ISLAMABAD, Sept 19: The government decided on Friday to eliminate subsidies on oil and gas and to phase out the subsidy on electricity by June 2009 under a plan to stabilise the economy.
Announcing an economic package at a press conference, Finance Minister Naveed Qamar said it was aimed at bringing about macroeconomic stability, narrowing down the fiscal and current account deficits and minimising pressures on foreign exchange reserves.
The finance minister, who was accompanied by State Bank Governor Dr Shamshad Akhtar, said Pakistan would not seek any new assistance from IMF, but international financial institutions and donors could monitor implementation of the package.
“We are not going into an IMF programme,” he said, adding that the ‘home-grown’ package had been worked out in consultation with different stakeholders, including the World Bank, IMF and ADB.
“I can safely announce today... we have eliminated the entire fuel subsidy and there is no additional subsidy today that is going out of the budget to subsidise fuel,” Mr Qamar added.
He said the subsidy on gas had also been withdrawn and the actual cost of gas would now be passed on to consumers.
He admitted that the passing on of subsidies to consumers would add to people’s hardship, but said the government had to stabilise macro-economic indicators which had deteriorated because of the policies of the previous government. He said the government was trying to be close to the fiscal deficit of around 4.7 per cent.
The finance minister said that various measures had been proposed to minimise government spending, but did not elaborate. However, he said the government was looking at PSDP allocations.
“We can only spend what we have in the kitty and suggest a drastic cut in the development sector,” he added.
Admitting that excessive borrowings from the SBP had led to inflation, Mr Qamar said the government had decided to launch non-bank borrowing schemes, including PIBs and commercial papers, in order to curb inflation.
He said that there would be no additional borrowing from the SBP and the government wanted to reduce the net borrowing to zero. He said that interest rates had to be reflective of the market.
The finance minister said the government had imposed additional duty on consumer goods to curtail import bill which was putting pressures on the reserves, adding that an increase in remittances would reduce pressure on the balance of payment.
He said the government would continue to pursue the policy of privatising state-run firms in the oil and gas sector despite a turmoil in domestic and international markets. “We are getting inputs regarding investment in Pakistan”.
In reply to a question, he said the government had invited the World Bank, IMF and ADB to help it to reduce the impact of looming crisis in the international market. He said that all these measures were part of an immediate plan and a medium-term plan would also be in place to stabilise economic indicators.
He said the country was expecting bumper crops of rice and wheat this year, adding that the wheat support price would be announced soon.The SBP governor said the package was aimed at stabilising the country’s economy. She said the central bank was trying to curtail inflation.
Answering a question, she said the exchange rate reflected the macro-economic indicators. “We have managed floating regime.”
Dr Shamshad said the SBP had been monitoring the rupee depreciation, adding that rebuilding the forex reserves to cover at least two to three months of import was a key part of the government strategy.
Asked if the international financial crisis had any impact on Pakistan’s economy, Dr Shamshad said that so far the impact had been witnessed only on the local stock market. However, she said that it might impact the overall economy.
She said the country’s international trade and foreign direct investment had witnessed a growth. She said that the increased demand for consumer goods had pushed up the inflation.
The current account deficit rose sharply to $2.572 billion during the first two months of the 2008-09 fiscal year -- equivalent to about 1.6 per cent of GDP. The full-year target is six per cent of GDP. Foreign reserves have declined to $9 billion from a record high of $16.5 billion in October last year.