IMF Requires Approval for Additional Subsidies as Pakistan Struggles with Fiscal Plans

The International Monetary Fund (IMF) has stated in the Memorandum of Economic and Financial Policies (MEFP) that Pakistan must obtain the lender’s approval before providing additional subsidies, as the two sides struggle to agree on fiscal adjustment plans.

Pakistan and the IMF have been in discussions since late January to reach an agreement to release $1.1 billion to the financially strained nation with a population of 220 million and nuclear capabilities.

The primary sticking point is Prime Minister Shehbaz Sharif’s plan, introduced in March, to charge wealthier consumers higher fuel prices, with the revenue generated being used to subsidize costs for the economically vulnerable, who have been hit hard by inflation.

Despite fulfilling most of the IMF’s requirements, the coalition government continues to negotiate with the lender in hopes of releasing the tranche. As Islamabad had adhered to all IMF conditions, the federal government sought US intervention again to encourage IMF staff to reach a staff-level agreement.

Read: IMF and Pakistan at Odds Over Bailout Program Delay

According to well-informed sources, Pakistan and the IMF have broadly agreed that Islamabad will not offer additional subsidies without the lender’s prior consent during the ongoing Extended Fund Facility (EFF) program. This understanding significantly resolves the dispute surrounding the proposed cross-fuel subsidy, a major barrier to reaching a staff-level agreement.

Regarding closing the $5 billion external financing gap by June 2023, sources indicate that Saudi Arabia and the United Arab Emirates (UAE) have confirmed over $2 billion and $1 billion to the IMF. Formal agreements with Saudi Arabia and the UAE are expected to be signed shortly.

The Pakistani government, however, is unhappy with the IMF’s demand for prior actions before finalizing the staff-level agreement, a requirement that has not been imposed in previous negotiation