Pakistan quells IMF concerns over fuel subsidy

Inflation rises to 17-month high in March

ISLAMABAD:

Pakistan has committed to the International Monetary Fund to raise fuel prices if no additional savings can be identified to maintain current levels, as inflation surged to a nearly one-and-a-half-year high of 7.3% last month, driven by increases in fuel, electricity and gas prices.

Sources told The Express Tribune that the IMF also imposed a new condition of increasing the quarterly stipend under Benazir Income Support Programme by 35% to Rs19,500 from January next year to offset the impact of increase in the energy prices. But the Rs5,000 quarterly increase in the BISP dole out cannot offset the impact on other income groups, particularly lower to upper middle-income groups.

The government sources told The Express Tribune that the assurance had been given to the IMF before reaching a conditional staff level agreement for the disbursement of $1.2 billion loan tranches. The executive board's meeting is linked with the Federal Board of Revenue's ability to generate Rs322 billion from the court cases.

The sources said that the government informed the IMF that the subsidy on petrol and diesel was "temporary" and would continue only until there are identified savings in the budget.

Prime Minister Shehbaz Sharif has maintained the fuel prices after initially increasing it by 20% soon after the conflict in the Middle East began. However, the government was still charging unreasonably high taxes on petrol, which are far more than the subsidy that the government was giving on the product.

In the case of high-speed diesel, the government was providing subsidies and the government was discussing the possibility of reducing taxes to maintain the prices, the sources added.

The sources said that the federal government informed the IMF that it was in discussions with the provinces to find more fiscal space for maintaining the fuel prices.

The finance ministry has apprised the global lender that it recognised that regular adjustment in fuel prices was important in suppressing the demand. Despite a 20% increase in fuel prices, there was no reduction in consumption last month because neither the people nor the government showed self-discipline.

But the Pakistani authorities told the IMF that to avoid very costly budgetary subsidies, they remained committed to allow regular fuel price revisions, unless additional savings were identified and secured.

The lender was told that the government saved Rs27 billion from a reduction in fuel allowances for official vehicles and a 20% cut in the last quarter's non-salary expenditures. Another Rs100 billion were diverted from the federal development budget.

The government is in discussions with the provinces for another Rs200 billion worth of fiscal space to continue with the current prices. However, there is also a view within the government that some increase in the prices should be passed on to the consumers this Friday as a measure to curb demand.

Due to better management of supplies by the Ministry of Petroleum, there is no shortage of fuel, but the Ministry of Finance is struggling to ensure fiscal space as well as the provision of dollars.

 

Prices hit 17-month high

Pakistan made the commitment days before the new inflation reading was reported by the national data collecting agency.

The Pakistan Bureau of Statistics reported on Wednesday that inflation rose to 7.3% in March, which was the highest level in the past 17 months. However, it was still lower than the government's expectations and also within the annual target range.

The food inflation pace further slowed down last month but the non-food prices escalated both in urban and rural areas. The PBS said that gas prices increased 23%, followed by an 18% increase in petrol and 14% in electricity last month over the same period of last year.

The non-food and non-energy inflation indicator also rose last month to 7.4% in urban areas and 8.4% in rural areas, according to the PBS.

Pakistan has assured the IMF that it stands ready to increase the interest rates provided the annual inflation rate slips beyond the target range of 7.5%.

However, any temporary slip should not become a base for increasing the interest rates that can further slowdown the economy.

BISP beneficiaries

The sources said that to offset the impact of future price hikes on the poor segments, the IMF has asked the government to increase the cash handouts being distributed among the 10 million BISP beneficiaries. They said that the number of beneficiaries would also be increased by 200,000 by June this year to 10.2 million.

The sources said that an understanding has been reached between the federal government and the IMF to increase the unconditional cash transfer amount from Rs14,500 to Rs19,500 beginning in January 2027. They said that increasing the amount to Rs19,500 was the new condition imposed by the IMF.

The increase would be sufficient to offset the inflationary impact and also take the handouts close to 15% of the cost of basic food being consumed by the lowest income groups, the sources added.

The sources said that as part of the conditional transfers, about 700,000 more beneficiaries would be added in the pool under the health and education schemes and another 200,000 in nutrition programmes being run through the BISP.

Prime Minister Shehbaz Sharif has already asked the BISP management to distribute money among the beneficiaries through banking channels aimed at avoiding hassles.