The Pakistan Stock Exchange's (PSX) benchmark KSE-100 index opened in the green on Friday, continuing its momentum from the previous day and soaring more than 900 points in the first hour of trading, just hours after the government raised the prices of petroleum products to comply with International Monetary Fund (IMF) stipulations.

According to the PSX website, the index reached 43,554 by 2:35pm, up 1,013 points or 2.38 per cent.

However, during late afternoon trading, the index shed most of its gains and eventually closed 319 points, or 0.75pc, up.

The rally in the stock market was attributed to the government's move to end a months-old fuel price freeze, introduced by the previous PTI government in February.

“The market is reacting to the government's move to withdraw fuel subsidies. It shows the government's resolve to address teething issues in the economy and will pave the way for the IMF programme and other funding sources,” Saad Hashemy, executive director at BMA Capital Management, told Reuters.

Raza Jaffrey, head of research at Intermarket Securities, termed the increase in fuel prices a "strong step" for the revival of the IMF programme.

"It is helping the KSE-100 [index] recover some of its sharp losses earlier this month, and also giving confidence to the forex market. More clarity is still needed on politics but the markets are relieved that the doomsday scenario of default will likely be avoided," he told Dawn.com.

Former PSX director Zafar Moti was also optimistic about the fuel price hike and the subsequent cap on fuel subsidies paving the way for loan releases by the IMF and other friendly countries.

He said the move would lead to an end to the "uncertainty" regarding the IMF programme and this had boosted investor sentiment.

Moti was hopeful that the rally being witnessed today would continue into the next week.

Fuel price hike

On Thursday night, the government raised the prices of all petroleum products by Rs30 per litre — the highest-ever increase in the prices of all petroleum products in one go — in a bid to rein in the fuel subsidies that had been a sticking point in talks with the IMF and resumption of a $6 billion facility, which has been stalled since early April.

An official earlier told Dawn that this was the first step towards convincing the IMF to release the next tranche of $1bn at the earliest.

Announcing the price hike, Finance Minister Miftah Ismail expressed the hope that now the exchange rate would improve, markets would stabilise, economy would balance out and investors would take the decision positively.

The finance minister said that with the Rs30 jump, ex-depot prices of petrol would increase to Rs179.86 per litre, high-speed diesel (HSD) to Rs174.15, kerosene to Rs155.56 and light diesel oil (LDO) to Rs148.31. Still, the government would be paying about Rs56.71 per litre subsidy on HSD, Rs37.84 on LDO, Rs21.83 on petrol and Rs17.02 on kerosene, he added.

On Wednesday, after the conclusion of latest round of talks with the Pakistan government, the IMF had called for "concrete policy actions", including the reversal of the fuel subsidies, to achieve the programme's objectives.

Economy on edge the past few weeks

The PSX and the rupee had both come under pressure in recent weeks as the government had failed to take decisive economic decisions, most prominent among which was the reversal of fuel subsidies.

Analysts and experts linked the economic pressure to uncertainty over the continuation of the IMF loan programme coupled with a rising oil import bill and widening trade deficit.

The PSX lost 1,447.67 points on May 9 in what was called a "blood bath".

A Dawn editorial on May 11 noted that the most important factor behind the erosion of investor sentiment was the failure of the new coalition government to come up with a credible plan to take politically tough decisions to fix the economy. For example, it continuously decided against the reversal of the fiscally unsustainable fuel and energy subsidies, which is the ‘prior action’ that IMF wants it to take before it agrees to restart funding.

In earlier meetings with Ismail, the IMF linked the continuation of its loan programme with the reversal of fuel subsidies, which were introduced by the previous government. However, Prime Minister Shehbaz Sharif has multiple times rejected summaries by the Oil and Gas Regulatory Authority and the finance ministry to increase fuel prices.

The PTI had announced a four-month freeze (until June 30) on petrol and electricity prices on February 28 as part of a series of measures to bring relief to the public.

At the time, and even after coming into power last month, the PML-N and other parties part of the new coalition government had severely criticised Imran Khan's government for "derailing" the IMF programme through unfunded fuel subsidies. But despite being at the helm for over a month, these parties have not reversed the subsidies; although the finance minister has repeatedly said these subsidies are not feasible and are costing the government Rs120 billion a month.

Earlier this month, Ismail said petrol should have been priced at Rs245 per litre according to the agreement the former government did with the IMF. However, the PML-N led government was still selling it at Rs145 per litre and would try its best to maintain that price, he added — a sign that the new government is finding it difficult to take a decision that might be unpopular with its voters.

In an editorial published on May 13, Dawn said that the PML-N was caught up in 'private consultations' — a reference to the senior leadership's trip to London to meet with Nawaz Sharif — as panic continued to grow over its inability to start working on fixing the economy.

The editorial called for the PML-N to firmly decide its future course of action, saying: "It’s time to lead or get out of the way."