IMF Urges Pakistan to Phase Out Fuel Subsidy, Caps Future Support

KARACHI — An International Monetary Fund (IMF) spokesperson said Saturday that Pakistan should phase out its fuel subsidy program, adding that any future government intervention if oil prices rise must be limited, time-bound, and fit within the current fiscal year’s budget.

Islamabad introduced the subsidy in September to protect lower-income motorists from surging petrol prices during the U.S.-Iran conflict. Under the program, motorcycle and rickshaw riders receive a weekly petrol voucher worth Rs500 ($1.80), while car owners with engines up to 800cc get a discount of Rs100 ($0.36) per liter on up to 10 liters every 10 days.

Pakistan is working with the IMF to shift from economic stabilization toward growth under the lender’s $7 billion Extended Fund Facility (EFF). Last month, the Fund urged the government to end the subsidy quickly, citing its high cost and overly broad reach.

“Under the current review, as outlined in the October 7 staff-level agreement, the fuel support scheme should be phased out because of its broad targeting,” an IMF spokesperson told Arab News.

“Any future fuel support—if oil prices rise unexpectedly—should be limited, time-bound, targeted through established social assistance programs, and accommodated within the fiscal year 2027 budget envelope,” the spokesperson added.

Finance Minister Muhammad Aurangzeb, Minister of State for Finance Bilal Azhar Kayani, and Finance Adviser Khurram Schehzad did not respond to Arab News’ requests for comment on the IMF’s position.

Like other nations, Pakistan was compelled to raise petroleum prices following the U.S.-Iran conflict that began in February. Petrol hit a record Rs458.41 ($1.66) per liter on April 3 before gradually easing to Rs330 ($1.20) as tensions subsided.

The spokesperson noted that under the EFF program, Pakistani authorities have committed to aligning domestic fuel prices with international rates while cushioning the impact on the most vulnerable segments of society.

‘SIGNIFICANT HEADWIND’

The U.S.-Israel conflict with Iran has disrupted global shipping lanes, particularly through Tehran’s blockade of the strategic Strait of Hormuz, threatening economic growth prospects for developing nations such as Pakistan.

“The Middle East war remains a significant headwind for Pakistan, given the country’s dependence on oil and gas imports from Gulf states,” the spokesperson said.

The IMF official said higher oil prices have already intensified domestic inflation pressures. According to the Pakistan Bureau of Statistics, consumer prices rose 9.6 percent in October, down from 10.3 percent the previous month.

“Sustained volatility could weigh on the economic outlook,” the official warned.

In response to the global shock, the spokesperson said Islamabad’s policy priorities should remain focused on macroeconomic stability and reforms to strengthen public finances, boost competition, raise productivity and competitiveness, and reinforce the social safety net and human capital.

The spokesperson also called for reforms in state-owned enterprises, along with improvements in public service delivery and energy sector viability.

Last month, the IMF reached a staff-level agreement with Pakistan following negotiations in Karachi and Islamabad. The agreement is pending approval from the Fund’s Executive Board.

Upon approval, Pakistan is set to receive approximately $1 billion under the EFF and $210 million under the Resilience and Sustainability Facility (RSF), bringing total disbursements to about $5.7 billion.

“The IMF Executive Board meeting on Pakistan’s EFF and RSF review, along with the 2026 Article IV consultation, is expected in December, subject to meeting program requirements,” the spokesperson said.

The spokesperson did not specify the requirements.

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