Analysts warn difficult months ahead as IMF team visits Pakistan

KARACHI: An International Monetary Fund team is visiting Pakistan to monitor progress on reforms tied to a $6.7 billion loan package, with analysts warning of difficult months ahead.

The IMF paid the $540 million first installment of the three-year deal in September, but future payments are dependent on the completion of tough economic reforms measured at quarterly reviews.

Pakistan, battling a homegrown Taliban insurgency, is blighted by a dysfunctional energy sector, with severe power shortages limiting GDP growth.

Sayem Ali, a senior economist at the Standard Chartered Bank, stated that progress had been made on certain benchmarks.

The fiscal deficit for the first quarter was brought down to 1.5 per cent of GDP, against an IMF target of 1.7 per cent.

Reducing Pakistan's fiscal deficit — which neared nine per cent of gross domestic product (GDP) last year — to a more sustainable level was a key aim of the IMF package.

The Washington-based lender envisages the deficit falling to 5.8 per cent of GDP this financial year, and 3.5 per cent by the end of the program.

However, the government has missed the target for foreign exchange reserves by $300 million, which have fallen alarmingly this year, with just $4.2 billion dollars held.

Saqib Sheerani, a former advisor to the finance minister, warned of tough times ahead as Prime Minister Nawaz Sharif's government tries to increase Pakistan's meagre tax receipts.

“There are some tax concessions that the government allowed recently, and they are contrary to the conditions,” Sheerani said.

Pakistan has 180 million people but only around 250,000 of them pay income tax and agriculture, which still accounts for 50 per cent of the economy, is totally exempt.

Broadening the tax base is politically difficult, even for a government elected with a healthy majority just five months ago.

Doing away with subsidies on electricity that fuel a huge debt problem within the sector is also challenging, with planned price rises held up by interventions from the courts.

“They are getting set back on their efforts to broaden the tax base, backed off power tariff increase and now (a) gas price increase is coming ahead,” Ali said.

In the next quarter, the government needs to raise the gas tariff in line with the IMF advice.

“That would be a tough call for the government as under new constitutional amendments provinces are empowered to set the gas price and they would resist it for sure,” Ali said.

Pakistan abandoned a previous $11.3 billion IMF loan program in 2011 after refusing to carry out strict financial reforms, and still owes about $4 billion to the fund.