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Pakistan hikes fuel prices in bid to stabilize economy

ISLAMABAD, Pakistan — The Pakistani government sharply raised fuel prices for consumers on Friday, paving the way for the resumption of a $6 billion bailout package from the International Monetary Fund and stabilization of the country’s economy. in the midst of a political crisis.

The decision to raise petrol and diesel prices by around 20% – or around 15 cents – a liter has allayed fears that Pakistan, which is already facing double-digit inflation, is joining a wave of global defaults as financial shocks from the pandemic, war in Ukraine and rising interest rates hit many poor countries.

But the decision could cost the new coalition government popular support, analysts say, adding to the political uncertainty that has rocked the country since Prime Minister Imran Khan was ousted in a no-confidence vote in parliament earlier. of last month.

“Rising prices signal that the government has decided to bite the bullet and make choices that are necessary, even if they cost short-term political capital,” said Uzair Younus, director of the Pakistan Initiative at the Council. of the Atlantic. “The rise will ease markets and reduce uncertainty. It will be essential for the government to maintain momentum and continue to make decisions that will lift Pakistan out of the current crisis.

Since his ousting, Mr Khan has held a series of political rallies, drawing huge crowds and strongly criticizing the current coalition government and the military, blaming them for his removal. Some officials now fear that the government’s decision to appease the IMF could spark a wave of public outrage from Mr Khan that he could manipulate on the streets.

Talks between the IMF and the new caretaker government, led by Shehbaz Sharif, had been deadlocked for weeks over terms for reviving the bailout package, which was announced in 2019 and then suspended after Pakistan’s previous government failed. did not respect certain loan conditions, such as the power cut. subsidies.

Pakistan has hoped for the release of a seventh tranche of about $900 million from the IMF’s $6 billion rescue package. Earlier this week, a new round of talks between the IMF and Pakistan’s new government in Doha, Qatar, appeared to break down after fund officials refused to agree to Pakistan’s request to delay the end of government subsidies.

Mr Sharif had been hesitant to end government energy subsidies and roll back unfunded subsidies to the oil and power sectors – a key IMF request – fearing a public backlash that could diminish his chances of success. his party in the next general election.

These elections are due to take place next year, but the new government is under increasing public pressure from Mr Khan’s supporters to hold them sooner.

On Thursday, Mr Khan warned the government to announce the next elections and dissolve parliament within six days. The warning came just after he drove thousands of supporters through the capital on Wednesday night. Angry supporters clashed with police in the capital and several other Pakistani cities. At least 1,700 protesters have been arrested by police in Punjab, the country’s most populous province.

This political pressure has added to the new government’s reluctance to undertake meaningful economic reforms which, while important to stabilizing the economy for years to come, would cause immediate pain to Pakistanis’ wallets, analysts say.

Late Thursday night, drivers desperate to fill up their tanks before the after-midnight price increase took effect flocked to gas stations in major cities. Many drivers’ incomes have already been squeezed by soaring inflation in recent years, which has driven up the price of basic commodities.

“There is no increase in our income commensurate with the rise in the price of fuel and other essentials,” Saleem Khan, 44, said as he waited to refuel his motorbike in 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 could send close to 10,000 rupees every month to his relatives in Bajaur, a tribal district bordering Afghanistan.

“This month, it looks like I will be able to send barely Rs. 7,000 to my family,” he said.

Nearby, Rasheed Ahmed, a garment factory worker, sat on his motorbike, worrying about how he would pay for basics like food and rent as fuel prices rose.

“We thought ousting Imran Khan would help the country bring down fuel prices, but the current rulers are crueler than the previous government,” said Mr Ahmed, 34.

The new coalition government has struggled to find its bearings since coming to power in early April and is in a particularly precarious position. He has no electoral mandate, but was chosen by parliament to take over after Mr Khan was ousted. And it is a tenuous coalition of political parties that have clashed frequently before and only come together around the singular goal of removing Mr Khan from office. Mr Sharif’s party also faces internal divisions over policy decisions.

Mr Khan’s government, before he was deposed, was also facing growing public discontent over rising inflation. Mr Khan says the economy was improving under his government, but in order to assuage public anger he announced he was cutting oil and energy prices – a move that has eased public discontent government but worsened the country’s budget deficit.

The move is now being described as “laying a landmine” by Miftah Ismail, the new finance minister, and has been a major sticking point in talks with the IMF, which has insisted Pakistan should end unfunded grants in order to secure the next tranche of the bailout.

While announcing the new fuel prices on Thursday evening, Mr Ismail said the government had realized the impact of painful economic measures but hoped these would translate into long-term benefits.

“It will also stabilize the rupiah and improve the situation in the stock market,” Ismail told a news conference. “More importantly, it will restore some balance within the economy.”

But the weeks-long delay in formulating new economic policies has come at a high price: the Pakistani rupee has plunged to a historic low against the US dollar in recent weeks, the current account deficit has widened and foreign exchange reserves depleted to $10 billion. This is 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 decision to raise fuel prices on Friday was still only a first step towards reviving the IMF bailout and restoring some economic stability in 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, columnist and former head of emerging markets investments at Citigroup. “Until the full rescue package is in place, uncertainty will persist, compounded by political unrest.”

Pakistan has entered into several IMF programs in its history, although successive leaders, including Mr Khan and former Prime Minister Nawaz Sharif, have expressed aversion to foreign financial aid. But the country’s emaciated economy and mounting debt leaves no government any choice but to agree to the bailouts.

The main reason for Pakistan’s recurring balance of payments is its inability to expand its exports, which have virtually stagnated for a decade due to protectionist policies, analysts say.

“This should change for Pakistan to get out of this vicious circle,” Nazar said.

Salman Massoud reported from Islamabad, and Christina Goldbaum from Dubai, United Arab Emirates. Zia ur-Rehman contributed reporting from Karachi, Pakistan.


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