Compliance with IMF conditions seems to have led the government to take the most inflationary steps possible. Petrol and other fuel prices have been raised Rs 30 a litre, Thursday’s raise, to Rs 209.16, was the second such hike in a week, with last Thursday’s Rs 30 being the first raise since then. Prime Minister Imran Khan, trying to fight off the no-confidence move which ultimately toppled his government, had announced an open-ended subsidy. To maintain the price of petrol where it was until the budget. The subsidy did not keep Mr Khan in office, but it derailed the IMF ESAF and forced the incoming government to maintain the subsidy.
The effects of removing the subsidy will be horrendous, with the delay in removing it showing that the Shehbaz Sharif government is only too aware of the consequences. As it is, as Finance Minister Miftah Ismail pointed out, the government is still paying a subsidy of Rs 9 per litre on petrol, and Rs 24 per litre on diesel. It was perhaps the government’s ill-luck that the cap on fuel prices was placed at a time when oil prices were going through the roof, with no end in sight to the Russia-Ukraine war which had caused them to go up. Keeping the subsidy in place would have meant the government having to print money in such large quantities to pay it, that the currency could have been rendered valueless. The government is not levying taxes yet; when it does, there will be another round of painful fuel increases.
The cost of transportation will go up, and thus that of all goods, but a more direct weight on production costs, and thus on export competitiveness, will be the power tariff hike, of Rs 7.91 a unit, which nullifies the subsidy announced by Mr Khan at the same time as he subsidized fuel. The problem that the government has not solved is how to avoid the political cost of what will be an unpopular decision.
