In a surprise move, the government on Thursday increased the petroleum products rates by Rs30 per liter, or up to one-fourth of their existing prices, paving the way for reaching a staff-level agreement with the International Monetary Fund by June 12.
The unprecedented decision will help defuse the landmines laid by the government of former prime minister Imran Khan on the one hand, and will save the country from looming default on the other.
Finance Minister Miftah Ismail made the decision public in an unscheduled news conference after Prime Minister Shehbaz Sharif gave him the go-ahead in a party meeting.
“The federal government has decided to raise the prices of petroleum products by Rs30 per liter, with the hike set to go into effect at midnight tonight,” said Ismail.
With the fresh hike, the new price of petrol will be Rs179.88 per liter — the highest ever rate — and showing an increase of 20% over the existing prices. Ismail said that it was a “difficult decision that will erode political capital” of the government.
Miftah said that the government was giving Rs86 per liter subsidy, and in the first batch it has reduced the subsidy amount by only Rs30.
“The government cannot take the country towards default and is ready to pay the political cost for the sake of protecting the interest of the state,” said the finance minister.
“There is an option whether to protect political interests of the government or save the country from default and we have decided to protect the state’s interests,” said the finance minister.
The next big action that the government is now required to take is to increase electricity prices by Rs5 per unit with effect from June 1, said the sources.
The total increase in the prices will be around Rs12 per unit that will include the withdrawal of Rs5 per unit electricity subsidy and the quarterly and annual tariff adjustments.
However, the decision will stoke inflation that was already at 13.4% in April — the highest in two years. The government had a choice to take the hit by increasing the prices or let the rupee weaken in the absence of an IMF deal, with thin foreign exchange reserves that could have caused hyperinflation.
But the government moved only after the IMF refused to sign on a staff level agreement until Pakistan takes corrective measures, including reversal of fuel subsidies and an agreement over next year’s budget.
The minister said that the gap between the assessment of the IMF and the government about the next year’s budget were not huge, hoping to bridge them in coming days.
The government’s decision to increase the prices at the expense of the political capital suggests that it might have won a nod from the establishment to stay in power longer than thought earlier.
The government had refused to take tough decisions and then call snap elections just to pave the way for the victory of the PTI.
The journey towards restoring the macroeconomic stability may also help stem the rupee losses that dipped to the new lowest level of Rs203 to a dollar on Thursday. The foreign exchange reserves also dropped to $10 billion, according to the central bank.