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Economy

Pakistan hikes fuel prices to unlock IMF funding

New government was reluctant to remove fuel price caps

 A pump is pictured at a gasoline station in Rawalpindi, Pakistan. People in the country are bracing for a 20% jump in fuel prices from Friday.   © Reuters

KARACHI, Pakistan (Reuters) -- Pakistan on Thursday announced it will hike fuel prices so that it can resume receiving aid from a $6 billion package signed with the International Monetary Fund in 2019, the country's finance minister said.

Prices will rise by 20% starting Friday, causing long lines to form at filling stations as the news spread. The new price of petrol will be 179.86 Pakistani rupees (around 90 U.S. cents) per liter and diesel will be 174.15 rupees, said the minister, Miftah Ismail, in a tweet. 

Reuters reported earlier on Thursday that the IMF and Islamabad had reached a deal to release over $900 million in funds, once Pakistan removed the fuel subsidies and hiked prices, according to a Pakistani source directly involved in talks in Qatar.

"When we raise fuel prices, the deal will be done. We have worked out the outlines of a deal," the source said in a text message after the end of the talks in Doha.

The price hike has been the main issue between Pakistan and the IMF as part of an agreement to withdraw subsidies in oil and power sectors to reduce the fiscal deficit before the annual budget is presented next month.

Ousted Prime Minister Imran Khan had given the subsidy in his last days in power to cool down public sentiment in the face of double-digit inflation, a move the IMF said deviated from the terms of the 2019 deal.

In addition to the $900 million, if the IMF clears the seventh review as a result of the talks, it will also unlock other external financing for the cash-strapped South Asian nation, whose foreign reserves cover less than two months of imports.

About half of the funds out of the $6 billion deal are yet to be released, and it is not clear when the IMF review would take place.

The IMF has said that a considerable progress had been made in the talks, but emphasized the urgency of Pakistan removing fuel and energy subsidies to get back on track. 

The IMF representative in Pakistan did not immediately respond to a Reuters request for comment.

Pakistan's new government, which took charge in April, has been reluctant to remove the fuel price caps.

The Pakistan government convened a joint session of parliament on Thursday to discuss the economic situation after the talks, according to an order seen by Reuters.

Pakistan's consumer price index rose 13.4% in April from a year earlier. 

A removal of fuel subsidies would likely have political consequences for the new coalition government, with elections expected within 16 months. 

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