ISLAMABAD, Sept 4: The International Monetary Fund (IMF) has cautioned Pakistan about higher external current account deficit and has asked authorities to enhance public savings for fiscal consolidation and to create right environment to encourage investment and increase productivity.

It noted that fiscal policy had an important role to play in bringing down the external current account deficit and addressing the external vulnerabilities. “It thus recommended a path of further fiscal consolidation through higher public savings," said the IMF at the conclusion of its article IV consultation with Pakistan here on Monday.

"Continuation of macroeconomic stability, market reforms, the privatisation programme, trade liberalisation, and improvement in the country’s physical and human infrastructure will provide the right environment to encourage further investment and increase in productivity, going forward," said the IMF.

The six-member IMF mission, led by Miguel Savastano, Division Chief in the Middle East and Central Asia Department, held discussions with the authorities in the federal government and the State Bank of Pakistan (SBP) over the last fortnight.

The mission concluded that Pakistan’s economy withstood well in 2005-06 the impact of several exogenous shocks, including the tragic earthquake of October 8, 2005, a significant rise in international prices for oil, and less favourable weather conditions which impacted on agriculture output.

At 6.6 per cent economic growth in 2005-06 remained impressive, especially in view of a monetary policy tightening which successfully helped in bringing annual inflation down to 7.6 per cent at end June 2006, compared to close to nine per cent a year earlier.

In the mission’s assessment, the prospects for sustained high economic growth in 2006-07 and over the medium-term remain excellent, with evidence of a strong pick-up in domestic and foreign direct investment, as Pakistan has increasingly been viewed as a promising destination for investment. The mission noted that, in part because of the pick up in investment, but also because of buoyant consumption, domestic demand growth had continued to outpace domestic supply growth in 2005-06, notwithstanding an improvement in comparison with the previous year.

In conjunction with the impact of the further rise in the international price for oil, that imbalance has led to a widening of the external current account deficit.

The mission also noted that larger inflows on the financing side of the balance of payments, including foreign direct investment, had ensured a full financing of the current account deficit in 2005-06, and added to international reserves.

The prospects for a similar outcome in 2006-07 and beyond looked good, provided continuation of the recent deceleration in the brisk pace of imports growth, and strong export performance.

The mission’s discussions with the authorities on monetary and fiscal policy took place in the context of the desirability to address pre-emptively the external vulnerabilities associated with the observed widening of the external current account deficit.

The mission commended the State Bank of Pakistan for the measures recently implemented to further tighten monetary policy. The targeted slowdown in domestic credit growth should help further reducing the inflationary pressures and the growth in imports.

The fiscal policy stance under the 2006-07 budget would support growth, and had to take into account the rehabilitation and reconstruction needs after the earthquake. The mission welcomed the focus of the budget on the infrastructure and human development, and the objective to further enhance tax revenue mobilisation.