ISLAMABAD, April 20: The government plans to convert National Savings Scheme (NSS) into a mutual fund to provide market-based returns to millions of its account and certificate holders.

Also, there is a realization among the government and donor agencies that Pakistan's inflation rate will cross the budgeted target of four per cent because of price hike in food items, but the authorities are hopeful to contain it below five per cent.

This has officially been conveyed to the International Monetary Fund. The Fund on Tuesday concluded on a positive note its discussions with Pakistan authorities for the eighth - and penultimate - review of economic reforms programme under $1.5 billion Poverty Reduction and Growth Facility (PRGF).

The return on saving schemes has been decreasing over the past couple of years owing to the government decision to link its rates of return with market-based Pakistan Investment Bonds and Treasury Bills.

"In the financial sector, it (IMF-mission) concurred with the authorities intentions to promote the development of saving institutions or a market basis, including the eventual transformation of the NSS into a modern savings institution, probably in the form of a mutual fund," an IMF statement said.

The IMF mission led by Zubair Iqbal, Assistant Director in the Middle Eastern and Central Asia Department, said at the conclusion of over a two-week long discussions that Pakistan's overall macroeconomic performance remained favourable for the fiscal year 2003-04 and growth rate was expected to exceed 5.8 per cent against a target of 5.3 per cent.

The SDR 1.034 billion was approved by the IMF in December 2001. It would conclude in November 2004. Two-thirds of the total funding has been disbursed to Pakistan so far.

Based on Pakistan's economic performance, and the authorities' policy commitments, the mission will recommend completion of the review by the Executive Board. A board meeting on Pakistan could take place in late June 2004. Upon completion of the review, Pakistan would become eligible to draw another SDR 172.3 million (about $253 million) under the PRGF.

The IMF-mission also said that Pakistan's inflation remained under control despite some upward pressure on food prices in recent months, and the external position continued to be strong.

It said the implementation of the budget 2003-04 was on track. Monetary policy has been slightly tightened in recent weeks to address inflation risks. Further progress was made in implementing structural reform measures, albeit with some delays, Pakistan's debt situation continues to improve towards sustainable levels.

Broad agreement was reached on the authorities' economic and financial policies for the remainder of this fiscal year and 2004-05. Building on the current momentum, and assuming that the exogenous factors remain favourable, growth next fiscal year could reach five per cent, while inflation will be contained to no more than five per cent.

This will be supported by a prudent fiscal policy consistent with the authorities objectives in their Poverty Reduction Strategy Paper (PRSP). The fiscal space for a further increase in social and poverty related expenditures will be enhanced by a planned reduction in subsidies to state-owned enterprises, as continued reforms in the sectors expected to lead to a further improvement in their financial position.

Should inflationary pressures increase, monetary policy will be further tightened, the statement said. The mission supported the authorities' intentions to continue structural reforms of the fiscal system, including in tax administration, public expenditure management and transparency.

The IMF welcomed the authorities' initiatives to better monitor and understand the developments in social and welfare indicators through timely surveys, and to increase the effectiveness of social and poverty related expenditures.

The mission supported the plans to further reform the power sector. The strategy which they have outlined is comprehensive, based on sound principles, and introduces greater transparency with regard to the remaining government interventions based on social considerations. The mission urged the authorities so implement this strategy as soon as possible.

The mission also supported the authorities' intention to continue with their ambitious privatization programme in energy, industrial, financial, and transport sectors.