WASHINGTON, Nov 7: Lauding progress of Pakistan’s economy attained during the past two years despite external shocks, the International Monetary Fund (IMF) has called upon the future government to continue economic reforms.

It stressed that the central task for the new government would be to deal resolutely with the remaining challenges by further broadening and deepening the reform effort in the future.

However, it warned that a high public debt continues to prevent critical investments, says a report released by the Fund here on Thursday after their annual consultations with Pakistan following clearance of dollar 144 million tranche.

A number of directors also urged the authorities to continue exploring the possibility of savings on defence expenditures.

“Important, in this regard, will be continued strong efforts to explain the rationale for reform to the population, and further sustained improvements in governance and the delivery of social services,” the directors said.

They described the proposed macro-economic policy mix for the near future as appropriate and observed that “monetary policy will be geared toward keeping inflation low within the current flexible exchange rate system and continued fiscal adjustment will aim at further improving public debt dynamics.”

Monetary and price developments, the directors warned, would need to be kept under close watch and the authorities should be ready to consider a moderate tightening of monetary policy if needed. Most directors saw merit in continued sterilized intervention to contain the real appreciation of the Pakistani rupee in the face of continuous strong capital inflows.

SOLUTION: Some directors, however, cautioned that this was unlikely to be a solution over the longer term and that competition-enhancing structural measures were a more effective approach to deal with upward pressures on the external value of the currency.

They supported further reduction of the budget deficit planned for next year. Noting that the budgetary position remained vulnerable and subject to regional tensions, they urged the authorities to ensure the attainment of the revenue objectives and to keep tight control over expenditure in protecting social and poverty-related spending.

In this regard, the directors highlighted, the need for careful following CBR reforms. Several directors suggested to explore the feasibility of more ambitious revenue plans going forward.

The directors expressed reservation about plans to support the restructuring and/or investment programmes of various public enterprises with “one-off” budgetary transfers. They cautioned that such plans should be part of a clearly articulated strategy to restructure, privatize or liquidate them, and that their cost should be part of the budget process rather than being brought up in an ad hoc fashion after the budget was passed.

“Growth appears to be picking up, inflation remains subdued and the external accounts have strengthened considerably owing to high worker remittances, sizable capital inflows, and more recently, improved export performance,” the report said.

SHORTFALL: The directors, however, warned that “the Central Board of Revenue (CBR) revenue shortfall through June 2002 is regrettable and calls for a decisive effort to reinforce revenue collection”.

The directors noted that a strong external position has allowed the State Bank of Pakistan to build official reserves to “unprecedented levels, reducing its vulnerability to external shocks”.

Structural reforms in Pakistan, the report said, had focused on tax policy and administration, energy pricing, privatization, fiscal accountability, transparency, and governance.

The IMF directors were encouraged that the fiscal deficit has declined and social sector spending is increasing as local governments have become operational. Notwithstanding these overall favourable developments, the directors observed that the high public debt burden continues to constrain needed investments in human development and infrastructure, and that private investment and economic growth remain insufficient to reduce rapidly Pakistan’s high rate of poverty.

SOCIAL SERVICES: They urged the government of Pakistan to improve public debt dynamics through fiscal adjustment and to address the country’s “social gap through enhanced provision of basic social services”.

They stressed that progress on these fronts would critically depend on stronger tax collection efforts and improved financial performance of public enterprises, specially the utility companies. They urged the authorities to step up the allocation of resources to basic education and health as well as to ensure the efficient use of these resources, which would be a key to improving productivity and growth prospects.

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