High Food, Petrol Prices Can Trigger Protests In Pakistan: IMF
Rising inflation in Pakistan, accelerating to 27.3 per cent in August -- a 47-year high -- can trigger "social protest and instability" in the cash-strapped country, the International Monetary Fund (IMF) has warned.
Pakistan's inflation measured by the consumer price index (CPI) accelerated to 27.3 per cent in August this year -- the level last seen in May 1975 -- even as the full impact of unprecedented floods on the prices of food items and other commodities is yet to come.
The adverse impacts of the floods and consequent disruption in food supplies will be visible in the inflation reading for the month of September, which may push the rate far higher than that of August.
"High food and fuel prices could prompt social protest and instability," the IMF said in an executive summary of the seventh and eighth reviews.
The IMF Executive Board earlier this week approved the seventh and eighth review of the stalled USD 6 billion Pakistan programme, and the State Bank of Pakistan (SBP) two days later on Wednesday received the much-needed USD 1.16 billion deposit to steer the cash-strapped country's economy out of the crisis.
The IMF, which has also asked the country to ensure several measures after receiving the loan, released the funds after Pakistan caved to several demands of the global lender for fiscal tightening.
The deal required the government to increase the petroleum levy to Rs 30 per litre on petrol by September 1 and Rs 15 per litre on diesel in three phases.
The government on Wednesday increased the levy to Rs 37.50 per litre on petrol -- Rs 7.5 per litre more than needed under the IMF deal -- to lower taxes on diesel.
The report released under the Extended Fund Facility (EFF) said that risks to the outlook and programme implementation remained high and tilted to the downside given the very complex domestic and external environment.
The spillovers from the war in Ukraine through high food and fuel prices, and tighter global financial conditions will continue to weigh on Pakistan's economy, pressuring the exchange rate and external stability, the report added.
The report further said that the policy of providing subsidies remained a risk, amplified by weak capacity and powerful vested interests, with the timing of elections uncertain given the complex political setting.
According to the report, socio-political pressures, apart from the protest risk, are expected to remain high and could also weigh on policy and reform implementation, especially given the tenuous political coalition and their slim majority in Parliament.
The political situation in Pakistan has been fragile since mid-April when former Prime Minister Imran Khan was ousted in a dramatic no-confidence motion and Opposition leader Shehbaz Sharif took charge leading a coalition government.
The report said that political instability in the country could "affect policy decisions and undermine the programme's fiscal adjustment strategy, jeopardising macro-financial and external stability and debt sustainability".
According to the lender, substantial risks stem from higher interest rates, a larger-than-expected growth slowdown, pressures on the exchange rate, renewed policy reversals, weaker medium-term growth, and contingent liabilities related to state-owned enterprises (SOEs).
"Further delays on structural reforms, especially those related to the financial sector (resolving undercapitalised banks and winding down SBPs involvement in the refinancing schemes), could hamper financial sector stability and reduce the effectiveness of the monetary policy.
Finally, climate change risks are mounting, including a tendency for more frequent climate-related disasters," it added.
The report also mentioned that the former Pakistan Tehreek-e-Insaf government granted a four-month “relief package” in late February that reversed commitments to fiscal discipline made earlier in the year.
The largely untargeted package reduced petrol and diesel prices (through a generous subsidy and setting fuel taxes at zero taxation); lowered electricity tariffs by Rs 5/kwh for almost all households and commercial consumers; and provided tax exemptions and amnesty.
The report said that steadfast implementation of "corrective policies" and "reforms" remained essential to regain macroeconomic stability, address imbalances and lay the foundation for inclusive and sustainable growth.
"Efforts to reduce poverty and protect the most vulnerable by enhancing targeted transfers are important, especially in the current high-inflation environment," it said.
The IMF has projected Pakistan's real GDP growth to decelerate to 3.5 per cent in FY23, following two years of above-trend growth as the economy recovered from the COVID-19 pandemic with support from expansionary policies.
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)
