IMF and subsidy

FEW expected the IMF’s silence over a capped, targeted fuel subsidy to be a green light for blanket price suppression. But the prime minister’s Friday night dash to slash the petrol levy — undoing a massive price hike meant to fully pass on the global increase in fuel prices over supply disruptions from just 24 hours earlier — suggests the government is back to its old economic playbook. While the move might not immediately blow up the latest staff-level agreement, the lender remains concerned about existing distortions, particularly in diesel pricing, introduced after the first adjustment amid the US-Israel war on Iran on March 7, and is pressing for their early removal. Initially, the government had sought to offset the revenue loss from the petroleum levy on diesel, currently at zero against the Rs80 per litre targeted in the budget, through higher levy rates on petrol. But this cushion has narrowed sharply after the prime minister slashed the petrol levy by Rs80 per litre to extend relief to all income groups, rather than maintaining a targeted subsidy.

The IMF quietly tolerated the targeted subsidy declared by the government, presumably because it did not undermine the levy’s revenue target. Last week’s announcement, however, has significantly altered that position. It suggests that the government’s attempt to balance public relief and fiscal discipline is becoming increasingly untenable. A populist move, the decision to slash the levy will weaken a major revenue source at a time when tax collection continues to fall short of the target. This raises serious questions about the feasibility of meeting key programme benchmarks such as the primary surplus. The lender’s insistence on removing distortions is therefore grounded in sound economic logic. Islamabad’s predicament is largely self-inflicted. Years of delayed tax reforms and a reluctance to decisively curb wasteful public expenditure have left the state with limited fiscal space to respond to external shocks. The current oil price surge, exacerbated by disruptions in global supply routes, has merely exposed these underlying vulnerabilities. Stable macroeconomic indicators notwithstanding, the space for relief is steadily shrinking. This is not about difficult trade-offs; it is about having the political will to execute tough reforms. Without effective tax reforms and a credible reduction in wasteful public spending, such dilemmas will persist regardless of how often they are repackaged in political rhetoric.

Published in Dawn, April 7th, 2026

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