Yeah yeah and this might increase as well as the as the shock prolongs and some of the fertilizer plants go offline in 2021 and 2020 sorry 2022 it went as high as $900 as well but the the price shock of urea prices doesn't affect the Pakistan economy because we can produce as much as we need. So there is no oversupply there is no like chance of import in this particular scenario and the prices are controlled by the government because they give them fixed gas

price. I have a question, though, and I'm going to go into the more cancelable territory because people tend to now want to have, like, a great, you know, subsidized. The world is fine. Prices shouldn't rise. But I really wanna sort of understand as an analyst. I've spoken to a lot of farmers previously on the podcast. A lot of times they've said the reason why पाकिस्तानी palm, like, agriculture industry is completely trash because we produce, like, per acre yield is, like, much less than global averages, is is a couple of things. A, price controls. And price controls tend to, we all know, price controls in any shape and form. Government regulation is always detrimental to any industry. Let it be free market and the it becomes efficiency seeking. The second thing that they mentioned was Pakistan uses one of the highest amounts of fertilizer per acre anywhere in the world. And a large part of that is because we are providing cheap gas to cheap fertilizer plants who are providing cheap fertilizer, and therefore, whether it makes economic sense or not, we just sort of the farmer plows the land with foot and, you know, essentially is wasting it in many ways. For the agriculturists, they actually mentioned it is killing our our fields because it's becoming toxic over time. I'm curious. Yes. We have to think in terms of how do we keep everything stable? How do we make sure that, you know, the inflation is minimized and so on and so forth? But there is an opportunity here. If I look at the local economy exclusively, I would like to reduce the inflation as much as I can, particularly food inflation because there is a direct impact to it on on on the masses. But if I look at the macro, I would love to get as many dollars as I can considering at a time, you know, Pakistan generally does not have a lot of things to export. And so if the if the discount is at 350 versus 900, I'm curious, would you make a case that we should potentially be at least exporting some of this to raise dollars? Again, that will directly potentially give us some forex reserves, provide us with some sort of a in terms of external current account, will provide us with some buffer.

तो I wouldn't be actually a proponent of export, and that's because right now if you're exporting urea, you are actually exporting gas. So we are already in a situation where our gas power plants are not working and we are using our coal power plants, our furnace oil power plants. What we can do in the best case scenario is see what the market tells us and that is we run all our fertilizer plants specially the urea plants with whatever gas we have and in case we have something left over which will be very unlikely we can export that. We cannot export something and then reimport it after six months when the fertilizer season is on just like the sugar scandal that will actually, like, might turn into a loss. And the first thing you pointed out about the fertilizers obviously the price controls on wheat, sugar they have reduced their productivity and deregulated crop I think it's the corn has been a really big success story. So pricing, regulation, politics and all those things, vote bank getting boards from the farmers that's a big inefficiency in the पाकिस्तानी agriculture sector and if we look at it from the point of view of the fertilizer application, nitrogen fertilizer are used a lot more than they are used in in comparison to phosphates in Pakistan. So urea is the star product and we don't use as much as of DAP that we should because DAP is still imported, part of it is imported so the price is set based on import parity. So now that will also get expensive if gas and phosphate is getting expensive throughout the world. So what actually happens in these shocks is because the price of urea is controlled and it should be. Otherwise if you study the agricultural economy, the type of credit farmers get the way they get it and at what cost they get it. If they get a price shock on urea, then they will be black marketing, your food security will will get hurt. What a good solution The in the farmer will be completely squeezed out. You have to start off with the regulatory And even stuff like if you will be importing, you will be importing wheat, you will be importing sugar and like at the end your import will, import bill will increase further. What a good solution in the long term might be, you increase the price of urea to international level at a time when it is around $405,100 dollars and start giving targeted subsidies to farmers who have very small farms And then see if there is a price shock in urea. In that time, maybe you can give targeted subsidies at different levels to everyone. So that could be a stepwise approach if you want to promote the correct proportion of fertilizer application in Pakistan in terms of the nitrogen ones and the phosphate ones. Doing it at this time won't give you good results and what most probably will happen is after one year of a lot of bad results you'll have to reverse it.

That makes sense and I think you can't even start off even if you had to you can't start off with with increasing urea price because that's going to short squeeze the And if we if we cover the- you have to re regulate the- the food prices.

Sorry to just to complete if we cover the investing angle of this fertilizer application the good part is because these companies get fixed price, gas, the supply is good, the production is kind of secured, whatever they will produce they will sell, the margin will be stable and all these companies because they are not investing in a new urea plant because there is no more additional gas allocation in the country everything is paid out as dividends. So these companies the Fauji Fertilisers, the Angro Fertilisers and even Fatma Fertilisers these companies are not affected by this conflict and these are like one of the few stable companies if people are looking to invest in.

