IMF Tells Pakistan to Scrap the Fuel Subsidy 9.5 Million People Rely On

Pakistan's fuel relief scheme has become one of the largest targeted subsidy programmes in the country's history — more than 9.5 million people have now received subsidised petrol through it, according to the government. But just as the programme hit that milestone, the International Monetary Fund has told Islamabad to wind it down, setting up a painful clash between protecting household budgets and securing a $1.2 billion bailout tranche.

A petrol pump in Pakistan, where registered motorcyclists can buy subsidised fuel under the government's fuel relief scheme.

How the Scheme Works

The initiative, approved by Prime Minister Shehbaz Sharif in September, offers 100 rupees — about 36 US cents — off every litre of petrol for owners of motorcycles, rickshaws and small cars with engines up to 800cc. Registration runs through a text-message system: eligible motorists send their details, receive a digital token, and redeem the discount directly at the pump.

Information Technology Minister Shaza Fatima Khawaja, who has championed the scheme's digital design, told Al Jazeera this week that more than 9.5 million people had received subsidised petrol under the programme. She described it as Pakistan's first nationwide use of technology to deliver targeted fuel subsidies, saying the government had ensured the process “remains seamless and agile for citizens.”

The scale grew fast. At a review meeting last week, the prime minister was told that 7.5 million citizens had already benefited, with 8.4 million registered and 12.2 million fuel tokens issued. The scheme now operates at petrol pumps across 129 districts, backed by a 24-hour helpline for motorists and station operators.

The subsidy was born of politics as much as economics. Officials acknowledged the scheme followed a threat by Jamaat-e-Islami, the country's major Islamist party, to march on Islamabad unless the government cut taxes on petrol and diesel.

Why Pakistanis Needed It

Fuel prices in Pakistan have risen by nearly 50 percent since the war between the United States and Iran began on February 28, according to the government — a figure the Associated Press put at “more than 50 percent.” The spike has cascaded through an already strained economy, pushing up the cost of transport, food and everyday goods.

The latest round of increases was severe. Petrol rose 42.7 percent to 458.40 rupees per litre, while diesel — critical for farmers and public transport — climbed 54.9 percent to 520.35 rupees. Pakistan's petroleum minister told the nation that the hike tracked international market trends, with the Strait of Hormuz effectively shut and fuel shipments delayed or stopped.

The human cost has been stark. A Lahore resident interviewed by regional media said his monthly earnings of 20,000 to 25,000 rupees were being swallowed by fuel costs: “All his money goes into petrol; he has three children, and there's hunger at home — his family is going without food.” Reports of residents choosing between filling the tank and putting food on the table have multiplied as prices climb.

The IMF Steps In

Now the programme that millions depend on may not survive. After reaching a staff-level agreement with Pakistan on Wednesday, the IMF said it had agreed with the authorities to phase out the fuel support scheme “promptly,” citing its high cost and broad targeting. The agreement covers the fourth review of Pakistan's $7 billion Extended Fund Facility and the third review of its $1.4 billion Resilience and Sustainability Facility.

If the IMF's executive board approves the deal, Pakistan will be able to draw about $1.2 billion within four to five weeks — roughly $1 billion under the EFF and $210 million under the RSF — bringing total disbursements under the two arrangements to about $5.7 billion.

The Fund's message was blunt: “Any future fuel support — should oil prices surprise on the upside — should be limited, time-bound, targeted using established social assistance programs, and accommodated within the FY27 budget envelope.”

During negotiations, Pakistani officials briefed the IMF delegation that the relief measures were temporary and would be withdrawn once global oil prices decline, and told the delegation that three months of the fuel subsidy could cost more than 75 billion rupees, according to sources cited by Pakistani media. The Fund rejected any extension beyond that window, sources said, keeping the two sides divided through the talks.

A Budget Under Strain

The numbers explain the IMF's discomfort. Pakistan's government recently announced a 129-billion-rupee fuel subsidy package to offset rising costs, but officials now concede it is no longer affordable. Separately, the Fund praised Pakistan's macroeconomic performance: real GDP growth reached 4 percent during the first three quarters of FY26, headline inflation moderated to about 10.3 percent in September after peaking in May, and foreign exchange reserves climbed to about $21.5 billion by the end of September.

The staff-level agreement also commits Pakistan to fiscal consolidation — an underlying primary surplus of 2 percent of GDP in FY27, a 15.264-trillion-rupee tax collection target, and timely energy tariff adjustments to prevent a revival of circular debt, which reached 1.675 trillion rupees by the end of June 2026.

The IMF did offer a concession of sorts: it noted that health and education spending had risen from 2.2 percent of GDP in FY24 to 2.5 percent in FY26 and endorsed a planned increase in targeted cash-transfer benefits for vulnerable households.

Prime Minister Shehbaz Sharif approved the fuel relief scheme last month, according to Pakistani officials.

What This Means

The fuel relief scheme was designed to shield Pakistan's working poor — the motorcyclists, rickshaw drivers and small-car owners who form the backbone of the country's transport — from an energy shock largely beyond Islamabad's control. By digitising distribution through tokens and text messages, the government avoided some of the leakage that has plagued past subsidies.

But the IMF's verdict treats that efficiency as beside the point: at 129 billion rupees and climbing, the scheme is a fiscal hole in a country whose economic stability still depends on Fund financing. Islamabad's argument — that the subsidy is temporary and politically necessary — collided with the Fund's demand that any relief flow through established social assistance programmes like the Benazir Income Support Programme, not through across-the-board fuel discounts.

The tension captures a familiar dilemma for Pakistan's policymakers: populist measures that ease immediate suffering often clash with the austerity the country's creditors demand. The Jamaat-e-Islami march threat that preceded the scheme's launch is a reminder that removing it carries real political risk too.

The IMF headquarters in Washington, D.C. The Fund has called for the 'prompt' phase-out of Pakistan's fuel subsidy.

What Happens Next

The staff-level agreement now goes to the IMF's executive board for approval, expected within four to five weeks. Until then, the fuel relief scheme continues to operate — the tokens are still being issued and redeemed at pumps across 129 districts.

Watch for three things in the coming weeks: whether the federal cabinet formally announces a wind-down timeline, how the government redirects support toward targeted cash transfers, and whether public anger over fuel prices — petrol at 458 rupees a litre is already straining household budgets — forces another political rethink. If the board signs off on the $1.2 billion, Islamabad will have little room left to resist the phase-out. If oil prices fall, the whole question could quietly deflate. For now, 9.5 million Pakistanis are watching the pumps.