Pakistan Weighs Strategic Fuel Reserves: Inside the Nation’s Desperate Bid for IMF Funding

When two deadlines—one from a creditor and another from an international lender keeping an eye on your every move—arrive at the same time, a certain kind of anxiety descends upon a nation’s finance ministry. Finance Minister Muhammad Aurangzeb, who is in charge of handling Pakistan’s current anxiety, arrived at the IMF and World Bank spring meetings in Washington with options rather than answers. Many choices.

Pakistan is under immediate pressure to return a $3.5 billion facility from the United Arab Emirates this month. The timing is terrible. A hit of that magnitude cannot be absorbed by foreign reserves, which are already stretched thin at about 2.8 months of import cover, without running the risk of violating the IMF program targets Pakistan has spent years pursuing.

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In response, Aurangzeb has essentially thrown every financial tool at the wall, including commercial loans, dollar-settled rupee-linked bonds, Islamic sukuk, Eurobonds, and—most remarkably—the first-ever Panda bond denominated in Chinese yuan, supported by the Asian Development Bank and the Asian Infrastructure Investment Bank.

The first part of a $1 billion program is the $250 million debut issue. For a nation that only recently had very limited access to global markets, this is an incredible array of tools.

“When you go through a supply shock like this… it sends a very clear view that we need to accelerate these journeys.” Muhammad Aurangzeb, Minister of Finance

The shadow that the Middle East conflict is casting over all of this is difficult to ignore. Iran’s closure of the Strait of Hormuz, which normally transports between 70 and 80 percent of Pakistan’s imports, especially fuel, has compelled the government to act in ways that no fiscal policy meeting could have anticipated. In a televised speech, Prime Minister Shehbaz Sharif acknowledged that the price of gasoline and diesel had already increased by Rs55 per litre, or about twenty US cents.

At the same time, he attempted to reassure the public that the government had implemented additional recommended increases. It’s another matter entirely whether that comfort is felt on the streets, where the cost of fuel directly affects the cost of food and transportation.

Beyond the standard language of policy, this is also the point at which Pakistan’s declared goal to develop strategic petroleum reserves begins to make sense. Aurangzeb was straightforward: the country’s structural reliance on commercial fuel reserves had been revealed by the supply shock, and it was now dangerously exposed to the kind of volatility that comes with a war it did not start and cannot end.

The movement toward renewable energy, which is already in progress but is now being discussed with greater urgency, is partially idealistic and partially a cold calculation about what it means to import the majority of your energy through waters that could be closed by a regional conflict. In addition, Pakistan is acting as a mediator between Iran and the United States, placing it at the center of the conflict despite its negative effects.

Meanwhile, the IMF review is moving forward. Alongside the second review under the $1.4 billion Resilience and Sustainability Facility, the Fund’s mission, headed by Iva Petrova, started its third assessment of Pakistan’s economic performance under the $7 billion Extended Fund Facility in late February.

A successful outcome would release slightly less than $1.3 billion in new funding, which Pakistan needs but which comes with reform commitments that are hard to fulfill when fuel prices are skyrocketing and there is strong political pressure to protect consumers.

The Memorandum of Economic and Financial Policies, a crucial policy document outlining commitments to structural, monetary, and fiscal reform, has reportedly been shared with Islamabad by the IMF. Even if they are only speaking anonymously, finance ministry officials are remarkably open about the pressure involved.

The frequency with which Pakistan modifies fuel prices is one area of obvious negotiation. After the Middle East conflict started to upset the oil markets, the nation already switched from fortnightly to weekly revisions. The IMF has now proposed daily price adjustments, a mechanism that would greatly increase domestic fuel prices’ responsiveness to global fluctuations but has its own enforcement challenges.

“Our plan is also to adjust fuel prices daily,” an official from the finance ministry told Arab News. “But it is not easy to govern how much petrol pumps are charging on a daily basis.” Tucked away in a technical policy debate, such an open admission reveals a lot about the discrepancy between what the IMF desires and what is truly governable on the ground.

According to Aurangzeb, Pakistan can cope. He cited remittances totaling about $41.5 billion a year, targeted social assistance for the nation’s poorest citizens, and anticipated GDP growth of nearly 4% as the buffers that should enable Pakistan to withstand the economic shock of the war through the fiscal year ending June 30. That might be the case.

The overall macroeconomic trajectory seems to be holding, even if it’s holding the way a tightrope holds: with a lot of effort and little margin for error. Fitch maintained Pakistan’s rating at B- but did not downgrade. The Fund has acknowledged “considerable progress” in its negotiations with Islamabad, pointing out that program execution through the end of February was largely in accordance with commitments.

If the Middle East conflict continues into the summer, it is genuinely unclear if Pakistan will be able to maintain this delicate balance. There is pressure on the supply chain, increased import costs, and political strain every week that the Strait of Hormuz remains closed. Although Saudi Arabia was cautiously mentioned as a potential lender without confirmation, Aurangzeb departed Washington without finalizing a replacement for the UAE facility.

He repeated, “All options are on the table,” which may have carried more weight the second time. If the geopolitical situation deteriorates, the options might become much more limited. For the time being, however, Pakistan is making progress: issuing bonds in previously unissued currencies, accumulating reserves that it ought to have accumulated years ago, and demonstrating week by week that the recovery is genuine this time.