| Welcome to Global Village Space

Thursday, November 30, 2023

Welcome inflation: Shehbaz to remove subsidies

IMF has demanded Pakistan to remove subsidies on petroleum products and electricity as the new government seems to give in.

Pakistan’s new finance minister on Friday agreed with IMF recommendations to reduce fuel subsidies and end a business tax amnesty scheme, pledging to pursue structural reforms to boost a crisis-wracked economy.

The International Monetary Fund (IMF) in 2019 approved a $6 billion loan over three years for Pakistan but disbursement has been slowed by concerns about the pace of reforms.

Finance Minister Miftah Ismail, who took office this month after a previous government lost a no-confidence vote, said he had “good discussions” with the IMF on a visit during the Washington-based lender’s annual spring meetings.

“They’ve talked about removing the subsidy on fuel. I agree with them,” Ismail, himself a former IMF economist, said at the Atlantic Council.

“We can’t afford to do the subsidies that we’re doing. So we’re going to have to curtail this,” he said.

Read more: Pakistan secures last minute bid on LNG cargo to defer crisis

He said that former prime minister Imran Khan, seeking to avoid ouster, set a “trap” for his successors through heavy subsidies on fuel and electricity, as well as a tax amnesty scheme for businesses — measures that derailed a disbursement from the IMF loan.

“He gave an amnesty to businesses for setting up factories so that they don’t have to pay taxes, or even if they evaded taxes that’s ok,” Ismail told reporters at an event organized by Pakistan’s embassy.

But Ismail added that some targeted subsidies should remain for Pakistan’s poorest amid sky-high global prices.

The country’s new Prime Minister Shehbaz Sharif has vowed to jumpstart a moribund economy, certain to be a major issue in elections due next year.

Pakistan has repeatedly sought international support and suffers from a chronically weak tax base.

Ismail said that Pakistan, the world’s fifth most-populous nation, needed to move to a new economic model by removing obstacles and promoting exports to the world.

“We have such an elite-benefitting country that almost every subsidy that you can speak of actually goes to the richest people,” he said.

Ismail said his immediate goal was reining in double-digit inflation — a target complicated by lifting fuel subsidies — and kickstarting job creation.

He denied Pakistan was in danger of defaulting on its debts, with foreign reserves currently standing at $10 billion, and much of its bilateral debt held with friendly countries China, Saudi Arabia and the UAE.

Sharif has little over a year before he has to call a general election, leaving observers wondering whether ousting Khan will backfire, since his government inherited an economic crisis that will take time to overcome.

Read more: IMF says will work with new govt

But Ismail said there was “never a wrong time to do the right thing.”

“If what we claim is true, and we are actually more competent, then we should be able to make a difference in a few months. And if we don’t, we’ll be thrown out by the people, which is fine.”

AFP with additional input by GVS News Desk