ISLAMABAD, May 27: Pakistan’s newly elected government has, in the midst of budget preparation, told the World Bank that it plans to eliminate subsidies on imported oil in the new financial year in a landmark, but politically challenging, step to return to a previous regime of passing oil prices to consumers.

The promise to pass on oil prices came in a meeting between Finance Minister Naveed Qamar and Praful Patel, the vice-president of the World Bank for South Asia, who is on a farewell visit to Pakistan before his retirement.

The decision to pass on oil prices to consumers is central to the new government’s future steps in tackling an otherwise fast rising budget deficit which was projected to rise to a staggering 9.5 per cent of gross domestic product in the financial year which ends next month.

The government has already announced undertaking a series of measures to slash expenditures which it hopes will drastically reduce the deficit to about 6.5 per cent of GDP — sharply in excess of a target of about 4.5 per cent earlier this year.

“The finance minister has told us that in the next fiscal year, they will pass on prices increase of commodities, especially oil, to consumers,” said Mr Patel during a meeting with a group of journalists in Islamabad on Tuesday.

In a late-night statement, Mr Naveed Qamar clarified that there was no outside pressure to eliminate subsidy.

“This is our own decision,” he said, adding that the prices of petroleum products would be raised gradually to bring them on a par with the international market price.

Pakistan’s government under former prime minister Shaukat Aziz from May 2006 practically abandoned its promise to keep domestic oil prices in line with global trends. The former government was primarily driven by concerns over a significant oil price increase leading to a slowdown in economic growth.

But critics have said a timely increase of oil prices even from a year ago would have kept the budget deficit close to the previous government’s target. “The deficit issue is a serious dark cloud,” said Mr Patel.

An international economist based in Islamabad said the government might have to consider raising oil prices on average by up to 75 per cent to meet the global trend of over $130 a barrel. In practical terms, this may translate into a significantly higher price increase for petroleum users as opposed to diesel-driven vehicles and kerosene which is used for cooking by low-income families.

Independent economists believe the move to correct the wrong done by the previous government of inducting political factor in the pricing system may prove to be a huge challenge for the new government.

The elimination of subsidy, resulting in substantial increase in petroleum prices, and its impact on other commodities, may result in a political backlash, unless the government’s economic team convincingly presents its case on the state of country’s economy before the public.

However, Mr Patel’s view was that inaction was no more a realistic choice for Pakistan’s economic managers as they prepare to finalise the budget for the next financial year, which is due to be presented on June 7. “But from what we are hearing about measures to be taken, there is hope,” he said, without elaborating on the specific measures that he discussed with Pakistan leaders and members of the country’s economic team.