Government slowly approaches IMF deal

Pakistan has successfully persuaded the International Monetary Fund (IMF) to lower its external loan requirement to $6 billion, as the government intends to offer a subsidized petrol package worth Rs, 150 billion to motorcyclists.

IMF set Petrol Price:

Discussions held at the Prime Minister’s House on Monday revealed plans to recover approximately Rs, 150 billion in annual subsidies, ranging from Rs, 25 to Rs, 50 per litre, from car owners in order to prevent objections from the IMF.

“The proposal is to raise the petrol price in the range of Rs, 300 to Rs, 325 per litre for car owners but reduce it to Rs, 250 to Rs, 225 per litre for motorcyclists.” according to sources.

Prime Minister Shahbaz Sharif is throwing a new challenge to the economic team at a time when the finance ministry and the State Bank of Pakistan (SBP) are already grappling with the issues of arranging $6 billion more loans and a further hike in the interest rates.

He added that “Against the IMF’s earlier estimates of $7 billion external financing gap, both sides have now agreed to reduce the estimates to $6 billion.”

The $1 billion reduction in financing needs means, lowering the new loan requirement by the same amount.

Finance minister:

While addressing a news conference last week, Finance Minister Ishaq Dar said that he had valid reasons to believe that the external financing gap was not $7 billion but $5 billion.

They have projected the current account deficit to be around $7.7 billion, which is a decrease from the IMF’s previous estimate of $8.2 billion.

They are reducing an additional amount of approximately $500 million from the estimated foreign exchange reserves requirement for the current fiscal year. According to the senior government functionary, “The IMF is now willing to consider the foreign exchange reserves level equal to 1.7 months of prospective imports cover.”

Pakistan’s gross official foreign exchange reserves stand at $4.3 billion not enough for one month of import cover.

However, despite shaving off $1 billion from the estimates, Pakistan’s woes have not ended. It still has to arrange assurances from the regional countries for $6 billion additional loans.

Pakistan has claimed that it has so far $2 billion assurance from Saudi Arabia and $1 billion from the United Arab Emirates , leaving it with a gap of $3 billion.

The sources said that Finance Minister Ishaq Dar made a telephonic call on Monday to the finance minister of Qatar to get his country’s help bridging the financing gap. The IMF is reluctant to announce a staff-level agreement until it is sure that the regional countries will bailout Pakistan.

Last Year:

In August last year, the directors of the regional countries China, Qatar, Saudi Arabia and the UAE, had given assurances at the IMF board that they would provide additional financing of $4 billion. But this did not materialise.

The finance ministry has a desire that the IMF should take the country’ case for board approval on March 24th, a date that seems overambitious given the fact both sides have not reached a staff-level agreement.

So far, Pakistan has increased the electricity prices, gas prices, fuel prices, devalued the currency and increased the interest rates by 3% to record high level of 20%.

According to sources, the matter of a potential interest rate hike remains unresolved, and there is a high probability of interest rates rising in the near future. The central bank has already convened a meeting of the Monetary Policy Committee(MPC) on April 4th.

After the recent hike, the real interest rate was slightly positive compared to the core inflation. But the IMF calculated the inflation adjusted positive interest rate from the headline inflation rate. Dr Reza Baqir led central bank had agreed to link the rate with the headline inflation. The headline inflation in February hit a 50-year high of 31.5%.

On the beginning of the IMF programme in 2019, the policy rate stood at 10.75%, which have almost doubled.

New challenges:

According to press statement by the PM’s Office, PM Shahbaz Sharif chaired a meeting on pro-poor initiatives. The statement indicated that the meeting received a briefing on the arrangement for providing subsidized petrol to motorcyclists and rickshaws.The prime minister instructed for finalising the package, it added.

The sources revealed that they had discussed reducing petrol prices for motorcyclists by Rs25 to Rs50 per litre. They added that the estimated cost of the provision of the subsidised fuel was Rs150 billion, which would be borne by the car owners.

Petrol Price cheaper:

Effectively the petrol will be cheaper by Rs50 to Rs100, depending upon the option, compared to the cost being paid by a car owner.

The final number was not locked but the per-litre cross subsidy could be Rs50 to Rs100 that would cost about Rs150 billion, according to another participant of the meeting.

Government officials stated that they have not finalized the mechanism for providing fuel, but they are considering various options, such as providing a one-time password, distributing pre-paid cards, or giving cash.

The prime minister instructed that at least Rs1,000 per month petrol subsidy should be given to the motorcyclists by recovering from car owners, they added.

However, the government seems playing a gamble with the IMF and the voters, as neither the IMF may support such a proposal nor the consumers will pay higher prices to finance the government’s election campaign.

If the government goes ahead with its plan to increase the petrol prices for car owners, it might be challenged in the courts due to its discriminatory nature. A PTI supporter will not pay for the cost of the PML-N’s political venture.

Proposal:

The proposal to take Rs25 to Rs, 50 per litre from a car owner and give it to motorcyclist is a double-edged sword, according to another meeting participant. Former PM Imran Khan had also given Rs, 200 billion fuel subsidy in February 2022, which led to derailment of the IMF programme.

The prime minister also directed to give wheat flour subsidy to one million people of Islamabad that would cost Rs1 billion per annum. The premier on Monday also fixed the minimum cotton intervention price at Rs8,500 per 40kgs – up from Rs5,700.

Published on Logical baat, March 14,2023.