Government plods towards IMF deal

ISLAMABAD:

Pakistan has managed to convince the International Monetary Fund (IMF) to reduce external additional loan requirement to $6 billion amid government’s desire to give Rs150 billion subsidised petrol package to motorcyclists.

In order to avoid an objection by the IMF, roughly Rs150 billion annual subsidy on account of Rs25 to Rs50 per litre is planned to be recovered from car owners, according to discussions that took place at the Prime Minister’s House on Monday.

“The proposal is to raise the petrol price in the range of Rs300 to Rs325 per litre for car owners but reduce it to Rs250 to Rs225 per litre for motorcyclists,” according to sources.

Prime Minister Shehbaz Sharif is throwing a new challenge to the economic team at a time when the finance ministry and the State Bank of Pakistan (SBP) are already grappling with the issues of arranging $6 billion more loans and a further hike in the interest rates.

A high-ranking government functionary told The Express Tribune that the IMF and Pakistan last week found a middle ground on the issue of external financing gap. “Against the IMF’s earlier estimates of $7 billion external financing gap, both sides have now agreed to reduce the estimates to $6 billion,” he added.

The $1 billion reduction in financing needs means, lowering the new loan requirement by the same amount.

While addressing a news conference last week, Finance Minister Ishaq Dar said that he had valid reasons to believe that the external financing gap was not $7 billion but $5 billion.

“The reduction has been achieved by marginally reducing the projection of the current account deficit and lowering the foreign exchange building requirements,” he added. The current account deficit is now being projected around $7.7 billion -- as against the earlier IMF projection of $8.2 billion, he added.

Another roughly $500 million is being reduced against the projected foreign exchange reserves requirement for the current fiscal year. “The IMF is now willing to consider the foreign exchange reserves level equal to 1.7 months of prospective imports cover,” according to the senior government functionary.

Pakistan’s gross official foreign exchange reserves stand at $4.3 billion -- not enough for one month of import cover.

However, despite shaving off $1 billion from the estimates, Pakistan’s woes have not ended. It still has to arrange assurances from the regional countries for $6 billion additional loans.

Pakistan has claimed that it has so far $2 billion assurance from Saudi Arabia and $1 billion from the United Arab Emirates (UAE), leaving it with a gap of $3 billion.

The sources said that Finance Minister Ishaq Dar made a telephonic call on Monday to the finance minister of Qatar to get his country’s help bridging the financing gap.

The IMF is reluctant to announce a staff-level agreement until it is sure that the regional countries will bailout Pakistan.

In August last year, the directors of the regional countries China, Qatar, Saudi Arabia and the UAE, had given assurances at the IMF board that they would provide additional financing of $4 billion. But this did not materialise.

The finance ministry has a desire that the IMF should take the country’ case for board approval on March 24th – a date that seems overambitious given the fact both sides have not reached a staff-level agreement.

So far, Pakistan has increased the electricity prices, gas prices, fuel prices, devalued the currency and increased the interest rates by 3% to record high level of 20%.

The sources said that the issue of interest rate hike was not completely settled yet and another interest rate hike might be on the horizon. The central bank has already convened a meeting of the Monetary Policy Committee on April 4th.

After the recent hike, the real interest rate was slightly positive compared to the core inflation. But the IMF calculated the inflation adjusted positive interest rate from the headline inflation rate. Dr Reza Baqir-led central bank had agreed to link the rate with the headline inflation. The headline inflation in February hit a 50-year high of 31.5%.

At the beginning of the IMF programme in 2019, the policy rate stood at 10.75%, which have almost doubled. SBP Governor Jameel Ahmad did not respond to a question by The Express Tribune whether “the IMF has asked Pakistan to further increase the interest rates”.

New challenge

According to press statement by the PM’s Office, Prime Minister Shehbaz chaired a meeting on pro-poor initiatives. The meeting was briefed about the provision of concessional petrol to motorcyclists and rickshaws, according to the statement. The prime minister instructed for finalising the package, it added.

The sources told The Express Tribune that discussion was held to cut the petrol price by Rs25 to Rs50 per litre for the motorcyclists. They added that the estimated cost of the provision of the subsidised fuel was Rs150 billion, which would be borne by the car owners.

Effectively the petrol will be cheaper by Rs50 to Rs100, depending upon the option, compared to the cost being paid by a car owner.

The final number was not locked but the per-litre cross subsidy could be Rs50 to Rs100 that would cost about Rs150 billion, according to another participant of the meeting.

The government officials said that the mechanism to provide the fuel had not been finalised but the options include provision of one-time password, giving pre-paid cards or giving cash.

The prime minister instructed that at least Rs1,000 per month petrol subsidy should be given to the motorcyclists by recovering from car owners, they added.

However, the government seems playing a gamble with the IMF and the voters, as neither the IMF may support such a proposal nor the consumers will pay higher prices to finance the government’s election campaign.

If the government goes ahead with its plan to increase the petrol prices for car owners, it might be challenged in the courts due to its discriminatory nature. A PTI supporter will not pay for the cost of the PML-N’s political venture.

The proposal to take Rs25 to Rs50 per litre from a car owner and give it to motorcyclist is a double-edged sword, according to another meeting participant. Former prime minister Imran Khan had also given Rs200 billion fuel subsidy in February 2022, which led to derailment of the IMF programme.

The prime minister also directed to give wheat flour subsidy to one million people of Islamabad that would cost Rs1 billion per annum. The premier on Monday also fixed the minimum cotton intervention price at Rs8,500 per 40kgs – up from Rs5,700.