Makes sense. I am actually gonna because we are at the forty five minute mark I was actually going to sort of evolve now towards investing which is your core forte. I'm sorry I poked you a lot on the economic side of things, but I'm curious. How do you see with all of this background that we've sort of discussed, what is your outlook for in terms of investment? What is your outlook on or rather reallocation in terms of industries that you're seeing right now? Again, maybe you can give me a couple of scenarios where, okay, if the conflict resolves very, very quickly, this is what I'm looking at. If the conflict prolongs for a little bit, maybe I'll reallocate. And yesterday I had a deep conversation with Lake, and we did speak about, you know, a longer term overall change because the prime minister announced today even he said, you know, for the sake of the country, you should be investing in EVs. And if the oil prices do end up remaining high, there is a case to be made for alternate solutions because the world has to move on. Right? So, EVs are a great alternative. They will potentially help us with import substitution of oil as well as providing space for capacity payments, has been a bin for us. Similarly, solar and then so on and so forth. So what industries are you looking at that might actually benefit from whatever

disruptions that we're seeing right now? So let's cover the scenario where the escalation is at a high level for the next two to three months and oil stays expensive. So in that scenario, the research we have done already and the video we have published in that the evidence is conclusive if government of Pakistan has passed on the oil shock then there is very minimal chance of devaluation and the correction that occurs in the stock market index that is limited to around twenty-twenty 5% and then that we have seen already. And if we look at the composition of our index, the major heavy weights are oil and gas exploration companies, the banks and the fertilizer companies. Oil and gas exploration companies are actually beneficiary of this situation and banks and fertilizer companies are kind of unaffected and the correction they have seen is not really affecting their business that much. So when 50% of your index almost consists of companies which are not affected or are beneficiary of this shock, that is what leads the recovery even during the times when escalation does not reverse. So, in that case I will be more inclined towards the oil and gas exploration companies, the refineries or banks or fertilizer companies which I can find at very good prices. Just a hint that refinery profit if these escalation continues will increase more than the oil and gas exploration companies. Because in Pakistan if you are exploring oil and gas your gas prices are capped at a particular price of $3 and $6. So beyond like if oil goes from 100 to $1.30 the oil companies do not make any additional profits and then there are windfall levies on the crude oil price as well. So all almost 50% of the gain is shared with the government in terms of the windfall levy and then 50% again of the remaining 50% is shared in taxes. So oil and gas exploration companies are beneficiaries but to the extent of like 20 to 25% of their earnings. So in that case if the escalation continues I will be investing in fertilizer stocks, I will be investing in banks which are available at good prices and then the refineries as well. If the escalation continues I will also be looking at cement companies, automobile companies which are available at very low prices. For that we particularly use a scenario where we price in a scenario of let's say import restrictions and we see that Pakistan is only importing let's say half of the cars it is importing right now and then we see what will be the earnings of that company and if that is available at a price because these stocks are coming down really sharply so you can kind of lock it in at a really good price and then really benefit when the things reverse. If we go towards de escalation mode in the next one month, then I will be more interested in stocks which have declined a lot and people are thinking that their business will get affected a lot but that will not happen because of the de escalation. In that case you can look at cement companies. Couple of an industry? Yes, cement companies all the stocks which have which people are thinking are gonna get affected so their prices decreased a lot which includes cement companies, automobile companies, even companies which assemble mobile phones, Air Link because they might also get affected by the import restrictions. So you have to build two scenarios, one is where the conflict continues, you do not get any additional financing from your friendly countries and your reserves are going towards the $10,000,000,000 mark. In that case, stay with the banks, fertilizer companies, oil exploration companies and refineries. But as soon as you see the de escalation then you can invest in companies which are import dependent and kind of cyclical as well. Those will give you a lot more return if the situation normalizes. We actually, like I pointed out that we have made a very special video on the whole index and the macro. In the next week, we'll be making on individual sectors as well. So people can follow our YouTube channel to see more in detail which companies will be getting affected positively by this shock.

