IMF agrees to continue prime minister’s fuel subsidy

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Fund urges Pakistan to 'do more', considers reduction in health, education targets from Rs4.2tr to Rs3.9tr

Negotiations between Pakistan and the International Monetary Fund (IMF) on the fourth economic review are underway, with the lender pressing Islamabad for further policy measures on sugar deregulation, electric vehicle (EV) tax exemptions, monetary policy and fuel subsidies.

Pakistani officials and the IMF mission have also begun drafting the Memorandum of Economic and Financial Policies (MEFP), with progress on the document expected soon as talks continue over the next loan programme tranche of more than $1.2 billion.

Sources said the IMF is urging Pakistan to “do more” under the ongoing review and has demanded the deregulation of the sugar sector with the consent of the provinces.

However, Sindh has objected to the federal government’s sugar policy, describing it as an encroachment on provincial autonomy. The disagreement has prevented the sugar policy from being finalised so far.

Negotiations involving the Ministry of Petroleum and the Power Division are also underway. The IMF mission is scheduled to meet Finance Ministry officials again, while talks with the Federal Board of Revenue (FBR) have concluded, according to Finance Ministry sources.

The IMF has also insisted on withdrawing tax exemptions granted to electric vehicles under the country’s auto policy.

Sources said the Fund has additionally called for currency depreciation and a further tightening of monetary policy as part of the measures being discussed during the fourth review.

These demands come as Pakistan seeks to complete the review and unlock the next tranche under its ongoing loan programme.

The IMF has agreed to continue the prime minister’s fuel subsidy for consumers who are already registered under the scheme. However, the Fund has demanded that no new beneficiaries be added, effectively limiting any further expansion of the programme.

The IMF is also emphasising that the subsidy should remain focused on motorcycles, three-wheelers and vehicles with engines of up to 800cc.

The Petroleum Ministry is scheduled to hold another meeting with the IMF mission, with the delegation expected to be led by the Petroleum Minister, sources said.

The structure of gas tariffs will also come under discussion during the negotiations, along with the issue of circular debt in the gas sector.

The IMF mission is also scheduled to meet officials of the Ministry of Privatisation. Discussions will cover the proposed privatisation of distribution companies (DISCOs) and the issue of line losses.

The IMF is also considering changes to the combined health and education spending target for the federal government and provinces.

A proposal is under consideration to reduce the target from Rs4.2 trillion to Rs3.9 trillion, amid concerns that provincial governments may once again fail to meet the required spending levels.

The issue has repeatedly surfaced during IMF reviews, with the Fund raising questions over the provinces’ capacity to achieve health and education expenditure targets. Sources said the IMF is also considering further tightening conditions related to health and education spending.

During the previous fiscal year, the provinces failed to meet the IMF’s health and education expenditure target. Sources put the shortfall at around Rs370 billion, while the earlier target was reported at Rs377 billion.

For the current fiscal year, provincial budget allocations for health and education are around Rs500 billion below the IMF target. Even if the combined target is reduced to Rs3.9 trillion, a gap of approximately Rs200 billion would remain between the allocated funds and the proposed target.

Sindh and Punjab have conveyed difficulties in meeting the spending targets because of financial constraints.

Sources said both provinces are also facing financial pressure because of their commitment to provide a Rs1.7 trillion cash surplus to the federal government.

Khyber Pakhtunkhwa, meanwhile, has assured the IMF that it will meet its health and education spending targets.

Punjab has allocated Rs1.3 trillion for health and education in its current budget. Sindh has allocated a combined Rs1.1 trillion, while Khyber Pakhtunkhwa has earmarked more than Rs800 billion for the two sectors.

Balochistan has allocated Rs268 billion for health and education.

Despite these allocations, the IMF has questioned whether the provinces have sufficient capacity to achieve the agreed expenditure targets.

The repeated failure to meet health and education spending commitments has become a recurring issue in IMF reviews, prompting discussions over whether the targets and related conditions need to be adjusted or strengthened.

Against this backdrop, Pakistani officials and the IMF mission have started work on drafting the Memorandum of Economic and Financial Policies, a key document in completing the fourth economic review.

Talks between the IMF mission and Pakistan’s relevant ministries and departments are continuing, with further meetings expected as both sides work to resolve outstanding issues.

The outcome of the discussions will determine progress toward completion of the fourth review and the release of the next loan tranche exceeding $1.2 billion.

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