March 27 (Bloomberg) -- Pakistan plans to lower taxes on manufacturers and support farm prices in its budget, aiming to expand the economy at an average annual pace of more than 6 percent over the next five years.

“This should give a boost to economic growth,” Shaukat Tarin, finance adviser to Pakistan’s prime minister, said in an interview yesterday. “We would like growth to pick up gradually, on a strong footing and on a sustainable basis.”

Pakistan’s economy is deteriorating amid the highest interest rates in Asia, year-long political wrangling and the nation’s fight against Taliban militants. The government, which was forced to turn to the International Monetary Fund for a $7.6 billion bailout in November, is due to unveil its budget for the year starting July 1 in June.

“Creating demand through consumer lending is not our strategy,” Tarin, 55, said in the interview in the capital Islamabad. “In the past seven years, the performance of agriculture and manufacturing has not been commendable.”

The government estimates farmers will harvest as much as 25 million tons of wheat in April, 2 million tons more than domestic consumption, he said. Pakistan has imported more than 2 million tons of the grain in the past year.

Record inflation prompted Pakistan’s central bank to increase its benchmark lending rate four times in 2008 to a decade high of 15 percent. Tarin predicts economic growth will slow to an eight-year low of 2.5 percent in the 12 months to June 30, from an average 6.8 percent in the past five years.

Interest Rates

The central bank’s policy rate may fall below 10 percent from 15 percent by December, Tarin said. State Bank of Pakistan Governor Salim Raza said this month slowing inflation provides opportunity for an interest-rate cut.

The government may tax the real estate and services sectors in the next fiscal year, while capital gains and agriculture are expected to be taxed in 2011 and 2012, respectively, the finance adviser said.

The government this year exempted capital gains from tax for two years to boost investment.

“A lot of people are not taking tax payments seriously,” Tarin said. “Out of 22 million households in Pakistan, only 560,000 individuals regularly pay taxes.”

Pakistan needs more revenue to increase spending on infrastructure such as roads, dams and electricity projects. Power shortages of as much as a third of capacity in the past 16 months have hurt factory output and slowed economic growth.

IMF Loan

“I am comfortable with the foreign-exchange reserves we have now, but ideally I would like these to be the equivalent of six months of the country’s imports,” Tarin said. The government will decide on seeking a $4.5 billion loan from the IMF, in addition to the November bailout, after a meeting of donor countries and lenders on April 17 in Tokyo, he said.

Pakistan will be seeking $10 billion of funds over the next three years for development projects from nations such as the U.S. and U.K. in the so-called “Friends of Democratic Pakistan” group, which was established in September to help the country revive its economy.

The group is helping Pakistan because of its efforts in fighting pro-Taliban militants in the tribal region bordering Afghanistan. Since 2001, the country has received more than $10 billion in aid from the U.S. as a reward for supporting former President George W. Bush’s plan to eliminate the al-Qaeda network in Afghanistan.

“From Tokyo I will go straight to the IMF meetings,” said Tarin, a 25-year veteran of Citigroup Inc. and a banker for 33 years. The IMF is holding its next general meeting in Washington on April 25-26.

Credit Rating

Pakistan completed its last IMF program in 2004 with a credit rating from Standard & Poor’s of B+, four rankings below investment grade. S&P in December raised the rating one level to CCC+, or seven levels below investment grade, after the IMF loan.

The foreign exchange held by the nation’s central bank reached $6.79 billion this month, or the equivalent of three months of imports, after a 75 percent decline in a year to $3.45 billion in October raised doubts about the country’s ability to repay debt.

The reserves will increase after the country receives about $1.6 billion of funds from the World Bank, the Manila-based Asian Development Bank and the IMF by March 31, Tarin said.

Foreign reserves fell as President Asif Ali Zardari’s government, which came into power one year ago, strained relations with the opposition party headed by former Prime Minister Nawaz Sharif in a dispute over the reinstatement of judges.

The rupee plunged 22 percent in 2008, the benchmark stock index fell 58 percent and the balance-of-payments deficit widened to a record.

The political tensions eased this month after Prime Minister Yousuf Raza Gilani reinstated the judges sacked in November 2007, meeting a demand by Sharif’s party.

To contact the reporters on this story: Khalid Qayum in Islamabad at kqayum@bloomberg.netKhaleeq Ahmed in Islamabad at paknews@bloomberg.net

Last Updated: March 27, 2009 01:25 EDT