It’s a difficult call
IMF staff-level negotiations will go forward after the government’s decision to hike gasoline prices starting Thursday night will remove a key roadblock to finalising a deal.
The IMF had given Islamabad two days to remove the ban on further negotiations after refusing to renew the $6 billion programme without removing the economically unsustainable gasoline and energy subsidies on Wednesday.
Since Prime Minister Imran Khan tried to fend off the opposition’s no-confidence threat by freezing energy prices for four months in June, Pakistan’s IMF package should be revived as a result of the government’s declaration. The IMF programme was previously halted.
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Price hikes at the pump are expected to dramatically boost inflation, but they are also expected to unlock financial assistance from other multilateral and bilateral lenders, strengthen the currency rate, and re-energise the stock market. This is a win-win situation.
At the end of a week of talks in Doha, the IMF stated that “concrete policy actions… to achieve programme objectives” were urgently needed, and that it was willing to continue “its dialogue and close engagement with Pakistan’s government on policies to ensure macroeconomic stability.” This included reversing fuel and power subsidies as well as forming the next year’s budget.
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As a result of this, the Shehbaz Sharif government’s decision to raise gasoline prices despite the increase in global oil prices demonstrates that it is more confidence in taking harsh and unpopular choices in order to deal with the economic crisis.
When Mr Khan issued a six-day ultimatum for early elections, the decision was made just before of the deadline. As a first step toward a more sustainable economy, the IMF and State Bank of India want the government to not only pass along the full cost of rising global energy prices onto consumers, but they also want the government to recover the full amount of GST and petroleum levies collected over the next fiscal year. The International Monetary Fund (IMF) is likely to increase its financing under the programme and prolong it until June 2023 if that requirement is satisfied.
