By Saeed Shah/Wall Street Journal
Islamabad, May 18: Pakistan’s new government is finding it tough to impose economic pain on a nation already suffering from a wave of inflation propelled by the Ukraine war.
Prime Minister Shehbaz Sharif, who leads a coalition that took power in April, must decide whether to take the politically risky step of removing a fuel subsidy that was put in place by the previous government after the Ukraine war erupted in February. The subsidy costs the government $600 million a month.
The International Monetary Fund, which suspended the country’s lending program over the fuel subsidy, began talks Wednesday with Mr. Sharif’s government on restarting the loans.
Across the developing world, debt and fiscal budgets were already stretched by the Covid-19 pandemic before the Ukraine war led to a steep rise in energy and food import costs. An analysis by J.P. Morgan found that Pakistan is one of the most vulnerable developing countries to rising commodity prices, along with Egypt and Sri Lanka, where an economic crisis has led to power outages and shortages of basic goods.
So far, the government has kept the fuel subsidy, saying they can’t impose more hardship on the population. The price of flour jumped 42% in one week, according to government data released May 12. Inflation is the issue voters care most about, according to surveys. A poll by Gallup Pakistan in April found that of those who approved of the removal that month of former Prime Minister Imran Khan, 71% cited his government’s record on inflation as the reason.
Pakistan’s finance minister, Miftah Ismail, said the impact of the Ukraine conflict has been more painful for government finances than the Covid-19 pandemic, because this time, rich countries aren’t providing aid and debt relief to poorer nations. Pakistan secured a moratorium on debt payments during the pandemic from the Paris Club group of creditor nations.
“The Ukraine war, for all oil-importing countries, has devastated our current account deficits,” Mr. Ismail said. “If our government decides to stay in office, for a longer period, the fuel subsidy will have to go.”
Mr. Sharif inherited a dire economic situation, with double-digit inflation and dwindling foreign currency reserves. Government figures show the country has only enough foreign reserves to pay for imports for another month-and-a-half. International markets usually look for reserves to cover at least three months for comfort.
The stakes in the decision on the fuel subsidy are magnified by a fierce challenge from Mr. Khan, who was ousted by a no-confidence vote in Parliament. His dismissal has galvanized support for the former cricketer, seen in near daily rallies held around the country. He says he will announce a protest to paralyze Islamabad within days.
The former prime minister is calling for immediate elections. Mr. Khan, who says the economy was improving before his removal, would use any price increases as ammunition, especially if elections are held.
“We are politically really boxed in,” Mr. Ismail said.
To shore up foreign-exchange reserves, the government is banking on Saudi Arabia and China providing billions of dollars in more loans, Pakistani officials say, in addition to the IMF.
Jahanzeb Sabri, 46, who heads a family of five and runs an electrical-appliances repair shop in Islamabad, says he has lost about half of his business since last year, while the prices of imported components have gone up as the rupee depreciates. He said that after the month of Ramadan, which ended earlier this month, food prices normally go down, but this year prices have kept climbing.
His family has had to mostly cut meat and fruit from their diet to save money, he said. “We can’t not pay electricity bills or rent, so our only option is to reduce the amount of food we consume,” Mr. Sabri said. “If we were getting two kilograms of vegetables before, we are buying one kilogram now.”
The Pakistan Business Council, which represents the country’s biggest enterprises, warns the country has been plunged into an existential crisis. The rupee and stock market are plummeting.
“The government should be making hard calls,” said Ehsan Malik, chief executive officer of the Pakistan Business Council. “It is becoming abundantly clear that they didn’t know what they were going in for.”
Saad Siddiqui, managing director for emerging-markets strategy at J.P. Morgan, said that while governments might think they are shielding their populations against price shocks with subsidies, delaying a return to prudent economic policies could result in greater economic hardship, as a delayed adjustment could potentially be even sharper.
“You have to ask yourself the question: how is the adjustment going to be made?” Mr. Siddiqui said. “Is it going to be made in a controlled way, by increasing fuel prices, which will reduce demand and therefore your import bill and revive the IMF program. Or will it be imposed by a weaker currency, which is going to impact the prices of everything and will be potentially much more disorderly.”
–Waqar Gillani in Islamabad contributed to this article.