Islamabad May 11 2023: The International Monetary Fund said Pakistan will scrap a new fuel subsidy proposal, a decision that potentially clears a hurdle to unlocking a long-delayed $1.1 billion loan disbursement.
Pakistan has committed not to implement a so-called cross-subsidy program in the current fiscal year and beyond, an IMF spokesperson said in a emailed response to questions. The government also won’t introduce new tax exemptions and will “durably allow” a market-based exchange rate for its currency, the IMF said.
Prime Minister Shehbaz Sharif has raised energy prices and increased taxes to receive the IMF aid. Those steps together with scrapping the fuel subsidy plan pose significant political risks for his government as approval ratings drop ahead of elections later this year and political tensions escalate over the arrest of former premier Imran Khan,
The IMF will continue engagement with the government on the loan despite the ramp up in political tensions, the spokesperson added.
Fuel pricing has been a sticking point for negotiations between the IMF and the cash-strapped government over the next installment of a 2019 aid program, which has stalled since August. There’s about $2.6 billion left to disburse from the $6.7 billion program that’s scheduled to expire next at the end of next month.
Petroleum Minister Musadik Malik earlier said the multilateral lender had reservations about the fuel subsidy plan, which would have raised prices for wealthier motorists to finance subsidies for lower income customers.
The energy ministry’s petroleum division in Pakistan did not immediately respond to a request for a comment.
The IMF funds are needed for the government to avoid a default on its external debt. The situation has worsened as the rupee lost a third of its value in the past year, contributing to record inflation while sending interest rates to an all-time high.
Pakistan also needs to confirm other funding that it expects to receive before the program resumes. The funds are key to helping the nation boost its foreign exchange that stands at a critically low level of $4.5 billion and cover just about one month of imports.
Meanwhile, the country’s political situation is worsening. Violent protests erupted across the country after Khan was arrested on Tuesday, with dozens injured and demonstrators attacking military buildings.
