Pakistan's new government might have to reduce gas and electricity subsidies

Pakistan's new government might have to reduce gas and electricity subsidies ...

Pakistan's new government is in internal discussions on whether to reduce nuclear and power subsidies in the stuttering economy, according to officials, as the industry regulator advised a significant increase to match global prices.

Imran Khan, a former premier, was deposed earlier this week in a confidence vote, and announced a reduced in gasoline and electricity tariffs in February, despite rising global prices, in a bid to gain backing from all over the country.

The relief measure, which is estimated at 373 billion rupees ($2.06 billion), has stretched government finances in a way that cannot be prolonged, according to the finance ministry's senior civil servant. It has also ruined an ongoing international Monetary Fund rescue program.

"The relief package will add to the financial deficit that we cannot afford at the moment," said Finance Secretary Hamed Yaqoob Sheikh.

"Either it has to be relegated back, or some compensation for other expenses would be necessary to ensure that the primary balance agreed with the IMF is achieved."

The primary budget balance excludes debt repayment obligations.

According to Shehbaz Sharif's top economic advisor, the fiscal deficit might account for up to 10% of the country's gross domestic product. It's likely to be named finance minister.

Sharif spoke to his economic team on Thursday to discuss the subsidies.

"We have been hearing this before (with the previous government) and are now talking with the new government," a finance ministry official told Reuters, asked if the matter was anonymity.

Officials are proposing to extend the reduction of subsidies over two to three months, he said, implying that the decision 'could be over with the new political leadership.

IMF SUBSTANT NOW

Pakistan is in the midst of a $6 billion IMF bailout program and has yet to complete its seventh review, which would make over $900 million available and expand other funding that varies by the fund's clearance.

The seventh review began in early March, but no settlement had been reached before Khan's government's collapse.

At a time when inflation is at 6.7 percent, a reversal of the fuel subsidies will be politically sensitive for a new government to support the public interest.

"Either the new government may raise prices, which will be politically costly, or they might cover the deficit by reducing other non-development expenditure, which will become politically difficult," said Pakistani economist.

According to sources in the Regulatory Authority, the government would eliminate subsidies and hike prices effective Saturday. Two scenarios are discussed: one where the government continued to keep levies and tax at zero, and another where they would be reimposed to increase revenues.

Diesel fuel prices should go up by more than 35% from 144 rupees ($0.8) to 195 rupees ($1.1) per litre, according to sources. This would reach 264 rupees ($1.5) per litre if levies and taxes were re-introduced, resulting in an increase of 83.3 percent.

Petrol, which is currently at around 150 rupees ($0.83), should be increased by 14% to 171 rupees per litre. The price, if levies and tax are included, would increase by 57% to 235 rupees ($1.3) per litre.

The government is not required to implement this recommendations, and it was not immediately clear what decision the government would make.

Sharif is yet to unveil his cabinet, but Ismail and the spokeswoman for Sharif's party, Marriyum Aurangzeb, did not respond to Reuters' requests for comment.

($1 = 181.00 Pakistani rupees)

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