Very cool. That that would be perfect. I think we're gonna link the YouTube channel down in the links below so you can check that out as well. अब्दुल मानवाई, I'm gonna wrap this up. But I just wanna have a sense of if, I mean, obviously, you're looking at the entire thing as from a investor's lens. More often than not, investors tend to be complete optimists, and they tend to stay out. And they're like, whatever is happening, it's fine. We'll just read the market. We'll invest. We'll see what what we make out of it. If you did had had had the opportunity, and I think you'd gave a couple of suggestions already for the government to be able to, let's say, maneuver through this situation better. What would you tell, let's say, the finance minister? Considering the situation right now, what do you think should the पाक्ष्णानी government be doing to ensure maximum stability but more so to potentially utilize whatever to to convert the adversity into an opportunity to ensure that we can gain the most, not in a finance capitalist way, but in terms of, you know, productivity, problem solving and actually utilizing our whatever, you know, geographical location that we have right now.

So like you said the investor hat, there's a famous quote that pessimists sound smart but optimists make money. So this an advice to all the people who are following the war as well and connecting it to investing. One day you will think that I am following the situation then I will be able to predict the bottom of the market. It's not as simple as that. You cannot become a journalist or a foreseer in one month just by following the developments. So it's much better to, like understand this is the percentage of savings I should be investing in the stock market, keeping in mind the level of conviction you have, what is your outlook, what scenario you're believing in more and then stick through the volatility because like our research also shows that the bottom is in but there will be volatility. One day it will be 5,000 up, one day it will be 5,000 down. You cannot like sell when the market is down and then buy back when it's up. So it's much better like if you have let's say 10 lakh rupees of saving. Decide an amount 2 lakh, 3 lakh, 4 lakh and then just invest that in the market in good companies and then see it after six months. The one advice and I'll only give one because if you give more the chances of those being picked decreases. So there is just one advice double down, triple down on public transport. The day you have public transport in Pakistan, a lot of your problems get solved. Because diesel obviously it's involved in industries, you cannot reduce that demand. But now solutions are available, EV solutions are available and petrol demand can be controlled a lot. For the time being, you can give targeted subsidies but even if you look at the number of motorbikes that are in Pakistan, they are around thirty-thirty 5,000,000. Even if you give 10 liters per month and give a 100 rupees subsidy, that comes to around 35,000,000,000 rupees per month. So it's much better to build a public transport network, make it free for the time being. Once people get used to it, may be you can recover 50% of the cost and I was actually thinking if if we have public transport from let's say 7AM till 11PM. The one thing which people really complain about that the shops open remain open in Pakistan till 2AM 3AM that problem can also get solved because when an individual who is going for a job and his working hours are within that public transport time limit, he might actually work for a lower salary or he might demand extra 5,000 for the commute if he has to come back late at night using his own vehicle. So if we go down this road, we might actually end up solving this other problem as well.

So this would be might be That makes sense and I think getting the entire country and 30,000,000 bike, like motorbike folks to convert their motorbikes into electric and spend all of that money if the government can just sort of on an emergency basis get because it is interesting that a lot of these I think Karachi bus, the new buses that are coming in are all electric. And I saw that in even in Islamabad, they've already made public transport free. So it's like a targeted subsidy, but you know that that subsidy is working, you know, because the rich people, you know, their ego is never gonna allow them to be going into the into the bus. And so it's actually genuinely helping the common man. And I think if there is ever an opportunity to to kick start a public transport revolution, I think this is it. This is the way. That was a phenomenal suggestion as well. But thank you so much. This was super insightful. Tons of learnings for me and, actually, for for the viewers as well. Thank you so much for taking out the time and sharing. Thank you. And for all of you guys, let me know in the comment section below. Are you an investor? Are you not an investor? How are you how are you protecting your money considering potentially devaluation, oil shock, inflation? Obviously, I mean, I know that you're you're worried. I know that you're fearful. But this is one of the reasons why I keep on having this conversation. I I'm not doing this to to to make to, you know, even make it worse and and instill more fear in you. What I want to want for the viewer to understand is things happen. You know, this is not a special time. It is a serious time. It is definitely a, you know, once a few decades sort of a time. But it's not something that hasn't happened in human history. The smarter thing to do would be to not panic and to figure out how can I protect myself? How do I build that safety net? How do I ensure that if there is devaluation and if there is potentially inflation coming in, how do I make sure that my cash is not wasted? And I I at at the very least, even if I don't get rich overnight, at the very least, my value retains. And I think, you know, investing is a great way to do that. And there are always a bunch of other things as well. But nonetheless, I'd love to know for your your opinions on what you're doing right now. Are you invested in the stock market? What's the future outlook that you see vis a vis the the regional conflict as well as Pakistan's economy? But nonetheless, I was name उदमनस and Zedi. You're watching Thought Behind Things. Thank you so much for watching, and I'll see you in the next one.