An official involved in the Dubai talks said the IMF wants Pakistan to reduce its deficit by increasing revenue while cutting wasteful spending. - File Photo

KARACHI: Pakistani officials on Wednesday began talks with the International Monetary Fund -- meetings moved to Dubai after Osama bin Laden's death -- aimed at getting agreement on enough reforms in the coming budget to restart a halted IMF bailout loan.

The two sides are expected to struggle to reach an accord on targets for the budget to cover the fiscal year that starts on July 1. The talks are expected to last until May 17, and the budget is due to be unveiled on May 28.

The talks come at a time when some US lawmakers have questioned whether Pakistan is serious about fighting militants and called for a suspension of American aid to Islamabad.

US support was pivotal to getting an agreement, in November 2008, on an $11 billion IMF loan to financially-strapped Pakistan. In August 2010, the IMF stopped releasing funds because of Pakistan's patchy implementation of fiscal reforms the government promised to carry out.

An official involved in the Dubai talks said the IMF wants Pakistan to reduce its deficit by increasing revenue while cutting wasteful spending.

The budget deficit for the first nine months of the current fiscal year was 4.5 per cent of gross domestic product. The government has said it aims to keep the budget deficit to less than 5.5 per cent of GDP for the year, but analysts doubt that can be achieved.

Pakistani budgets have a “huge lack of fairness” in that some sectors are not taxed at all and some untargeted subsidies such as for electricity have yet to be eliminated, said the official.

In Pakistan, tax revenue is equivalent to only about 10 per cent of GDP, one of the lowest levels in the world. The IMF and other donors have pressed Pakistan to raise its ratio by implementing fiscal reforms.

But it remains to be seen if the unpopular government will increase its tax base in the new budget, especially with an election due in roughly 18 months.

“Pakistan will have to take tough measures to increase its revenue otherwise the economy will never head towards sustainable growth,” said Khalid Iqbal Siddiqui, director at Invest and Finance Securities Ltd.

Economic growth is expected to be 2.4 per cent this fiscal year compared with 4.1 per cent last year.

Ways to generate revenue may include a gross asset tax or a wealth tax, along with a much-debated general sales but political considerations may prevail.

“Heading towards elections, I don't think there will be any substantial move on tax reform,” said Sakib Sherani, a former economic adviser to the government, adding that there are many vested interests that benefit from tax-exemptions.

DEPENDENCE ON FOREIGN AID?

In the wake of the recent United States operation that killed bin Laden, the subject of American aid is a key and hot one.

Prior to the US operation, Pakistan's finance minister said it was “largely a myth” that the country got tens of billions of dollars in aid from the US.

According to a US government auditor's report, by the end of 2010, Pakistan got only $179.5 million of $1.5 billion authorized in civilian aid.

“Foreign aid may be small and marginal but the US clearly plays a role in terms of its membership of the board of the IMF and in the past has been helpful,” said Hafiz Pasha, member of the government's economic advisory council.

Pakistan's foreign reserves, according to Pasha, are hovering around record high levels at $17.11 billion but of that, $8 billion is from the IMF and nearly $3.5 billion belongs to commercial banks.

“So really, our own genuine reserves are about $5 billion to $6 billion and we have to start repaying our debt early next year,” Pasha said, referring to the need start paying off the IMF loan by 2012.