New Delhi, April 8 (IANS) While the International Monetary Fund (IMF) has asked Pakistan to remove subsidy on diesel as keeping prices of fuels below the market price violates the conditions that have been fixed for its loans to the cash-strapped country, Islamabad has, in brazen defiance of the norms, gone ahead with reducing the subsidy on petrol as well.

“The prime minister’s Friday night dash to slash the petrol levy — undoing a massive price hike meant to fully pass on the global increase in fuel prices over supply disruptions from just 24 hours earlier — suggests the government is back to its old economic playbook,” an article in Karachi-headquartered Dawn newspaper states.

While the move might not immediately blow up the latest staff-level agreement with the IMF, the lender remains concerned about existing distortions, particularly in diesel pricing, introduced after the first adjustment amid the US-Israel war on Iran on March 7, and is pressing for their early removal, the article points out.

Initially, the government had sought to offset the revenue loss from the petroleum levy on diesel, currently at zero against the Rs 80 per litre targeted in the budget, through higher levy rates on petrol. But this cushion has narrowed sharply after the prime minister slashed the petrol levy by Rs 80 per litre to extend relief to all income groups, rather than maintaining a targeted subsidy, the article observes.

The IMF quietly tolerated the targeted subsidy declared by the government, presumably because it did not undermine the levy’s revenue target. Last week’s announcement, however, has significantly altered that position.

It suggests that the government’s attempt to balance public relief and fiscal discipline is becoming increasingly untenable. A populist move, the decision to slash the levy will weaken a major revenue source at a time when tax collection continues to fall short of the target, the article states.

This raises serious questions about the feasibility of meeting key IMF programme benchmarks such as the primary surplus. The lender’s insistence on removing distortions is therefore grounded in sound economic logic. Islamabad’s predicament is largely self-inflicted.

Years of delayed tax reforms and a reluctance to decisively curb wasteful public expenditure have left the state with limited fiscal space to respond to external shocks. The current oil price surge, exacerbated by disruptions in global supply routes, has merely exposed these underlying vulnerabilities, the article points out.

--IANS

sps/na