The IMF mission will submit its detailed report to its executive board scheduled to meet in late January next year to consider Pakistan's economic situation. - File photo

ISLAMABAD: The International Monetary Fund (IMF) has forecast a challenging current financial year for Pakistan, with current account balance turning into deficit and security situation and global risk aversion restricting capital inflows into the country.

The crux of a cautious IMF statement is that the authorities would have to remain extra vigilant in view of fast changing global and domestic economic conditions to remain within budgetary limits by containing expenditure and increasing revenues and push forward structural reforms. An official said the statement would have 'positive impact' on ongoing discussion with other lending agencies.

Pakistan side led by Finance Minister Abdul Hafeez Shaikh and IMF Staff Mission led by Adnan Mazarei remained in discussions between November 9-19 in Dubai that culminated in a closed-door seminar in Islamabad with wide-ranging representation from opposition parties, academia and representatives of the business community.The IMF mission will submit its detailed report to its executive board scheduled to meet in late January next year to consider Pakistan's economic situation. “The outlook for 2011-12 is challenging. Although real GDP growth is projected at about 3.5 per cent and inflation is projected to decline, the external current account balance is projected to return to a deficit, and global risk aversion and security concerns may limit capital inflows”, said the IMF's concluding statement.

It said the consultations revolved around Pakistan's recent economic performance and the challenges ahead in the light of uncertainties in the global economic environment. Pakistan authorities assured the IMF of the government's resolve to strengthen macroeconomic policies and “continue to pursue reforms to enhance medium term growth prospects”.

Against this background, discussions were centered on short-term steps to address vulnerabilities. “Specifically, the Pakistani authorities and the mission agreed that containing the budget deficit in 2011-12, a cautious monetary policy, and a responsive exchange rate would reduce vulnerabilities, contain inflation and protect Pakistan's international reserves”.

The two sides also discussed a set of reforms for the medium-term to lift economic growth to reduce poverty, and raise living standards and employment, while assuring continued macroeconomic and financial sector stability.

These include structural reforms to remove constraints to growth, especially in the energy sector, and strengthen public finances, including tax reform, improving the quality of expenditure by raising the share of spending in priority areas such as health, education, and infrastructure, manage fiscal decentralisation, and improving debt management.

“Additionally, reforms to improve the effectiveness of financial sector intermediation, broaden access to finance, and reinforce financial sector stability should also continue”, the IMF stressed. “The IMF remains committed to continuing close engagement with Pakistan,” it concluded.

Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies.

On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the IMF managing director, as chairman of the board, summarises the views of executive directors, and this summary is transmitted to the country's authorities.