Pakistan reforms retarded and reversed, IMF
May 20, 2011
The International Monetary Fund IMF says that government of Pakistan has failed to implement conditions agreed with the fund to avail multibillion loan. Even due to slow response the reforms have been retarded and some conditions, such as in petroleum prices case, have been reversed.
The Fund in its recently released statement noted that the structural reforms had moved forward in late 2008 and 2009, but have been retarded or reversed in 2010 and 2011. In 2008 and 2009, steps were taken to strengthen bank supervision, bolster the social safety net, reform petroleum pricing and taxation, and liberalize the foreign exchange market.
Some progress has also been made recently in modifying the existing general sales tax by reducing exemptions and strengthening the refund mechanism. However, this reform has been delayed and its scope has been far narrower than earlier envisaged. Moreover, very little progress has been made in reforms in the electricity sector and commodity operations, which are urgently needed to eliminate financial losses that impose a burden on public finances and pose a threat to macroeconomic stability. Further, the legislation needed to strengthen bank supervision and central bank autonomy has not yet been enacted, strengthening of the social safety net is still not complete, and the reform of petroleum pricing has been partially reversed in recent months, the IMF observed.
The global lender noted that prior to the floods, modest signs of recovery in manufacturing, mainly in the textile sector, and exports suggested that the Pakistani economy was regaining momentum. Real GDP growth was estimated to have reached 4 percent in 2009-10. However, as a result of floods, real GDP growth is unlikely to exceed 2 percent in 2010-11. Also, adverse security developments continue to hurt domestic and foreign investors’ confidence, while electricity shortages continue to prevent the economy from achieving its potential.
The lender stressed that to make progress under the program, economic reforms need to be reinvigorated. They are needed to strengthen public finances and improve financial intermediation, and to raise economic confidence to stimulate higher savings, investment, growth and employment. Stronger public finances are needed to allow for higher spending on development and poverty reduction, and to increase much-needed social outlays over the medium term. Economic reforms will also mobilize financial support from external donors and spur greater private capital inflows.
The IMF noted that the fiscal policy has been affected by low economic activity and a difficult security environment. Raising budget revenues has been difficult, and efforts have been made to maintain fiscal discipline by eliminating non-priority spending while accommodating additional large security spending. “These efforts proved initially successful, but since June 2009, the authorities have exceeded the budget deficit targets under the program, among others, due to large additional subsidies for the electricity sector” the statement added.
The overrun on the fiscal deficit target at end-June 2010 reached 1.7 percent of GDP. Meanwhile, the catastrophic floods, which hit Pakistan in the summer of 2010, reduced growth and posed a further challenge to public finances by depressing budget revenues and necessitating additional spending to meet the humanitarian and reconstruction needs. Important delays in tax and expenditure reform and the impact of the floods are expected to keep the fiscal deficit high in 2010-11, according to the IMF.