The recent increase in global oil prices is challenging Pakistan’s fragile macroeconomic stability, with the IMF showing tolerance towards Islamabad’s decision to support domestic fuel prices, signaling a shift in strategy, as per a report by Dawn. However, the report warns that while shielding the population from rising fuel costs may be politically justifiable, it is not economically sustainable.
The West Asian conflict has introduced a new element of uncertainty into the IMF’s backing of Pakistan, complicating fiscal planning. Consequently, the IMF program is no longer just about stabilization but has turned into a resilience stress test, the report highlights.
The IMF’s seeming approval of Pakistan’s move to support its domestic fuel prices reflects a practical approach, but the IMF still stresses the importance of fiscal discipline and meeting primary surplus targets. This puts pressure on Islamabad to strike a balance between immediate relief and long-term stability, according to the report by the Pakistan-based media house.
The crisis has already posed a threat to recent progress in controlling inflation, managing the external account, and stabilizing the currency, the report points out. The IMF also emphasizes the need to address energy sector distortions and accelerate structural reforms to rectify the situation.
“The emphasis on maintaining a primary surplus and avoiding untargeted subsidies underscores a fundamental tension,” the report adds. The conflict in the Middle East further complicates the situation, with volatile energy prices and tighter global financial conditions potentially leading to inflationary pressures and impacting growth and the current account, as per the IMF.
The recent staff-level agreement between the IMF and Pakistan comes at a critical time, with disruptions in energy flows through the Strait of Hormuz adding pressure on the country’s inflation, the report highlights. Any sustained disruption in energy supply tends to transmit inflationary pressures across import-dependent economies, with Pakistan particularly vulnerable, the report points out.
The IMF’s expectations from Islamabad to absorb external shocks, safeguard its citizens, and continue fiscal consolidation become more challenging as the Middle East crisis escalates.
