Govt caves in to IMF, drops petrol bomb

Govt caves in to IMF, drops petrol bomb

In an unexpected move, the government raised the prices of petroleum products by Rs30 per litre, or up to one-fourth of their current levels, paving the way for a staff-level agreement with the International Monetary Fund by June 12.

The unprecedented decision will help defuse the landmines planted by former Prime Minister Imran Khan’s government on the one hand while saving the country from default on the other.

Finance Minister Miftah Ismail announced the decision in an unscheduled news conference after Prime Minister Shehbaz Sharif approved it at a party meeting.

“The federal government has decided to raise the price of petroleum products by Rs30 per litre, with the increase set to take effect at midnight tonight,” Ismail said.

With the new increase, the new price of petrol will be Rs179.88 per litre, the highest ever rate, and a 20% increase over current prices. Ismail called it a “difficult decision that will erode political capital” for the government.

“The government was giving Rs56 per litre subsidy, and I have only reduced the loss by Rs30 per litre,” Miftah said at the news conference. The new price of high-speed diesel will be Rs174.86 per litre, representing a 20.8 per cent increase.

Miftah stated that the government was providing a subsidy of Rs86 per litre, with only an Rs30 reduction in the first batch.

“The government cannot take the country into default and is willing to pay the political cost to protect the state’s interests,” said the finance minister.

“We had the choice of protecting the government’s political interests or saving the country from default,” said the finance minister.

The government also raised the price of light diesel oil by 25.4 per cent to Rs148.31 per litre and kerosene by 24 per cent to Rs155.56 per litre. The federal government had approved Rs157 billion in subsidies from March 1 to May 15, which were expected to reach Rs300 billion if prices remained unchanged until June.

According to the sources, the government must raise electricity prices by Rs5 per unit beginning June 1.

The total price increase will be around Rs12 per unit, including the removal of the Rs5 per unit electricity subsidy and quarterly and annual tariff adjustments.

However, the decision will exacerbate inflation, already at 13.4 per cent in April, the highest in two years. The government had to choose between increasing prices and allowing the rupee to weaken in the absence of an IMF deal, which could have resulted in hyperinflation.

However, the government moved only after the IMF refused to sign a staff-level agreement until Pakistan takes corrective measures, such as ending fuel subsidies and reaching an agreement on next year’s budget.

“With the increase in prices, a major barrier to reaching a staff-level agreement has been removed, and a deal could be reached before June 12,” said the minister. He added that the remaining outstanding issues were not particularly complex and could now be resolved within days.

The minister stated that the gap between the IMF and the government’s assessment of the next fiscal year’s budget was not large and that he hoped to bridge it in the coming days.

The government’s decision to raise prices at the expense of political capital suggests that it may have received approval from the establishment to remain in power for longer than previously thought.

The government refused to make difficult decisions and then called snap elections to ensure the PTI’s victory.

The path toward restoring macroeconomic stability may also help stem rupee losses, which reached a new low of Rs203 per dollar on Thursday. According to the central bank, foreign exchange reserves have also dropped to $10 billion.

In its handout, the IMF emphasised the importance of concrete policy actions, including eliminating fuel and energy subsidies and the FY2023 budget, to achieve programme objectives.

The IMF stated that significant progress had been made during the mission-level talks, including the need to continue addressing high inflation and elevated fiscal and current account deficits while ensuring adequate protection for the most vulnerable.

“These are the landmines that the previous government planted when Imran Khan reduced electricity rates by Rs5 per unit and petroleum rates by Rs10 per litre,” Miftah said, adding that global crude oil prices had risen from $85 per barrel at the time to more than $108.

By doing so, the previous government harmed the Pakistan Muslim League-Nawaz (PML-N) and wreaked havoc on the national economy, he claimed.

Former finance minister Shaukat Tarin told the IMF that he would not give “any subsidy” and levy an Rs30 per litre petroleum levy and a 17 per cent GST.

According to Ismail, the PML-N had criticised the PTI government for charging higher petroleum development levy and GST rates because the party was never in favour of providing subsidies.

Share this post