Sunday, January 2, 2011

Act before it’s too late, IMF officials warn Pakistan

ISLAMABAD: The International Monetary Fund has warned Pakistan to take the required actions to reduce the ever- increasing budget deficit. In a latest official communication to the government of Pakistan, the IMF warned that the state of the economy is far worse than previously realised and urged immediate fiscal belt-tightening measures, senior official at Ministry of Finance confirmed yesterday.

The IMF withheld $3.5bn in 2010 from its total $11.3bn loan package for Pakistan in a bid to exert pressure to take action.

The letter discloses that Pakistan’s budget deficit is already 6per cent, above a 4.7per cent target, due to failure to bring in a general sales tax and curb expenditures, which are promises made by Pakistan to the IMF in return for lending.

Pakistan also needs to do more to strengthen the independence of its central bank, the letter from IMF says. The IMF has already extended a breathing space of 9 months extension in Standby Arrangement on the assurance on behalf of Pakistan that it would complete the prerequisites required for the fifth and sixth review.

The official said that Pakistan and IMF would hold discussions for the fifth review in early 2011 with a view to presenting to the Board a request for the completion of the fifth review before end-June 2011, at which time, IMF will also propose a set of performance criteria for end-June 2011 and structural benchmarks that would form the basis for the sixth and final review under the SBA. Now the SBA programme loan has been extended up to September 30, 2011.

According to the Staff report of IMF, the nine-month extension will provide the authorities with time for completing the GST reform, implementing a set of measures to correct the course of fiscal policy, and amending the legislative framework for the financial sector.

The budget deficit could go up to 8 percent this financial year if the government borrowing continues at the same pace, according to Finance Ministry officials. Pakistan’s ratio of tax to gross domestic product is below 10 per cent and many of the nation’s elite pays no tax at all. The US and the IMF officials regularly point out that other countries with that level of taxation have frequently fallen into economic crisis.

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