ISLAMABAD: Pakistan has assured the International Monetary Fund that it will raise fuel prices if additional fiscal space cannot be created, as inflation climbed to 7.3% in March, driven by rising energy costs.
Sources said the commitment was made ahead of a staff-level agreement for the release of a $1.2 billion loan tranche. The government conveyed that the current subsidy on petrol and diesel is temporary and will only continue if sufficient budgetary savings are identified.
Prime Minister Shehbaz Sharif had earlier maintained fuel prices after an initial 20% hike following Middle East tensions. However, officials acknowledged that sustaining subsidies without fiscal adjustments would be difficult.
As part of new conditions, the IMF has asked Pakistan to increase quarterly payments under the Benazir Income Support Programme (BISP) by 35%, raising stipends from Rs14,500 to Rs19,500 starting January 2027. The move aims to cushion low-income households against rising energy prices, though it may not fully offset the burden on middle-income groups.
The government informed the IMF that it had already generated fiscal space through Rs27 billion in savings from reduced fuel allowances and cuts in non-salary expenditures, along with Rs100 billion diverted from the development budget. Talks are ongoing with provinces to secure an additional Rs200 billion to support current fuel pricing.
Despite a recent 20% increase in fuel prices, consumption has not declined significantly, prompting the IMF to stress the importance of regular price adjustments to manage demand and limit costly subsidies.
Data from the Pakistan Bureau of Statistics showed that inflation reached a 17-month high in March. Gas prices surged by 23%, petrol by 18%, and electricity by 14% on a year-on-year basis. Core inflation also rose to 7.4% in urban areas and 8.4% in rural regions, indicating persistent underlying pressures.
Pakistan has also indicated readiness to tighten monetary policy if inflation exceeds the 7.5% threshold, although officials cautioned against premature interest rate hikes that could slow economic growth.
To expand social protection, the government plans to increase BISP beneficiaries to 10.2 million by June and further scale up conditional cash transfers for health, education, and nutrition programmes.
While improved supply management by the Petroleum Division has averted fuel shortages, authorities continue to face challenges in maintaining fiscal balance and ensuring adequate foreign exchange for imports.
Story by Shahbaz Rana
