Pakistan raises fuel prices by 20% to unlock IMF funding

Government moves to consolidate its finances to reduce its deficit after inflation hit 13.4% in April

Pakistan is raising fuel prices by 20 per cent to continue receiving aid from a $6 billion package agreed on with the International Monetary Fund in 2019, the country’s finance minister has said.

The Washington-based fund met with officials from Pakistan in Qatar this month and highlighted policy deviations by Islamabad related to fuel and subsidies, particularly in the month of February of this year.

Against a backdrop of high inflation that reached an annual 13.4 per cent in April, declining foreign currency reserves, a 7 per cent unemployment rate and a large current account deficit, the government needs to tighten monetary policy and consolidate its finances in order to reduce the budget deficit.

Fuel prices will rise as of Friday, with the new price of petrol set at 179.86 rupees ($0.88) a litre while diesel will be 174.15 rupees, finance minister Miftah Ismail said on Twitter on Thursday.

Reuters reported earlier on Thursday that the IMF and Islamabad had reached a deal to release more than $900 million in funds, once Pakistan removed the fuel subsidies and raised prices, according to a Pakistani source.

Raising fuel prices is a key issue between Pakistan and the fund as part of plans to remove subsidies in the oil and energy sectors that will help to reduce the fiscal deficit before the country presents its annual budget next month.

An IMF mission led by Nathan Porter held both in-person and online discussions with Pakistani authorities in Doha during discussions that ran from May 18 to May 25 on policies to secure macroeconomic stability and support sustainable growth in Pakistan.

The discussions aimed to reach an agreement on policies and reforms that would lead to the conclusion of the pending seventh review of the authorities’ reform programme, Mr Porter said on Wednesday.

“Considerable progress was made during the mission, including on the need to continue to address high inflation and the elevated fiscal and current account deficits, while ensuring adequate protection for the most vulnerable,” Mr Porter said.

“In this regard, the further increase in policy rates implemented on May 23 was a welcome step. On the fiscal side, there have been deviations from the policies agreed in the last review, partly reflecting the fuel and power subsidies announced by the authorities in February.

“The team emphasised the urgency of concrete policy actions, including in the context of removing fuel and energy subsidies and the fiscal year 2023 budget, to achieve programme objectives.”

Pakistan’s current account deficit stood at more than $12 billion between July 2021 and February 2022, in stark contrast to a $1bn surplus in the same period a year earlier.

If the seventh review is approved by the IMF, that would ease the foreign currency reserve crunch in the country.

Pakistan currently has foreign reserves that cover fewer than two months of imports, according to Reuters.

About half of the funds in the $6 billion deal have yet to be released, and it is not clear when the IMF review would take place.

Pakistan’s economy is projected to expand by about 4 per cent this year, according to IMF estimates released in April before the deterioration in the country. The economy grew 5.6 per cent in 2021.

Inflation is forecast to accelerate to 11.2 per cent this year, from 8.8 per cent in 2021.