ISLAMABAD, Pakistan — The Pakistani government on Friday sharply increased fuel prices for consumers, paving the way to revive a $6 billion bailout from the International Monetary Fund and stabilize the country’s economy amid growing political unrest.
The move to raise petrol and diesel prices by about 20 percent – or about 15 cents – per liter allayed concerns that Pakistan, already experiencing double-digit inflation, would join a wave of global defaults as the financial shocks of the pandemic, the war in Ukraine and rising interest rates have plagued many poorer countries.
But the decision could cost the new coalition government popular support, analysts say, adding to the political uncertainty the country has left since Prime Minister Imran Khan was ousted in a no-confidence vote in parliament early last month.
“The price hike indicates that the government has decided to take the plunge and make the necessary choices, even if they cost short-term political capital,” said Uzair Younus, director of the Pakistan Initiative at the Atlantic Council. “The increase will ease markets and reduce uncertainty. It will be critical for the government to maintain momentum and continue making decisions that will take Pakistan out of the current crisis.”
Since his ouster, Khan has held a series of political rallies, drawing huge crowds and vehemently criticizing the current coalition government and military, blaming them for his removal from office. Some officials now fear that the government’s move to appease the IMF would send Mr Khan a wave of public outcry that he could manipulate in the streets.
Talks between the IMF and the new interim government, led by Shehbaz Sharif, had stalled for weeks over the terms for reviving the bailout, which was announced in 2019 and later suspended after Pakistan’s previous government failed to comply. to a number of loan conditions, such as cutting energy. grants.
Pakistan has hoped to release a seventh tranche of about $900 million of the IMF’s $6 billion bailout package. Earlier this week, a new round of talks between the IMF and the new Pakistani government in Doha, Qatar, appeared to fail after fund officials refused to comply with Pakistan’s request to delay the cessation of government subsidies.
Sharif has been reluctant to end government energy subsidies and roll back unfunded subsidies to the oil and energy sectors — a key IMF demand — for fear of public reaction that could jeopardize the chances of success. of his party at the next general election.
Those elections are scheduled for next year, but the new government is under increasing public pressure from Mr Khan’s supporters to hold them earlier.
On Thursday, Mr Khan warned the government to announce the next elections and dissolve parliament within six days. The warning came shortly after he led thousands of supporters to the capital on Wednesday evening. Angry supporters clashed with police in the capital and several other Pakistani cities. At least 1,700 protesters were arrested by police in Punjab, the country’s most populous province.
That political pressure has contributed to the new government’s reluctance to implement meaningful economic reforms that, while important to stabilize the economy in the coming years, would immediately hurt Pakistanis’ pockets, analysts say.
Late Thursday night, drivers desperate to fill their tanks before the price hike took effect flocked to gas stations in major cities. The incomes of many motorists have already been pressured in recent years by rising inflation that has pushed up the price of basic goods.
“Our income is not increasing in proportion to the rise in the price of fuel and other essentials,” Saleem Khan, 44, said as he waited to fill the tank of his motorcycle at a gas station in the port city of Karachi.
mr. Khan earns about 18,000 rupees, or about $90, a month working in a restaurant in the city. In previous months, he was able to send nearly 10,000 rupees a month to his relatives in Bajaur, a tribal district bordering Afghanistan.
“This month it seems like I can barely send rupees 7,000 to my family,” he said.
Nearby, Rasheed Ahmed, a garment factory worker, sat on his motorcycle, worrying how he would pay for basic necessities such as food and rent with the rise in fuel prices.
“We thought the impeachment of Imran Khan would help the country lower fuel prices, but the current rulers are more brutal than the previous government,” said Mr. Ahmed.
The new coalition government has struggled to orientate since coming to power in early April and is in a particularly precarious position. It has no electoral mandate but was elected by parliament to take over after Mr Khan’s ouster. And it is a tenuous coalition of political parties that previously often clashed and gathered only around the singular goal of removing Mr Khan from office. Mr Sharif’s party also faces internal divisions over policy decisions.
Khan’s government, before being removed from office, also faced mounting public discontent over rising inflation. Mr Khan claims the economy was improving under his administration, but to assuage the public’s flare-up, he announced he was cutting oil and energy prices – a move that eased public discontent, but it the country’s budget deficit widened.
That move is now described as the “laying of a landmine” by Miftah Ismail, the new finance minister, and was a major sticking point in talks with the IMF, which insisted Pakistan should end unfunded subsidies to get the next installment of the rescue package.
Announcing the new fuel prices late Thursday night, Mr. Ismail said the government recognized the impact of painful economic measures, but hoped they would yield long-term benefits.
“It will also stabilize the rupee and improve the stock market situation,” Mr Ismail said at a news conference. “Most importantly, it will bring some balance back to the economy.”
But the weeks-long delay in forging new economic policies has come at a high price: The Pakistani rupee has fallen to an all-time low compared to the US dollar in recent weeks, the current account deficit widened and foreign exchange reserves shrunk to $10. billion. That’s barely enough to cover two months of imports from the country.
On Friday, the Pakistani rupee showed some signs of recovery. But the government’s move to raise fuel prices on Friday was still only a first step towards restoring the IMF bailout and restoring some economic stability to the country.
“Pakistan is not out of the woods yet. It needs at least $10 billion to stabilize its reserves and the currency,” said Yousuf Nazar, a newspaper columnist and former head of Citigroup’s emerging markets investment. “Until the full bailout package is completed, uncertainty will continue, which has been exacerbated by political unrest.”
Pakistan has engaged in several IMF programs in its history, although successive leaders including Mr Khan and former Prime Minister Nawaz Sharif have expressed their aversion to foreign financial aid. But the country’s emaciated economy and rising debts leave any government with little choice but to accept the bailout packages.
The main reason for Pakistan’s recurring balance of payments is the inability to expand its exports, which have been almost stagnant for a decade due to protectionist policies, analysts say.
“This should change for Pakistan to get out of this vicious circle,” said Mr. nazar.
Salman Masood reported from Islamabad, and Christina Goldbaum from Dubai, United Arab Emirates. Zia ur-Rehman contributed reporting from Karachi, Pakistan.