ISLAMABAD, Aug 26: Pakistan is facing two immediate challenges — higher inflation and rising international oil prices — which have resulted in deterioration in terms of trade and put pressure on the budget. This was stated by the International Monetary Fund (IMF) Staff Mission led by Assistant Director in the Middle East and Central Asia Department Milan Zavadjil while concluding discussion with the Pakistan authorities on recent economic developments, prospects, and policies under the annual article consultation.

According to a press release of the IMF resident representative office in Pakistan, the mission saw two immediate challenges confronting the policy makers—addressing the higher than targeted rate of inflation and dealing with the adverse implications of persistently higher international oil prices.

To meet these challenges, the mission and the authorities concurred on the need to continue to focus on macroeconomic stability. The Fund observed that for the medium term, the key challenge would be to sustain high growth rates while maintaining macroeconomic stability. This would require higher rates of private sector investment in addition to public sector investment, as well as a significant investment in human capital and skills development.

In this context, the mission welcomed the government’s agenda for second generation reforms, and looked forward to its timely implementation. In this regard, the mission and the authorities concurred on the importance of resolving outstanding issues that have hampered energy sector reform. The need to improve services delivery, capacities and accountability was stressed.

The mission observed that an improvement in the tax collection effort during coming years was essential to enable the government to implement its ambitious social and infrastructure programmes. In this context, the mission stressed the need for the on-going tax policy and administrative reforms to result in a significant improvement in tax compliance and broadening of tax base.

They said that Pakistan’s economy registered a remarkable broad-based acceleration of growth in 2004-05 and the growth prospects remain strong for the current fiscal year. This performance and outlook reflect the government’s efforts of the past five years aimed at macroeconomic stabilization, rebuilding investors’ confidence and implementing far reaching structural reforms.

There are growing indications that the strong economic recovery over recent years, which is an important part of the government’s poverty reduction and growth strategy, is improving living standards.

The mission appreciated the efforts of the State Bank to tighten monetary policy by allowing a significant raise in interest rates over recent months in order to bring inflation down. Given the current domestic and external environment, the process need to be sustained for some time, until growth in monetary aggregates slows and inflation is on a clear downward trend.

The Fund said that Pakistan’s fiscal programme had rightly focussed on strengthening infrastructure, the social sectors and human development.

Consistency with the landmark fiscal responsibility law recently approved by the parliament, strong growth, and relatively favourable interest rate environment would ensure a further decline in government’s debt burden.

However, the mission pointed out that with the economy facing capacity constraints and inflationary pressures and given the need to adjust to the terms of trade loss, there was little room for a more accommodating fiscal stance.