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Is Pakistan getting rid of its China addiction by going ahead with IMF reforms?

As prescribed by IMF, Pakistan's new government is ready to roll back fuel subsidies to bring economy back on track

Pakistan’s newly appointed Finance Minister Miftah Ismail is likely to roll back tax exemptions and raise fuel prices with an eye on fixing the fast deteriorating economic situation. On an immediate basis, fuel prices are expected to be raised.

Earlier this year, former Pakistan Prime Minister Imran Khan announced a Rs 10 a litre reduction in petroleum products. He also reduced the electricity rate by Rs 5 a unit, despite the International Monetary Fund’s prescription of revoking subsidies. “His populist measures including reduction in fuel and power tariffs have led to this deepening of the economic crisis in the country,” a foreign policy watcher said.

Soon after taking over, Ismail reached Washington to hold talks with the International Monetary Fund. The IMF has underlined the need for Pakistan to implement reform measures and revoke the subsidies and exemptions announced by the Khan administration.

“They’ve talked about removing the subsidy on fuel. I agree with them,” Ismail said while speaking at the Atlantic Council, a think tank in Washington. “We can’t afford to do the subsidies that we’re doing. So, we’re going to have to curtail this,” he said.

Nathan Porter, IMF Mission Chief for Pakistan, said in a statement that the “unfunded subsidies” had slowed discussions between Pakistan and the multilateral lender.

“We agreed that prompt action is needed to reverse the unfunded subsidies which have slowed discussions for the 7th review,” Nathan Porter, IMF Mission Chief for Pakistan, said in a statement. In February, the sixth review was completed, after which the IMF provided $ 1 billion Extended Fund Facility (EFF) assistance to Pakistan.

“Based on the constructive discussions with the authorities in Washington, the IMF expects to field a mission to Pakistan in May to resume discussions over policies for completing the 7th EFF review,” he said.

Pakistan received the $1 billion grant from the IMF under its $6 billion Extended Fund Facility (EFF). While in 2019, IMF agreed for a bailout package, it halted assistance in January 2020, after former Pakistan Prime Minister Imran Khan refused to increase electricity tariff and impose additional taxes as prescribed by the multilateral agency.

“The newly inducted government has started on the right note and after Sri Lanka’s default of external debts, it is clear that a delay in implementing the IMF riders will have severe implications,” Rajiv Dogra, former diplomat told India Narrative.

Analysts see Pakistan's extended conversation with IMF as part of a course correction over its over-reliance on China, which is driving the controversial China Pakistan Economic Corridor (CPEC).

Also read: Bilawal Bhutto meets Pakistan’s elder statesman Nawaz Sharif—have the two worked out a power sharing deal?

Will Pakistan's newly appointed finance minister Miftah Ismail be able to steer Islamabad out of the woods?