New Delhi, April 8 (NationPress) According to a report, the International Monetary Fund (IMF) has mandated that Pakistan eliminate its diesel subsidy, as maintaining fuel prices below market levels contradicts the established conditions for its financial assistance to the economically distressed nation. In a blatant disregard for these regulations, Islamabad has proceeded to decrease the petrol subsidy as well.

“The prime minister’s uncharacteristic move on Friday night to reduce the petrol levy—reversing a significant price increase that was intended to fully reflect the global surge in fuel prices due to supply disruptions—indicates a return to familiar economic strategies,” an article from the Karachi-based Dawn newspaper notes.

Although this action may not immediately jeopardize the latest staff-level agreement with the IMF, the institution remains apprehensive about the existing pricing distortions, particularly concerning diesel, which emerged after initial adjustments were made amidst the US-Israel conflict with Iran on March 7. The IMF is advocating for their prompt elimination, according to the article.

The government initially aimed to compensate for the revenue shortfall from the diesel levy—currently set at zero, while the budget targets Rs 80 per litre—by increasing petrol levy rates. However, this buffer has drastically diminished following the prime minister’s decision to slash the petrol levy by Rs 80 per litre to provide relief across all income brackets, rather than maintaining a targeted subsidy, the article highlights.

Previously, the IMF had tacitly accepted the targeted subsidy implemented by the government, likely because it did not compromise the revenue goals from the levy. However, the recent declaration has markedly shifted that stance.

This raises doubts about the government’s ability to maintain a balance between public relief and fiscal responsibility. The populist decision to reduce the levy jeopardizes a crucial revenue stream at a time when tax revenues are already failing to meet targets, the article explains.

Such actions prompt serious concerns regarding the sustainability of critical IMF program targets, such as achieving a primary surplus. The lender’s push for the removal of pricing distortions is thus firmly rooted in sound economic reasoning. Pakistan's challenges are largely self-inflicted.

Years of postponed tax reforms and an unwillingness to decisively reduce unnecessary public spending have constrained the government's fiscal flexibility to react to external shocks. The recent spike in oil prices, worsened by disruptions in global supply chains, has simply highlighted these underlying weaknesses, the article concludes.