Pakistan is cutting fuel and energy subsidies that the recently ousted PM Imran Khan instituted. These cuts have come at the request of the International Monetary Fund (IMF), as they do not align with an agreement that occurred in 2019 wherein the country would receive necessary bailout funds to help its struggling economy.

The IMF’s Role in Subsidy Cuts

The IMF claims the fuel and energy subsidies did not receive proper funding and therefore were creating an even larger financial burden for the already struggling country. Former PM Imran Khan initially instituted the subsidies in February 2022. They were successful in lowering the price of fuel while also causing the government to take on an estimated potential debt of 260 billion rupees ($1.289 billion).

Although it was a tough political decision to make, the newly instituted Prime Minister Shehbaz Sharif announced that the government would be ending the subsidies and that fuel prices would sharply increase. If PM Sharif had not cut the fuel and energy subsidies, the country would have lost out on billions in necessary bailout funds from the IMF. Pakistan finds itself in a dire economic situation with its funding gap, which American bank Morgan Stanley speculated to be near $8 billion. A gap that substantial means these funds are absolutely necessary to keep the country afloat economically and stable politically.

Economic Impact

Inflation rates have hit double digits while the country faces a default on its debt without the IMF’s bailout funds. With respect to the potential default, the cutting of fuel and energy subsidies appears to be absolutely necessary. However, PM Sharif’s administration still hesitated at the decision due to the potential loss in political capital and the further financial burden it will place on Pakistanis across the country. The rupee declined in value by a whopping 7% in the month of May, the largest decrease since March 2020, according to Al Jazeera. The rise in inflation has put a lot of stress on a country already struggling with 21.9% of the population living below the national poverty line as of 2018.

Just a week prior to the announcement of the subsidy cuts the country had already raised fuel prices by 20% as the first step after a meeting with the IMF in Doha. The prices then increased a further 17% after the fuel and energy subsidy cuts to a price of 209.86 Pakistani rupees ($1.06) per liter of petrol. As fuel prices rise, so will inflation rates, exacerbating the dire economic situation in the short term. Yet, the cuts are absolutely necessary for Pakistan’s long-term outlook. Without the fuel and energy subsidy cuts, Pakistan would default on its debt essentially throwing it into economic chaos. The IMF’s bailout funds offer the country a little more time to figure out how to curb inflation rates and reassess its fuel price crisis.

Political Unrest

The current political turmoil enveloping the country made PM Sharif’s decision to cut the fuel and energy subsidies even more difficult. Pakistan only ousted former PM Khan from power in April 2022 after a vote of no confidence in the Pakistani parliament. Currently, the country’s parliamentary elections will not occur until 2023. That has not stopped PM Khan from gathering his supporters with claims that the Parliament wrongly removed him from power. In late May, he even led his supporters to the capitol building in Islamabad where a conflict with police broke out.

Many political strategists within Pakistan feared that if Pakistan cuts fuel and energy subsidies, it could exacerbate the current economic situation and further motivate former PM Khan and his supporters to push for a new election. Despite Pakistan’s recent financial and political turmoil, the hope is that the newly installed government’s cooperation with the IMF will help stabilize the country.

– Devin Welsh
Photo: Unsplash