All of a sudden, the economic crisis in the country has sprouted teeth and nails – a direct result of the government’s aggressive subsidy reversal campaign under which fuel prices have catapulted from Rs 60 per liter in a week . For a layman, this is part of the ‘debt dance’ of the government being threatened with default to induce the IMF to dip into its pockets full of dollars to give to Pakistan which no longer has much to pay for its imports. . What has caused the government to incur the ire of an inflation-shattered people is its desperation to bring back the IMF’s stalled $6 billion Extended Financing Facility (EFF). It is true that a default has been stalking Pakistan for some time now and could happen at any time – but what about the unimaginable misery the people are going through trying to survive this unprecedented inflation?
Right now the economy is being pulled and torn in literally every possible direction simultaneously. In a week or two, we may be able to determine the economic forces that will set the tone for trade, commerce and cuisines as the country continues to grapple with relentless political and economic crises. To strike a staff-level deal, the IMF – without any preamble – told Pakistan to get its house in order and stop wasting money on bolstering ballot banks. Subsidies to the fuel and power sector were the most controversial, so the government was asked to either cut the ax to them or fall on the sword of default. These subsidies were introduced by the PTI-led regime on February 28, 2022, in violation of its agreement with the IMF after the 6th review under the EFF program. Unfunded fuel subsidies consumed 30 billion rupees in March, 70 billion rupees in April, 100 billion rupees in May and 52 billion rupees still in June 2022. Electricity subsidy also devoured 140 billion rupees. Dollar inflows fell sharply, leading to a weekly decline in foreign exchange reserves. And foreign exchange reserves held by the SBP fell from $20 billion in August 2021 to $9.7 billion in May 2022.
The government said it had no choice but to dodge a default on foreign loans and bonds. However, so far it has also failed to come up with a comprehensive conservation strategy, as oil consumption has increased by 20% despite a massive price hike. This must be reduced on a war footing. The question is: why is the regime in place reluctant to go ahead and restore two weekly holidays? Currently, the government should encourage the public and private sectors to have employees work from home for one or more days a week. It should also consider limiting the opening hours of shopping malls and wedding halls, as well as promoting carpooling and imposing fines on motorists driving cars without any other passengers. This unprecedented spike in oil prices will make inflationary pressures unbearable. CPI-based inflation has reached a staggering high of 13.8% (May 2022), and the recent fuel price hike will push it up by around 1.4%. However, the ripple effect could be even worse, so the cost of groceries is also expected to increase. The government has put in place a plan of targeted subsidies, but it is simply not enough. They will have to expand it at the expense of the national exchequer in the next financial year, because this rise in inflation should bring more people and people below the abject poverty line.