THE government’s decision to raise fuel prices from Thursday night to partially pass on the impact of rising global oil prices to consumers will remove a major hitch in the way of concluding a staff-level agreement with the IMF.
The Fund had on Wednesday refused to revive the $6bn programme without the removal of the fiscally unsustainable fuel and electricity subsidies and had given Islamabad two days to lift the cap for the continuation of talks.
The government’s announcement should now bring Pakistan closer to the revival of the IMF package, which was suspended after the previous PTI government froze energy prices for four months through June to provide relief to the public as then prime minister Imran Khan attempted to fight off the pressure of the no-confidence threat posed by the opposition.
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The hike in fuel prices will significantly increase inflation but will pave the way for the early release of an IMF loan tranche of almost $1bn, unblock financial assistance from other multilateral and bilateral lenders, shore up foreign exchange reserves, improve the exchange rate and energise the stock market.
In its brief statement at the conclusion of the weeklong negotiations in Doha, which focused on fiscal consolidation including the reversal of fuel and power subsidies and the formation of next year’s budget, the IMF had emphasised the “urgency of concrete policy actions ... to achieve programme objectives” and expressed its willingness to continue “its dialogue and close engagement with Pakistan’s government on policies to ensure macroeconomic stability”.
That the Shehbaz Sharif government, which had been reluctant to enhance fuel prices despite the consistent rise in global oil markets out of fear of a political backlash, has finally decided to lift the price cap shows that it feels politically more confident to take tough and unpopular decisions to tackle the economic crisis.
The decision came on the eve of a six-day ultimatum given by Mr Khan to announce early elections. The increase in fuel prices, however, is only the first step towards saving the economy as both the IMF and State Bank want the government to not only transfer the entire burden of global energy prices to the consumers but also recover the full amount of GST and petroleum levy in the next fiscal year. Once that condition is fully met, chances are that the IMF will enhance funding under the programme and extend the arrangement through June 2023 for fiscal consolidation in the country.
Published in Dawn, May 27th, 2022