Pakistan authorities did not consult with the International Monetary Fund (IMF) staff ahead of announcing their recent fuel subsidy proposal, the lender's resident representative said.
"The IMF is seeking greater details on the scheme in terms of its operation, cost, targeting, protections against fraud and abuse, and offsetting measures, and will carefully discuss these elements with the authorities," Esther Perez Ruiz told Business Recorder via message early Tuesday morning.
The IMF's statement comes after Prime Minister Shehbaz Sharif announced on Sunday that the low-income segment of the country will be given a fuel subsidy of Rs50 per litre as part of a new relief package.
Unfunded and untargeted subsidies are frowned upon by the IMF that instead advocates scaling up social protection for the most vulnerable.
In a press conference the next day, Minister of State for Petroleum Musadik Malik said the premier has in fact "ordered the difference between fuel prices paid by the affluent and poor income segments to be Rs100”, elaborating that the mechanism would be a cross subsidy that would be generated by raising fuel prices for the rich segment.
"As a general matter, the IMF sees strengthening support for those eligible for social assistance through the unconditional Kafalat cash transfer scheme as the most direct way to help the neediest in Pakistan," said Ruiz.
The development potentially means the staff-level agreement could still take some time as authorities remain engaged in talks with the IMF. The government has time and again expressed hope its bailout programme that has remained stalled at the ninth review since November last year would be revived soon.
Its recent negotiations with the IMF resulted in Pakistan imposing additional taxes, higher energy tariffs, a move back towards a market-based exchange rate, and a retreat from its position of unfunded subsidies.
The measures meant Pakistan completed almost all of the prior actions except for the external financing requirement the IMF wanted it to for clearing $1.1 billion in disbursements under the Extended Fund Facility that started in 2019.
A development on this front has not yet materialised.
The staff-level agreement
On the staff-level agreement, Ruiz said substantial progress has been made in discussions towards policies to underpin the ninth EFF review in recent days.
"At this point, ensuring there is sufficient financing to support the authorities in the implementation of their policy agenda is the paramount priority. A staff level agreement will follow once the few remaining points are closed," Ruiz told Business Recorder in a separate message.
Currently reeling from one of its worst economic crisis in history, Pakistan has been faced with a barrage of woes with a perceived default risk and downgrade by international ratings agencies reflecting the state of the economy that has also had to bear major political turmoil and frequent change in key leadership.
Its inflation has been tipped to go beyond 34%, shattering decades-old records, while its currency is getting weaker by the day.
The current account deficit has been tamed using extreme import controls, but foreign exchange reserves held with the central bank have only gotten a boost after loan inflows from China.