| Welcome to Global Village Space

Monday, June 3, 2024

How Pakistan is adopting coercive policies for the revival of the bailout package

In order to satisfy IMF requirements for the extension of the bailout package, the Pakistani government has raised domestic fuel prices by more than 90 percent during the prior month. The politically unfavorable action has garnered significant public opposition.

Fuel price reductions have been announced again by Pakistan’s Finance Minister Ishaq Dar. Oil is the nation’s largest import. The previous administration’s subsidy program severely harmed not only its relationships with the IMF but also the national treasury. To revive Pakistan’s failed $6 billion loan program, the International Monetary Fund (IMF) imposed four severe conditions. It included increasing electricity tariffs, the cabinet approving a ruling to gradually impose a 50 rupees per liter petroleum levy to collect 855 billion rupees and the government’s position on adjusting oil rates.

After the difficult experience of providing over Rs300 billion in gasoline assistance, the IMF demanded that Pakistan discontinue its role in determining fuel prices. The law is amended to impose a Rs 50 per liter petroleum levy on petrol, high-speed diesel, E-10 gasoline, high octane blending component (HOBC), light diesel, and premium kerosene oil. It has also proposed an Rs30,000 per metric tonne tax for liquefied petroleum gas. Pakistan was also tasked with establishing an anti-corruption task force to analyze all existing government rules intended to curb corruption.

Read more: Pakistan asks IMF for restructuring ‘pause’

Understanding the matter better

The Economic Coordination Committee (ECC) of the cabinet had already approved an Rs7.91 per unit increase in electricity prices in three stages, but the final announcements remained undecided. According to the Memorandum for Economic and Financial Policies (MEFP) report, the IMF has recommended that the seventh and eighth outstanding program evaluations be combined but did not indicate that it would also authorize $2 billion in loan tranches. Experts feel that restricting the uncertain economic policies implemented by succeeding governments made nearly all international financial institutions wary of conducting business with Pakistan.

The IMF  approved reviving a bailout package for Pakistan, procuring timely assistance as the high global tariff on energy imports shoves the cash-strapped country to the verge of a payment crisis. If agreed by the IMF board, the staff-level consensus will generate total allocations of $4.2 billion under the program. “The IMF Board has ratified the renewal of our EFF proposal. Pakistan should receive the 7th & eighth tranche of $1.17 billion. . The relaxation arrives as “Hostile external circumstances have beaten Pakistan’s economy due to the spillovers from the war in Ukraine, and domestic obstacles,” explained in a statement. by Antoinette Sayeh, the IMF Deputy Managing Director.

The advancement arrives a day after the union government condemned the PTI for “endeavoring to injure the IMF loan program” after the Khyber Pakhtunkhwa government supposedly denied executing the tasks of the Fund’s agreement in a letter. In the letter, KP Finance Minister Jhagra cited the reason that the KP administration might find it hard to operate a provincial excess this year in perspective of the flood-related destructions. The recent agreement heeds by months of deeply undesirable belt-tightening by the government of Shehbaz Sharif, who came into power in April and has productively eradicated fuel subsidies and initiated new criteria to extend the tax base.

The government struggles to get the program back on the trail via applying uncomfortable corrective economic regulations to protect Pakistan from default. “Pakistan is at a difficult economic crossroads. A difficult exterior environment incorporated with procyclical domestic strategies fueled with the domestic need to unsustainable degrees,” confessed Nathan Porter, who directed the IMF board in weeks of dialogue with Islamabad. “The consequent economic overheating steered to substantial fiscal and external debts in FY22, contributed to soaring inflation, and corroded reserve buffers,” Porter added.

According to a statement from the Bloomberg news agency, Pakistan requires at least $41 billion over the next 12 months to repay debt and fund imports. The inflation rate in Pakistan is the second-highest in all of Asia. Critics viewed the agreement as significant for Sharif’s coalition administration, which came to power in April and is attempting to stabilize the economy at a time when Russia’s foray into Ukraine has caused petroleum prices to soar.

Read more: IMF urges Pakistan to end subsidies?

In order to satisfy IMF requirements for the extension of the bailout package, the Pakistani government has raised domestic fuel prices by more than 90 percent during the prior month. The politically unfavorable action has garnered significant public opposition. In light of the increased distrust in the global economy and financial markets, the IMF announced that “the authorities should be prepared to take any further measures necessary to achieve program objectives.”

The $6 billion IMF plan to avoid default on foreign deficit compensations was agreed upon in 2019 by the administration of then-Prime Minister Imran Khan. The overseas lender has paid less than fifty percent of the amount. Khan has removed from office in early April thanks to a no-confidence motion in parliament that Sharif led, making him the next prime minister of Pakistan. Khan handed unfunded incentives to the electricity and oil divisions during his final days in office, but the present government has canceled the subsidy. It also imposed a tax on fuel that will result in a 70% increase in tariffs within a month. Pakistan is one of the countries that has received the most bailout money.

As of right now, it is participating in its 23rd loan proposal with the IMF since the State joined the organization in 1950. Authorities notice a persistent lack of political will and public enthusiasm for necessary economic reforms despite successive governments’ promises to “break the beggar’s bowl” or free the nation from the IMF’s grasp. According to government statistics, fewer than 3 million people in a nation of nearly 230 million file income tax returns. Any efforts to expand the tax base are met with fierce opposition. Even still, experts claim that Pakistan’s economic woes are nothing new and that the strategic importance of this nuclear-armed South Asian nation with nearly 230 million citizens compels major nations to keep it afloat.


The writer is a Political Scientist and Assistant Professor at the Department of Political Science in Abdul Wali Khan University Mardan. The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.