Pakistan has managed to persuade the International Monetary Fund (IMF) to reduce its external additional credit requirement to $6 billion due to the government’s intention to provide a Rs 150 billion subsidized fuel package to motorcyclists.
According to discussions at the Prime Minister’s House on Monday, an annual subsidy of about 150 billion rupees, ranging from 25 to 50 rupees per litre, is planned to be levied on car owners to avoid opposition from the IMF.
“The proposal is to increase the price of petrol to Rs 300 to Rs 325 per liter for car owners and to reduce it to Rs 250 to Rs 225 per liter for motorcyclists,” sources said.
Prime Minister Shehbaz Sharif is posing a new challenge to the economic team as the finance ministry and the State Bank of Pakistan (SBP) grapple with $6 billion in additional loans and further interest rate hikes.
A senior government official told The Express Tribune last week that the IMF and Pakistan have found a middle ground on the external financing gap. “Despite the IMF’s earlier estimate of a $7 billion external financing gap, the two sides have now agreed to reduce the estimate to $6 billion,” he added.
A $1 billion reduction in funding requirements would mean a reduction in new credit requirements by the same amount.
At a press conference last week, Finance Minister Ishaq Dar said there are reasons to believe the external financing gap is $5 billion, not $7 billion.
“The reduction was achieved by slightly reducing the current account deficit forecast and reducing foreign exchange requirements,” he added. The current account deficit is now about $7.7 billion, compared with the IMF’s previous forecast of $8.2 billion, he added.
About $500 million more is being cut against the projected foreign exchange reserve requirement for the current fiscal year. “The IMF is now ready to consider the level of foreign exchange reserves equal to 1.7 months of future import cover,” a senior government official said.
Pakistan’s total official foreign exchange reserves are $4.3 billion, which is insufficient to cover one month’s imports.
However, despite cutting $1 billion from the estimates, Pakistan’s woes are far from over. It still needs to guarantee an additional $6 billion in loans from regional countries.
Pakistan has so far claimed to have received $2 billion in guarantees from Saudi Arabia and $1 billion from the United Arab Emirates (UAE), leaving it $3 billion vacant.
According to sources, Finance Minister Ishaq Dar spoke to the Finance Minister of Qatar over the phone on Monday and sought his country’s help in bridging the funding gap.
The IMF is reluctant to announce a staff-level deal until regional countries are confident it will bail out Pakistan.
In August of last year, the directors of the regional countries of China, Qatar, Saudi Arabia, and the United Arab Emirates promised to provide additional funds in the amount of 4 billion dollars at the IMF Council. But this did not happen.
The finance ministry wants the IMF to get the country’s case before the council on March 24 – a date that seems ambitious given that the two sides have yet to reach an agreement at state level.
So far, Pakistan has increased electricity, gas, fuel prices, devalued the currency and raised interest rates by 3% to a record 20%.
Sources said the issue of interest rate hike is still not fully resolved and another rate hike could be on the horizon. The Central Bank held a meeting of the Monetary Policy Committee on April 4.
Since the last increase, the real interest rate has been slightly positive relative to core inflation. But the IMF calculated the inflation-adjusted positive interest rate from the core inflation rate. The central bank, chaired by Dr. Reza Bakir, agreed to link the rate to core inflation. In February, core inflation was 31.5% over the last 50 years.
At the beginning of the IMF program in 2019, the policy rate was 10.75%, which has almost doubled. SBP Governor Jameel Ahmad did not respond to The Express Tribune’s query on whether the IMF has asked Pakistan to hike interest rates further.
A new challenge
According to a press release from the Prime Minister’s Office, a consultation on pro-poor initiatives was held under the chairmanship of Prime Minister Shehbaz. In the meeting, it was reported about the provision of discounted fuel to motorcyclists and rickshaw pullers, the report said. The Prime Minister ordered the preparation of the package, he added.
Sources told The Express Tribune that discussions were held to reduce the price of petrol for motorcyclists from Rs 25 to Rs 50 per litre. They added that the estimated cost of providing subsidized fuel would be Rs 150 billion, which would be borne by vehicle owners.
Depending on the option, petrol is effectively 50 to 100 cheaper than what the car owner would pay.
Another attendee of the meeting said the final figure has not been locked in, but the cross subsidy per liter could be between Rs 50 and Rs 100, which is around Rs 150 billion.
Government officials said the fuel supply mechanism has yet to be finalized, but could offer a one-time password, pre-paid cards or cash.
The Prime Minister has directed that a petrol subsidy of at least Rs 1,000 per month be given to motorcyclists through refunds from car owners, they added.
However, the government seems to be gambling with the IMF and the voters, as neither the IMF supports such a proposal nor the consumers paying high prices to fund the government’s election campaign.
If the government implements a plan to raise fuel prices for car owners, it may be sued due to its discriminatory nature. A PTI supporter will not pay for PML-N’s political venture.
The proposal to charge Rs 25-50 per liter from the car owner and give it to the motorcyclist is a double-edged sword, said another meeting participant. Former Prime Minister Imran Khan also gave Rs 200 billion in fuel subsidies in February 2022, which derailed the IMF program.
The Prime Minister also directed to subsidize wheat flour worth Rs 1 billion per year to one million residents of Islamabad. On Monday, the prime minister also fixed the minimum intervention price for cotton at Rs 8,500 per 40 kg – up from Rs 5,700.