Islambad, Pakistan– Pakistan’s government has hiked fuel prices by up to 6.45 percent, as the country continues to face widening fiscal and current account deficits amid spiralling inflation.
On Monday, countrywide fuel prices increased to Rs98.89 ($0.70) per litre, with diesel prices at Rs117.43 ($0.83), a government notification said, hitting nine-month highs.
Pakistan subsidises the price of most fuels in the country, but has been cutting those payments in recent months as the newly elected Pakistan Tehreek-e-Insaf (PTI) government struggles to contain ballooning government expenditure amid an overall economic slowdown.
In the past six months, the country has received at least $8 billion in grants and loans from Saudi Arabia, the United Arab Emirates and key strategic and economic partner China, with whom Pakistan is embarking on the $56bn China Pakistan Economic Corridor (CPEC) project.
The influxes have helped stave off a looming foreign reserve crisis, with central bank reserves back up to $8.56bn, or just over two months of imports, according to a central bank statement released on Thursday.
Last week, the International Monetary Fund’s Pakistan mission chief Ernesto Ramirez Rigo held two days of meetings with Pakistani Finance Minister Asad Umar, central bank officials and others ahead of an expected IMF bailout.
The bailout, which both Pakistani PM Imran Khan and IMF chief Christine Lagarde alluded to after a meeting in February, would be Pakistan’s 13th IMF programme since 1980.
Spiraling inflation
The fuel price hike comes amid spiralling consumer inflation in the South Asian country, with consumer price inflation (CPI) hitting 8.21 percent last month, according to the Pakistan Bureau of Statistics (PBS), the highest level since June 2014.
The inflation numbers have been mainly driven by the increasing prices of fuel and food, according to a PBS statement.
On Friday, Pakistan’s central bank increased the country’s interest rates by 50 basis points to 10.75 percent, saying that the economy was uner considerable strain.
“The current account deficit remains high, fiscal consolidation is slower than anticipated and core inflation continues to rise,” said a statement accompanying the announcement.
As a result, the central bank has pared back its expected annual GDP growth rate projection from around 6 percent to 3.5 percent.
“The increase in petrol and diesel prices tend to raise inflationary expectations among consumers,” said Saad Ali, head of research at Karachi-based Inter Market Securities. “Almost all sectors are affected by it, because in Pakistan most goods are still transported via road.”
Ali said the central bank was currently attempting to discourage non-essential imports by raising interest rates and through currency devaluation. The Pakistani rupee has lost roughly 23 percent of its value against the US dollar in the last year.
“The initial problem that we had was a wide current account deficit and resultant depletion of forex reserves,” said Ali.
“The current account deficit was widening because of consumer demand and robust industrial activity – both leading to higher demand for imports – so to curtail that the central bank had to first devalue the currency and increase interest rates,” he added.
Ali said the measures taken thus far had managed to bring the current account deficit to a more manageable level, but that rising inflation continues to pose a significant threat to the economy.
“All of this is a reflection of the central bank trying to curtail demand,” he said. “This will lead to modest GDP growth, but that will be a sign that they have been successful.”
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