ISLAMABAD, Pakistan — Pakistan’s government on Friday sharply increased fuel prices for consumers, paving the way to revive a $6 billion bailout package from the International Monetary Fund and stabilize the country’s cratering economy amid deepening political turmoil.
The move raising gasoline and diesel prices by about 20 percent — or about 15 cents — a liter staved off concerns that Pakistan, which already faces double-digit inflation, would join a wave of global defaults as the financial shocks from the pandemic, the war in Ukraine and rising interest rates batter many poorer nations.
But the decision may cost the new coalition government popular support, analysts say, adding to the political uncertainty that has embroiled the country since Prime Minister Imran Khan was ousted in a no-confidence vote in Parliament early last month.
“The price hike signals that the government has decided to bite the bullet and make choices that are necessary, even if they cost near-term political capital,” said Uzair Younus, the director of the Pakistan Initiative at the Atlantic Council. “The hike will ease markets and reduce uncertainty. It will be critical for the government to maintain momentum and continue making decisions that get Pakistan out of the current crisis.”
Since his ouster, Mr. Khan has held a series of political rallies, drawing huge crowds and heavily criticizing the current coalition government and the military, blaming them for his removal from office. Some officials now fear that the government’s move to appease the I.M.F. could hand Mr. Khan a wave of public outrage that he could manipulate on the streets.
Discussions between the I.M.F. and the new interim government, led by Shehbaz Sharif, had been deadlocked for weeks over the terms of reviving the bailout, which was announced in 2019 and later suspended after Pakistan’s previous government failed to meet some loan conditions, like cutting energy subsidies.
Pakistan has hoped for a release of a roughly $900 million seventh tranche of the $6 billion I.M.F. bailout package. Earlier this week, a fresh round of talks between the I.M.F. and the new Pakistani government in Doha, Qatar, appeared to fail after fund officials declined to accept the Pakistani request to delay the ending of government subsidies.
Mr. Sharif had been reluctant to end government energy subsidies and roll back unfunded subsidies to oil and power sectors — a key I.M.F. demand — fearing public backlash that could diminish his party’s chance of success in the next general elections.
Those elections are scheduled to be held next year, but the new government has come under mounting public pressure from Mr. Khan’s supporters to hold them earlier.
On Thursday, Mr. Khan warned the government to announce the next elections and dissolve Parliament within six days. The warning came just after he led thousands of supporters to the capital Wednesday evening. Angry supporters clashed with the police in the capital and several other Pakistani cities. At least 1,700 protesters were arrested by the police in Punjab, the country’s most populous province.
That political pressure has added to the new government’s reluctance to embark on meaningful economic reforms that, while important to stabilize the economy in the years to come, would cause immediate pain to Pakistanis’ wallets, analysts say.
Late Thursday night, drivers desperate to fill their tanks before the price increase went into effect after midnight flocked to gas stations across major cities. Many drivers’ incomes have already been squeezed by soaring inflation in recent years that has pushed up the price of basic goods.
“There is no rise in our income proportional to the rise in the price of fuel and other essential items,” said Saleem Khan, 44, as he waited to fill his motorcycle’s tank at a gas station in the port city of Karachi.
Mr. Khan makes around 18,000 rupees, or about $90, a month working in a restaurant in the city. In previous months, he could send nearly 10,000 rupees every month to his relatives in Bajaur, a tribal district bordering Afghanistan.
“This month, it seems I’ll be able to send barely 7,000 rupees to my family,” he said.
Nearby, Rasheed Ahmed, a garment factory worker, sat on his motorcycle, worrying how he would pay for basics like food and rent with the fuel price increase.
“We thought the ousting of Imran Khan will help the country in decreasing the fuel prices, but the current rulers are crueler than the previous government,” Mr. Ahmed, 34, said.
The new coalition government has struggled to find its bearings since coming to power in early April and is in a particularly precarious position. It has no electoral mandate, but was chosen by Parliament to take over after Mr. Khan’s ouster. And it is a tenuous coalition of political parties that previously clashed frequently and only came together around the singular aim of removing Mr. Khan from office. Mr. Sharif’s party also faces internal divisions over policy decisions.
Mr. Khan’s government, before its removal from office, was also facing increasing public discontent over rising inflation. Mr. Khan claims that the economy was improving under his government, but in order to soothe the public’s flaring tempers, he announced he was cutting petroleum and energy prices — a move that eased public discontent but added to the country’s fiscal deficit.
Understand the Political and Economic Turmoil in Pakistan
That move is now described as the “laying of a land mine” by Miftah Ismail, the new finance minister, and was a major sticking point in the talks with the I.M.F., which insisted that Pakistan would have to end the unfunded subsidies in order to get the next tranche of the bailout package.
While announcing the new fuel prices late Thursday night, Mr. Ismail said the government realized the impact of painful economic measures but hoped these would result in long-term benefits.
“It will also stabilize the rupee and improve the situation at the stock market,” Mr. Ismail said at a news briefing. “Most importantly, it will bring back some balance within the economy.”
But the weekslong delay in forging new economic policies has come at a steep price: The Pakistani rupee plunged to a historic low compared with the U.S. dollar in recent weeks, the current account deficit widened, and foreign exchange reserves depleted to $10 billion. That is barely enough to cover two months of the country’s imports.
On Friday, the Pakistani rupee did show some signs of recovery. But the government’s move to raise fuel prices on Friday was still only a first step toward reviving the I.M.F. bailout and restoring some economic stability to the country.
“Pakistan is not out of the woods yet. It needs at least $10 billion to stabilize its reserves and the currency,” said Yousuf Nazar, a newspaper columnist and former head of Citigroup’s emerging markets investments. “Until the entire bailout package is in place, uncertainty will continue, which has been aggravated by the political turmoil.”
Pakistan has entered into several I.M.F. programs in its history, although successive leaders, including Mr. Khan and former Prime Minister Nawaz Sharif, have expressed their aversion to foreign financial assistance. But the country’s emaciated economy and rising debt leave any government little choice but to accept the bailout packages.
The core reason for Pakistan’s recurring balance of payments is its inability to expand its exports, which have been almost stagnant for a decade because of protectionist policies, analysts say.
“This would have to change for Pakistan to come out of this vicious cycle,” Mr. Nazar said.
Salman Masood reported from Islamabad, and Christina Goldbaum from Dubai, United Arab Emirates. Zia ur-Rehman contributed reporting from Karachi, Pakistan.