RAWALPINDI, Jan 18: The International Monetary Fund says in a new report on Pakistan’s economy that although the outlook for 2007-08 remains favourable, the policies of the government may not be sufficient to achieve the inflation target and reduce the current account deficit significantly.

The report has been compiled after discussions between the fund’s staff and economic managers of the government on economic development and policies under Article IV of IMF’s articles of agreement in September 2007. The staff report was completed in November and released on Jan 17.

The report, it may be mentioned, does not take into account the events which followed the Dec 27 assassination of Benazir Bhutto and other recent developments.

It says capital inflows would more than cover the current account deficit but there are risks that some inflows could be delayed. Against this background, the staff recommended stronger fiscal adjustment effort accompanied by a somewhat tighter monetary stance and greater exchange rate flexibility.

The government considered it very difficult to implement a greater fiscal effort given the political calendar and thought that rates would be kept under review to ensure that their objective of reducing net central bank credit to the government was met.

Looking beyond 2007-08, the IMF report points out macro-economic policies should be geared at keeping the current account deficit on a declining path. A policy mix relying on further fiscal consolidation would contribute significantly to this objective while lessening pressures on real interest rates.

The fiscal effort should rely primarily on strengthening revenue mobilisation substantially to reduce the deficit, while allowing for increased spending in infrastructure, human capital, and poverty alleviation. Towards this end, the new government should move ahead vigorously with reforms to expand taxation of the agricultural and services sectors and reduce tax exemptions, the report underlines.

Even with the envisaged reduction in the current account deficit over the medium term, Pakistan will continue to depend heavily on the availability of large capital inflows. Therefore, a high degree of flexibility would be required to respond quickly to external shocks. In particular, given the need to continue strengthening the international reserves position, the authorities should adhere to their plans to rely primarily on active demand policies in response to external financing shortfalls, it recommends.