ISLAMABAD: The International Monetary Fund is reported to have expressed concern over rising inflation in Pakistan and growing uncertainties over keeping fiscal deficit within a 5.5 per cent target set by the government last month.
A senior government official told Dawn on Sunday that the IMF had conveyed its concern to the government over the twin risks through its resident mission in Islamabad and then followed it up with the Pakistan’s economic team during the IMF-World Bank spring meetings in Washington where Finance Minister Abdul Hafeez Shaikh discussed the possibilities of a fresh funding programme.
The official said the IMF expressed surprise when the government announced a revised fiscal deficit target of 5.5 per cent, although it had given a target of 5.3 per cent to the IMF on the basis of all the data and budgetary measures shared with it, only a day before the announcement of fresh budgetary measures on March 15.The lending agency believed the deficit would be around 6 per cent at the end of the year. The original deficit target envisaged at the time of budget announcement in June last year was 4 per cent, revised later to 4.7 per cent to adjust additional burden arising out of floods.
He said the IMF was also perturbed over the partial readjustment of budgetary measures announced on March 15 after negotiations with the manufacturing sector, particularly relating to general sales tax zero-ratings and viewed that changes would further increase the fiscal deficit.
The removal of discriminatory general sales tax regime, including exemptions and zero-rating, had been one of the key demands of the lending agency and the government’s backtracking from the announced measures within a few days has attracted the ire of the IMF, which it said should have been built upon in the next budget.
The IMF believes that 5.5 per cent or higher fiscal deficit was ‘simply not sustainable’ in the given economic conditions when the growth rate hovered around 2.5 per cent or so. “The fiscal deficit of 5.5 per cent per se was not bad provided the economy maintains a growth rate of more than 6 per cent, but it was unsustainable when GDP is growing at a nominal rate,” the IMF is reported to have told the finance ministry.
The gap would need to be bridged through additional borrowing, triggering more inflation, also contributed by international commodity prices, particularly of oil.
Officials said the IMF had been assured that new revenue measures would be introduced in the budget as a package and would include reformed general sales tax, tax on farm income, services and wealth through a broad-based economic move, both at the federal and provincial levels.
The officials said it was against this background that the IMF publicly criticised the government ahead of Dr Hafeez Shaikh’s visit to Washington. The IMF said delays in tax and expenditure reform and the impact of floods were expected to keep the fiscal deficit high in 2010-11.
“Structural reforms had moved forward in late 2008 and 2009, but have been retarded or reversed in 2010 and 2011,” said the IMF. It said two years ago, the government had taken steps to strengthen bank supervision, bolster the social safety net, reform petroleum pricing and taxation, and liberalise the foreign exchange market, but tax reform had been delayed and its scope had been far narrower than earlier envisaged.
Moreover, very little progress has been made in reforms in the electricity sector and commodity operations, which are urgently needed to eliminate financial losses that impose a burden on public finances and pose a threat to macroeconomic stability.
Further, legislation needed to strengthen bank supervision and central bank autonomy had not yet been enacted, strengthening of the social safety net was still not complete, and the reform of petroleum pricing had been partially reversed in recent months, the IMF said.
Also, adverse security developments continue to hurt domestic and foreign investors’ confidence, while electricity shortages continue to prevent the economy from achieving its potential. The IMF asked the authorities to reinvigorate electricity pricing and loss control reforms to make progress under the IMF programme to mobilise financial support from international lenders and spur greater private capital inflows.
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