THE donor community has started worrying about a possible slowdown in the economy, if political uncertainty continues to haunt the rulers and key issues like increasing fiscal, trade and current deficits, and high inflation are not addressed seriously.

The local officials of International Monetary Fund (IMF), the World Bank, the Asian Development Bank (ADB), the International Finance Corporation (IFC) and foreign banks see economic “ fundamentals” “still pretty good” but weakening with some of the key macroeconomic issues unresolved. The foreign exchange reserves are sliding while the foreign investment inflows which have substantially financed current account deficits in the past few years, are witnessing some temporary pause till such time the new elected government is installed.

They tend to agree that the economy today seems to be vulnerable to shocks or bubbles after having seen improvements over the last eight years.

Finance Minister Dr Salman Shah and Special Secretary Dr Ashfaque Hasan Khan fear that if oil prices were not revised upward during the current financial year, fiscal deficit would jump to 5.9 per cent against the “original target of four per cent”. The ministry of finance officials also believe that efforts to raise additional tax revenue need to be mounted.

However, Chairman of the Federal Bureau of Revenue (FBR) Abdullah Yousuf told Dawn that he would oppose levy of additional taxes to help meet fiscal deficit target. “We are already struggling hard to meet our Rs1.025 trillion revenue target set for the current financial year against Rs846 billion of the last year. Therefore, we cannot push people too much to pay more”, he said.

The FBR is trying hard to achieve 21 per cent increase in revenues during 2007-08, considered by its officials to be a challenging task. “Under these circumstances no one should expect us to go for additional taxes”, Mr Yousuf explained.

Asked how should the government cope with the increasing financial problems being faced in the backdrop of international oil prices, the FBR chairman said it was the task of the policy makers to propose any measure they want. He was of the view that the caretaker government or the future elected government should decide about it. “From our side, no one should be in any illusion that we are in a position to generate additional revenues other than what we are already collecting.”

An official in the local IMF office when asked to comment on the current economic trends said a Fund’s mission is to hold consultations with authorities under Article IV consultations and look at the economic performance.

While he accepted that the delay in raising oil prices was a serious issue, he saw the situation on other fronts as encouraging. For example, the political uncertainty will gradually disappear especially after the January 8 elections. The stock market which went down earlier, has started recovering. The economy is expected to maintain growth momentum but the key challenge is to avoid impact of oil price hike on the budget.

”The claim of the oil marketing companies is increasing and it is fast becoming difficult for the government to continue paying subsidy on petroleum products. Another key challenge is to control inflation. There are inflationary pressures on the economy particularly with regard to food inflation.

However, the IMF official said, the macro- economic performance of the government is improving and that the economy is not all that vulnerable as some people believe.. “Economic fundamentals are still pretty good”, but foreign direct investment(FDI) needs to be further increased.

Former official of the World Bank in Pakistan Abid Hasan said he foresaw “financial imbalances.” The trade balance was increasing due to reduction in exports and the fiscal deficit could also cause problems in near future.

In the short run, the government can finance its current account deficit by depending upon foreign capital inflows. But “ this is not a good economic option”. The government needs to help promote exports and manage increased remittances to finance its current account deficit.

The FDI, Mr Abid Hasan said, was also vulnerable keeping in view the political uncertainty. He did not see long- term investment in order to create new assets. This asset-building was earlier seen in telecom and banking sectors which were not being experienced in other areas.

Without ensuring rule of law and improved governance system, he said the economy could slow down and for this, the government should take bold decisions.

In the eyes of the international donors, Mr Hasan said, fiscal side needed to be urgently improved by passing on to the people the impact of high international oil prices. Asking Habib Bank and other banks to pay differential to the oil marketing companies would not be a good economic practice

When contacted, the local chief of the International Finance Corporation (IFC), Mr Kaiser Naseem said that sustaining economic growth was an important issue which will has to be taken seriously by all the relevant people. He was concerned about corporate governance for attracting foreign investment.

“Foreign investors are looking at corporate governance practices to step up investment”. They were seeking the best standard corporate governance practices.

He regretted that no major international fund was interested to make big investments. He cited the example of California-based Calpers’ Fund, which has made $5 billion global investment but did not invest a single dollar in Pakistan.

An official in local Asian Development Bank (ADB) office when asked to comment on the current economic situation also was concerned about the increasing fiscal and current account deficit as well as the inflation. He said that economy had slowed down. Even President Pervez Musharraf has admitted that it is difficult time for the economy. Earlier, an ADB report indicated that the growth rate may decline to 6.5 per cent against the official target of seven per cent for this fiscal year.