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Pakistan asked to check inflation; restrict trade and fiscal deficits

According to informed sources, the visiting six-member IMF review mission headed by Miguel Savastano has also stressed the need to further deregulate the economy to attract more foreign investment in the country.

The Fund officials also believed that there was a need to accelerating the process of privatisation in Pakistan. The review missions has discussed with senior government officials the "whole economic performance".

The members of the mission have so far met with Governor State Bank Dr Shamzad Akhtar, Minister for Commerce Humayun Akhtar Khan, Minister for Privatisation and Investment Zahid Hamid and the senior officials of the Planning Commission. IMF's Senior Director for South Asia and Middle East, Mohsin Khan, sources said, was also currently visiting Pakistan and would hold separate meetings with top government officials including President Gen Pervez Musharraf and Prime Minister Shaukat Aziz.

However, the review mission is in the capital in connection with the Article IV annual consultations with Pakistan. It has discussed issues concerning monetary policy, the government's overall policy framework, fiscal and trade deficits and medium term policies to further improve the economy specially by increasing revenues which have come down in respect to tax-to-GDP ratio.

Sources said that although Pakistan was not interested in seeking any new funding arrangement after the expiry of $1.6 billion Poverty Reduction Growth Facility (PRGF), it has expressed its willingness to take IMF's technical assistance to improve its revenues, lower its fiscal and trade deficits and accelerate the country's privatisation programme which received some set back after the annulment of steel mills deal by the Supreme Court.

Sources said generally Fund officials believed that inflation in Pakistan has started declining but the process needed to be accelerated in the coming weeks. They also maintained that tightening of the monetary policy by the central bank will help further reduce the inflationary pressures. The IMF mission would remain in Pakistan till October 1, during which it would also discuss other issues including, revenue collection, privatisation, investment and exports.

According to one IMF source the review mission has praised the new monetary policy stance issued by the State Bank as it will help the government to achieve its 6.5 per cent inflation target set for 2006-07.

He said that the Monetary Policy Statement issued by the central bank was a timely action in order to restrict undue monetary expansion. The rise in the discount rate, he expected, will contain credit growth and will result in higher market interest rates. The Statement will also contribute in limiting the trade deficit and at the same time it will reduce liquidity available in the banking system and ultimately it was bound to reduce inflationary pressures.

He did not see any significant adverse impact on growth or reforms being implemented by the government. Investment, he pointed out, was picking up and the outlook for future growth was positive.

Responding to a question, he said that investment will take place, irrespective of higher interest rates and some containment of domestic credit demand. The external balance which was compounded by higher oil prices was expected to be adjusted, he believed.

He also said that growth momentum was still there and 7 per cent GDP growth target set for 2006-07 was not all that difficult to achieve. However, he said it was important to keep fiscal deficit under control and that the government needed to mobilise more revenues by further tightening tax administration.

The source also said the privatisation programme will continue to further improve investment climate and there will be further picking up of Foreign Direct Investment (FDI).

The steel mill issue was not going to fundamentally affect the privatisation policy which was to further disinvest state owned enterprises.

He said much has been done by the government to improve the investment climate especially by taking lot of liberalisation measures. But he said there was a need to get rid of red tap and to provide easy licensing to increasingly facilitate the investors.