Pakistan should act swiftly to reduce its widening budget deficit, a senior IMF official said on Tuesday, as the government struggles to hammer out a political consensus to revive an economy battered by militancy and floods.
Analysts say Pakistan’s fiscal deficit is likely to exceed 7 percent of economic output — as against the 4.7 percent target for fiscal 2010/11 — partly due to delays in implementing key tax reforms encouraged by the International Monetary Fund.
“The challenges that the economy is now facing are essentially around the impact on the economy of the large budget deficit,” the official told Reuters on condition of anonymity.
“At the moment the urgent task is to try and move forward on controlling both spending and also to take action to raise revenues (to reduce the deficit).”
The official said the IMF had not yet come up with its own estimate of the budget deficit.
In 2008, Pakistan agreed to crucial reforms, including an elimination of fuel subsidies and implementation of a Reformed General Sales Tax (RGST), under the terms of an $11 billion IMF bailout package to avert a balance of payments crisis.
But Prime Minister Yusuf Raza Gilani’s government last month deferred plans to implement reforms and reversed an increase in fuel prices to appease opposition parties and defuse a political crisis.
A senior IMF official said the Fund supported the government’s efforts to win political support for economic reforms.
But he said the government needed to take “urgent” measures to check rising inflation — which hit 15.46 percent in December — by cutting its budget deficit.
The government should cut subsidies to reduce spending and raise revenues by implementing tax reforms, he added.
The seven-tranche IMF programme has kept the US ally’s fragile economy afloat. Islamabad in December asked the IMF for a nine-month extension, ending in September, to give it more time to implement reforms.
International financial support is crucial for Pakistan, especially after devastating summer floods which inflicted $10 billion in losses. Pakistan is also waging a costly war against Taliban insurgents and needs to invest heavily in the energy industry to ease frustrations over power cuts.
The government is now holding talks with the main opposition party led by former prime minister Nawaz Sharif in an effort to strike a consensus to implement reforms.
The IMF official said the government had assured the Fund that it was committed to the reforms and that it was confident of reaching a political consensus before September.
“We support this step (of political dialogue) because we do believe that the kinds of economic decisions Pakistan has to make, of which fiscal tax policy is one, are decisions that can be best implemented when there is a broad national consensus,” he added.