“There is no request for an IMF program at this stage,” Jeffrey Franks, the IMF’s mission chief to Pakistan, said at a briefing in Islamabad yesterday. There is a “big danger” the fiscal shortfall will exceed the goal of 4.7 percent of gross domestic product in the year that began July 1, fanned by subsidies and the risk of below-target tax revenue, he said.
Pakistan’s economy has been hurt by power blackouts, an insurgency on the Afghan border and a drop in exports as global growth falters. The nation also needs to repay billions of dollars to the Washington-based lender, threatening to pressure foreign reserves, and Franks said there are ongoing discussions between the government and the IMF about the country’s outlook.
“Given large debt repayments and a sharp decline in foreign direct investment inflows, it seems inevitable that Pakistan will be forced into another IMF bailout by end-2013,” Sayem Ali, an economist at Standard Chartered Plc in Karachi, wrote in a note on Oct. 1. Foreign-reserves will fall to “critical” levels of $7 billion by June next year, Ali said.
The IMF suspended disbursement of an $11.3 billion loan in May 2010 after Pakistan failed to meet conditions attached to it. The program expired in September last year, and the country didn’t seek a new one.
Pakistan has to repay about $7.5 billion to the lender from 2012 to 2015, with $1.2 billion of that amount handed over as of June, Moody’s Investors Service said in July, when it cut Pakistan’s credit rating deeper into junk status on falling reserves and political instability.
While Pakistan has made some fiscal progress in the past couple of years, it needs further reforms to achieve its budget goals, Franks said.
At the same time, any proposed tax amnesty initiative seeking to bolster revenues may only be effective in the short term, he said, adding the government needs to broaden the tax base permanently.
Only 1.5 million people, or less than 1 percent of the population, files tax returns, according to the Finance Ministry.
One obstacle to the rapid provision of fresh IMF aid may be the need to await the outcome of the next general election, which is due by early 2013. A tussle between the judiciary and the government has added to political tension ahead of the poll.
The current-account deficit widened to $4.6 billion in the fiscal year through June 2012, from a surplus of $214 million in 2010-2011. The budget gap was 8.5 percent of GDP in 2011-2012 when energy-sector payments are included, according to the IMF.
Economic risks have weighed on Pakistan’s rupee, which has weakened about 8 percent against the dollar in the past year.
The government estimates the economy probably expanded 3.7 percent in the 12 months ended June 2012. It has a goal of 4.3 percent growth for the current financial year, even as power blackouts as long as 18 hours a day hamper businesses.
Inflation eased to a 33-month low of 8.79 percent in September, bolstering scope for a further reduction in interest rates to spur spending at home. The next monetary policy review is due tomorrow.
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