Pakistan may Withdraw Energy Subsidies to Secure IMF’s Approval for Economic Bailout: Report

Islamabad: The Pakistan government might withdraw energy subsidies to big export industries, in addition to reducing non-salary, non-essential civil and security costs as part of harsh measures required to secure the International Monetary Fund`s approval for an economic bailout, Dawn reported.

Senior government officials said that the IMF mission chief for Pakistan Nathan Porter has reached Islamabad to hold a technical discussion with authorities, as per a news report. The technical discussion between IMF and the Pakistan government will continue till Friday, February 3.

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Furthermore, the second phase of policy negotiations will continue until February 9 to finalise a memorandum of economic and financial policies. The government`s effort to secure an arrangement with IMF entails the burden of massive fiscal adjustment on the basis of the ability to pay amid an already affected majority population, Dawn reported citing an official.

According to the official, the development means all segments of society, including the middle class, civil administration, armed forces and judiciary will have to sacrifice the kind of lifestyle that is no more sustainable.

The officials admitted that about 30 percent of people were already below the poverty line and being looked after through various social sector support programmes, as per the Dawn report. Meanwhile, another 22-25 percent of the population is the most vulnerable to the inflationary spiral. As per the news report, the authorities will have to announce strong measures and start their implementation. The measures will create a road map along with measures to address a circular debt of more than Pakistani Rupees (PKR) 2.5 trillion in the power sector, expenditure cuts, and tax measures to bridge a PKR Rs 2-2.5 trillion fiscal hole based on how IMF and Pakistan government establish consensus.

The measures could also include a significant reduction in the size of the cabinet to show political commitment and withdrawal of all untargeted and unbudgeted subsidies, particularly PKR 120 billion in energy subsidy to exporters announced four months ago without budget allocation.

The Pakistani government has already surrendered the exchange rate cap, allowing more than PKR 40 per dollar depreciation in less than a week. Pakistan’s government has also increased the policy rate by one percent to 17 percent to allow the IMF to field its staff mission for the completion of negotiations on the 9th quarterly review.

On January 19, the Pakistan government formally expressed its readiness to accept all the conditions of the IMF and urged the mission to visit Islamabad for talks on USD 3 billion, which is part of the programme to avoid a sovereign default.

The IMF has said that its mission “will focus on policies to restore domestic and external sustainability,” which includes bolstering the fiscal position with durable and high-quality measures and supporting the people affected by the floods, and restoring the viability of the power sector.

Furthermore, IMF said that it will reestablish the proper functioning of the foreign exchange market, enabling the exchange rate to clear the FX shortage. According to the news report, Pakistan needs USD 8-9 billion during the remaining five months of the current fiscal year to address international obligations.