ISLAMABAD – The International Monetary Fund (IMF) on Friday presented a bleak picture of the economic situation in Pakistan and recommended a complete overhaul of the economy to put the country back on the path of recovery without disengaging itself to facilitate reforms.
Upon conclusion of its extended talks with Pakistan’s economic managers, the IMF issued a statement of its assessment, cautiously appreciating the proposed plan of the government but at the same time candidly observing that the intention must be reflected in implementation.
“To lay the basis for higher and broad-based economic growth, tax reforms, reduction of poorly targeted subsidies, and financial sector reforms are needed to improve governance and promote higher savings, investment and growth,” the IMF statement said.
The IMF mission, led by Adnan Mazarei, held talks with the government from March 1 to March 11. The government had invited the IMF team to set performance benchmarks for the month of March so that these could be implemented by mid-May to complete the fifth review, which is mandatory for the release of the sixth installment of the $11.3 billion Standby Arrangement Programme worth $1.7 billion.
A Finance Ministry official said on condition of anonymity that the talks with the IMF would continue as they were not finished yet. He said that some of the issues required more time and the IMF would keep in touch from Washington. “The IMF remains committed to the ongoing dialogue with the Pakistani authorities, and will continue discussions on their reform program,” the statement said.
The official said that a 2 percent increase in the power tariff would be announced in the next few days. The statement said the IMF mission held constructive discussions with government and central bank officials on recent developments, the outlook for Pakistan’s economy for the rest of the 2010/11 fiscal year and 2011/12, and on economic policies to restore macroeconomic stability in the context of the improved external current account and international reserves.
“We also discussed structural reforms to strengthen public finances and the financial sector,” said the statement. There was also agreement on the need to reduce the budget deficit in the current financial year. The mission welcomed the recent expenditure restraint and tax policy and enforcement measures being considered by the government for additional revenue.
These measures, if implemented promptly and consistently, would help improve the budgetary position, said the IMF mission. “The mission also welcomes the government’s efforts to lower recourse to the State Bank borrowing since late-December,” the statement said.
“Further, expenditure prioritisation needs to protect pro-poor spending and flood assistance and reconstruction efforts. Moreover, a binding agreement will be needed with provinces on their budgetary positions to assure attainment of the deficit target. Given the large domestic borrowing needs, the Ministry of Finance needs to improve debt management. Looking ahead, significant fiscal consolidation will be needed in 2011/12 in order to reduce inflation and ensure debt sustainability. The lower budget deficit would also help manage the impact of higher oil prices on the economy,” the statement read.
The budget deficit and quasi-fiscal operations had contributed to a loosening of monetary conditions, thus adding to inflationary pressures, said the IMF mission. To help counter these pressures, credit to the budget from the SBP should be reduced further, it said. Moreover, the banking sector needed careful monitoring, given the high and rising level of non-performing loans, the statement said.
The talks with IMF were important as Pakistan needs Letter of Comfort from the Fund to get foreign inflows from multilateral and bilateral donors. The talks were supposed to be completed by March 9, however, the IMF mission accepted the Pakistani authorities’ request to extend its stay for a further three days till March 11.
