The International Monetary Fund’s (IMF) resident representative for Pakistan Esther Perez Ruiz has stated that the government’s recent decision to extend a cross-subsidy for fuel was made without consulting with the IMF.
It was reported by Bloomberg that the statement came from IMF’s key official two days after Prime Minister Shahbaz Sharif announced a “petroleum relief package” for low-income people, warranting a Rs 50 subsidy per litre of petrol for low-income individuals. The subsidy was doubled to Rs 100 the next day, for motorcycle and small car (up to 800cc) owners.
The announcement of the relief package was made a few days after the government increased the petrol price by Rs5, to Rs272 per litre, succumbing to the IMF’s demands.
How does the fuel subsidy scheme relate to the eagerly awaited IMF loan?
What a fuel cross-subsidy entails and the possibility of its successful implementation has been explained by Profit.
Read: Why the govt’s petrol cross-subsidisation scheme is a logistical nightmare
The tl;dr explains how the government plans on funding the subsidy by balancing the gap by charging higher fuel prices from those who own cars bigger than 800cc. Whether this scheme will work or not comes later. More pressing is the concern to secure the IMF loan.
Ruiz disclosed that “Fund staff are seeking greater details on the scheme in terms of its operation, cost, targeting, protections against fraud and abuse, and offsetting measures, and will carefully discuss these elements with the authorities,” adding that Pakistan has made “substantial progress” towards meeting policy commitments needed to unlock the critical IMF funding. However, Pakistan is required to meet a few more conditions, before it can secure the loan and circumvent the looming threat of default.
“A staff-level agreement will follow once the few remaining points are closed,” Ruiz elaborated. “Ensuring there is sufficient financing to support the authorities in the implementation of their policy agenda is the paramount priority.”
Well, that is one thing, not just the IMF, but the entire country is concerned about.
This relates to the IMF funding because the global lender expects Pakistan to fulfil their conditions, one of which is a ban on subsidies. Therefore, concerns regarding losing the IMF loan rose after the new scheme was announced.
Moreover, another delay in the funding, as communicated by the Finance Minister Ishaq Dar, was the IMF’s wish to see countries fulfil the pledges they have made to assist Pakistan in bolstering its finances, before approving the bailout package.
The current state of affairs
As it stands, Pakistan remains the only South Asian country that has failed to secure a bailout from the IMF. Sri Lanka secured financing this week, while Bangladesh pushes on with carrying out IMF-mandated reforms, leaving Pakistan the only one scrambling to meet the demands of the global lender.
However, Pakistan has been taking several measures to revive a stalled $6.5 billion IMF loan programme. These measures encompass increases in taxes, fuel prices and a shift to a more market-based exchange rate.
Damage in the wake of this on-going economic turmoil
It is an understatement to say that any government policy or decision does not operate in a vacuum. The recent petroleum relief package is no different. Apart from the risky outcome of this new fuel subsidy, there are other implications of it. The uncertainty surrounding the outcome of this decision has increased the volatility in the market by ten folds, with consequences bleeding into the stock market.
The impending threat of not securing a loan from the IMF has caused the stock market to plummet. On Tuesday, share prices fluctuated within a small range throughout the session, after trading began at a low.
Anxieties fostered by the ongoing politico-economic unrest urged investors to approach with caution, shared Arif Habib Ltd. The uncertainty of securing an IMF loan led investors to be hesitant, causing volumes on the mainboard of the exchange to dry up. Meanwhile, third-tier stocks continued their dominance.
Analyst Ahsan Mehanti revealed that the dismal data on foreign direct investment showing a 40 per cent fall for July-February on a year-on-year basis was another reason for poor investor participation. Consequently, the KSE-100 index settled at 40,877.98 points, down 40.47 points or 0.1 per cent from the preceding session.
This reflects that the shocks from the current economic crisis are far reaching and becoming worse with every passing day.
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