The question of subsidies

Policymakers seem to have gone back to the economic drawing board after Pakistan came out of the over week-long intensive negotiations with the IMF as empty-handed as it had entered them. The government’s move to increase the petroleum prices late Thursday evening reveals some sketchy progress has been made for the release of the over $900 million IMF tranche, tied to the removal of fuel subsidies. However, a staff-level agreement under the $6 billion Extended Fund Facility (EFF) remains elusive this far. This was a fiscally-depressed Pakistan’s second shot at consensus in the last few months. Had we been able to disarm the IMF with a homegrown strategy over its doubts on our inability to deal with the country’s internal and external economic challenges, reaching a consensus would not have been that impossible.

Under the IMF’s economic commandments, doling out subsidies is forbidden amid fiscal slippages when primary deficit is exceeding the envisaged targets manifold. Much against the IMF’s sensibilities, the PTI-led government had committed to impose a petroleum levy up to Rs30 per liter and increase electricity prices, but then copped out. Instead of collecting the petroleum levy and raising power tariffs to curtail the monster of circular debt, Islamabad froze petroleum and electricity rates and introduced unfunded subsidies to maintain the energy prices. It is estimated that fuel subsidies are going to cost Rs118 billion alone in May 2022. The power sector subsidy is going to dent the national kitty by Rs140 billion.

The PTI government had tried to convince the IMF to complete the outstanding seventh review and release of $1 billion tranche, but to no avail. The new government too tried to do the same; Finance Minister Miftah Ismail met with IMF officials on the sidelines of annual meetings of the Bretton Woods Institutions last month and convinced them into restarting the talks. The resulting Doha talks that have just ended have also failed to reach a consensus – mainly because of inaction on the part of the Pakistan government. The IMF has raised objections over the unfunded fuel and energy subsidies and inquired what alternate plan the government has to steer the economy out of the crisis mode it finds itself in. It is on the government to take drastic decisions to avoid a default, for which revival of the IMF programme is indispensable. The government can provide targeted subsidies to those who deserve them by using data from the Ehsaas/BISP programme, since a countrywide survey had just been completed. This data could be matched with excise departments at the provincial level to identify owners of motorcycles, auto rickshaws, and tractors. For all others, a reversal of subsidies on petroleum products makes economic sense.