ISLAMABAD: The International Monetary Fund (IMF) hopes that Pakistan’s external current account balance — helped by Coalition Support Fund (CSF) disbursements and strong growth in remittances — would improve during the 2012-13 fiscal year.

An IMF spokesman painted a blurred picture of capital flows, saying that the flows remained “very weak” while debt payments were on the rise. Answering specifically whether the balance of payment situation will remain under control without additional foreign inflows and debt repayment obligations, the spokesman emphasised that “sound macro-economic policies will be important to ensure the sustainability of the balance of payments in the medium and long terms”.

IMF has released a report that took a look at monetary and exchange rate policies, and called upon the government to better contain inflation and external risks.

IMF executive board members pointed out that the achievement of durable low inflation would require more prudent monetary policy, accompanied by substantial fiscal adjustment to ease the government’s funding requirement, which has been driving inflation.

In this connection, a greater role of State Bank would be important, they said recommending improved exchange rate flexibility to facilitate external adjustment and safeguard foreign reserves.

About the outlook for inflation during the remaining months of the current fiscal, the spokesman stated: “Our forecast is that inflation will rebound later in the 2012-13 to above 10 per cent.”

IMF feels that a more prudent monetary policy is needed to reduce inflation, the spokesman said.

He declined to say whether or not the IMF was in agreement with the current monetary policy stance. Concluding the first post-programme monitoring discussions and the ex-post evaluation of exceptional access under the 2008 Stand-By Arrangement (SBA), IMF said Pakistan continued to face difficult macroeconomic challenges as growth remained insufficient, underlying inflation was high, and the external position was weakening.

The situation is compounded by an uncertain global environment, and a difficult domestic situation, as well as adverse effects of natural disasters. The IMF executive board directors have emphasised that strong policy measures and deeper reforms are critical to addressing vulnerabilities, boosting sustainable growth, and reducing poverty.

Underscoring the need to reduce fiscal deficit for restoring macroeconomic and external stability, IMF directors called for short-term revenue and expenditure efforts to achieve the government’s fiscal target for the year.

The efforts should focus on broadening key taxes and reducing subsidies while protecting the most vulnerable. IMF called for a comprehensive revenue and expenditure reforms to strengthen the fiscal position in the long run and create space for capital and poverty-related spending.

According to IMF, Pakistan’s programme implementation was initially good, but remained incomplete thereafter in the face of adverse external and domestic shocks. Progress on structural reforms was mixed, and goals for sustainable fiscal consolidation could not be met. IMF directors recognised that going forward, better analysing the risks to the programme, including those related to donor financing, strong ownership and securing broad political support for tax and other reforms, would be critical.