KARACHI, July 25: Pakistan needs to tighten fiscal and monetary policy to contain inflation and reduce its current account deficit, says International Monetary Fund.

The warning issued by an official in Washington on Thursday, and subsequently posted on the IMF website, came days ahead of the central bank’s next policy meeting, when it is expected to raise interest rates.

“Now a significant tightening of both fiscal and monetary policies to contain inflation and reduce the external current account deficit is needed in our view,” said David Hawley from IMF’s external relations department.

Pakistan is in talks with the World Bank on a broad economic package that could include financing by the development lender linked to government reforms.

In May, the central bank increased its key discount rate to 12 per cent from 10.5 per cent.

June annual inflation was 21.53 per cent, the highest since the 1970s while the government has forecast a fiscal deficit of 7 per cent of gross domestic product for 2007-08.

Earlier this week Pakistan raised petroleum prices by up to 17 per cent as part of a plan to phase out subsidies by the year-end.

Also this week, Finance Minister Naveed Qamar said the government aimed to bring its net borrowing from the central bank to zero per cent to reduce pressure on the bank to maintain a tight monetary stance.

As of June 28, with two days left until the end of the

2007-08 fiscal year, the government’s incremental borrowing from the State Bank was Rs633 billion.

Mr Hawley noted the central bank’s foreign currency reserves had fallen nearly $6.5 billion since the end of June 2007 to about $7.7 billion, while the rupee has depreciated by 20 per cent against the dollar since June 2007.

The drain on reserves is a consequence of burgeoning oil import bill and foreign investors retreating because of political uncertainty dogging the country four months after a civilian coalition formed a new government.

Prime Minister Yousuf Raza Gilani is due to leave for his first official visit to the United States on Saturday and is scheduled to meet President George W. Bush on Monday.

Last week, two US senators unveiled a bill to provide Pakistan with $7.5 billion over five years to help its transition to civilian-led democracy.

—Reuters