WASHINGTON: Pakistan’s economy faces “significant risks” in spite of an improvement in overall macroeconomic conditions, says the IMF in the latest review of its lending programme, according to a statement released by the Executive Board on Thursday.

The statement notes that measures taken by the government are “bearing fruit, but continued efforts are needed” to ensure the recovery can be sustained.

“Fiscal consolidation is broadly on track, but the authorities must be prepared to take further action to address possible revenue shortfalls”, says the statement, issued by the Fund’s First Deputy Managing Director and Acting Chair of the Board, David Lipton.

There is “ample scope for increasing revenues”, particularly through reforms in “tax administration”, the statement says, going on to call for “a robust organisational framework for public debt management”.

The Fund also calls for more purchases of dollars from the spot markets to boost reserves, and “allowing greater exchange rate flexibility”. In the past, spot market purchases of dollars have led to sharp declines in the value of the rupee.

The Fund sees little risk to the financial sector which has been jolted recently by the action against KASB Bank.

On the structural side, the Fund calls for further reform of power tariffs and “gas price rationalisation” by moving forward with the gas levy and “more favourable producer prices”. It notes a strong commitment to privatisation, but sees “potential difficulties related to market conditions”.

“Legislation to enhance central bank independence is crucial and should conform to international best practices”, the statement adds, suggesting lingering differences with the government in this area. The government is struggling with obtaining passage of this legislation which has been stuck in committee and has not been brought before Parliament despite a commitment to do so by June of 2014.

The Fund has waived non-observance of performance criteria and prior actions in two areas, including the net domestic assets and government borrowing from the State Bank “on the basis of corrective measures taken”.

The statement combines the fourth and fifth review of the ongoing Extended Fund Facility (EFF) under which Pakistan has borrowed $3.2 billion so far, including the latest tranche of $1.05 billion which is to be cleared for release within the next few days.

Pakistan acceded to the EFF on September 4, 2013 in the midst of rapidly declining reserves and looming repayments on external debt, most of which was to the IMF. The total size of the facility is $6.44bn equal to 425pc of quota, making it the second largest facility acceded to by Pakistan.

The Fund also expressed its “deepest condolences to the people of Pakistan for the loss of innocent life in the recent horrific attack on a school in Peshawar”.

Published in Dawn, December 19th, 2014