(Bloomberg) -- Pakistan’s new Prime Minister Shehbaz Sharif faces a crucial few weeks when he must end fuel subsidies and convince the International Monetary Fund he’s doing enough to win a bailout, while ousted premier Imran Khan threatens new protests amid soaring inflation.
A fuel-price review is due May 15 and the leader faces a “very difficult” decision on raising prices of gasoline and diesel, Ishaq Dar, a senior leader of Sharif’s party, told reporters Monday. Meanwhile Khan -- who as premier had capped pump prices until June by providing a subsidy of more than 300 billion rupees ($1.6 billion) -- has warned he will lead two million people to march on the capital to demand new elections immediately.
The political test for Sharif, who has so far talked of more populist measures, will play out as the IMF resumes talks with Pakistan to revive a suspended loan program that is needed to help shore up dwindling foreign exchange reserves. The cost of insuring Pakistan’s debt against the risk of default has jumped in recent weeks.
Sharif’s “inaction is taking its toll on the economy,” said Asif Ali Qureshi, chief executive officer at Optimus Capital Management Ltd. in Karachi. “Political considerations are weighing heavily on the government’s ability to make tough economic decisions.”
Credit-default swaps for the country have increased 92 basis points in May off a two-month low to the highest in almost three weeks at about 913 basis points. That brings the contracts closer to the highest in a decade of 1,068 marked in April, according to CMA data.
While finance minister Miftah Ismail has publicly advocated raising fuel costs, Sharif has twice refused to raise pump prices. Pakistan’s inflation rate has accelerated to 13.37% -- second-fastest in Asia after Sri Lanka, its forex reserves of $10.3 billion are enough to cover about two months of imports, stocks have tumbled more than 5% in the past month and the rupee is trading at a record low against the U.S. dollar.
The IMF has said it will start talks with Sharif’s government in the second half of May and the administration needs to implement policies to achieve macroeconomic stability.
Sharif and his key cabinet members, including Finance Minister Ismail, early this week flew to the UK to consult with his brother and three-time premier Nawaz Sharif about raising fuel prices. The former leader has lived in self-exile in London since 2019, a year after he was convicted and jailed in a corruption case.
To add to Sharif’s woes, Khan’s rallies are attracting huge crowds and he’s called on his supporters to be prepared to converge on the capital Islamabad for protests until fresh elections are announced. He has blamed the Sharif brothers and former President Asif Ali Zardari, whose Pakistan Peoples Party is a part of Sharif’s month-old coalition government, of planning his ouster from power with help from the Biden administration. The Pakistani leaders and the US have denied the allegations.
Khan was ousted from power last month when Sharif and Zardari joined hands and led a successful no-confidence vote against him. Sharif will complete his term in August 2023 and national elections must be called within three months.
Khan doesn’t have the “momentum to destabilize” the government, according to Akhil Bery, a director at the South Asia Initiatives of Asia Society Policy Institute. Sharif would do well to focus instead on the economy, he added.
“The government is not performing well on the economic front,” Bery said. It has opted to keep the subsidies in place, even though this is a “significant drain on the treasury.”
©2022 Bloomberg L.P.