The IMF Warns Pakistan on Economic Reforms

Sources:

Int’l Herald Tribune: Ailing economy: IMF censures Pakistan over ‘retarding reforms’

Reuters: Pakistan's forex reserves sustainability a cause for concern

The Economist: The Decline of Pakistan: Five Years On

Bloomberg Businessweek: Pakistan Keeps Rates on Hold, as Forecast, on Easing Inflation

This week the IMF released a report strongly criticizing Pakistan for backtracking on economic reforms it agreed to as a condition loans. In 2008, the IMF and Pakistan began an $11.3 billion loan program on the condition that the government would increase tax revenue and give its central bank more autonomy to set monetary policy. The IMF says that in the early months of the program, Pakistan followed through on its commitments. However, in May of 2010 the IMF stopped payments to Pakistan after reforms stalled. In December of 2010, the IMF granted Pakistan a nine month extension of the program with the expectation that Pakistan's government would institute a new sales tax program. Pakistan is now attempting to negotiate a second round of loans from the IMF, in part to help pay back loans from the first round.

Pakistan has one of the lowest tax-to-GDP ratios in the world, yet is consistently in danger of defaulting on loans by the IMF and foreign lenders. Pakistan's government has a total public debt of roughly $138 billion and a debt-to-GDP ratio of more than 60%, higher than most quickly developing countries. The IMF has been pushing Pakistan to increase its tax revenues by improving collections, specifically by instituting a sales tax. Pakistan has instituted a sales tax, but some traders have shutdown their businesses in protest over the measures. As a result, the government has been slow to implement the tax. The IMF is pushing for the tax in the hopes that it would allow Pakistan's government to fund more development and poverty reduction projects, especially in areas with poor security conditions.

Beyond tax reform, the IMF plan for Pakistan includes several other measures. The IMF wants Pakistan's government to pay down its debts to boost economic confidence that will lead to higher savings rates and investments. The IMF also believes that Pakistan's monetary policy should be dictated by the central bank and insulated from political pressures. Finally, the IMF is pressuring Pakistan to decrease its subsidies for petroleum, however this is politically unpopular at a time when global fuel prices continue to rise.

Pakistan's GDP is projected to grow at 2.5% this year as it struggles to manage its debt obligations and pay for the cleanup of the 2010 floods that affected more than 20 million people. Pakistan's economy also suffers from internal fighting that frequently lead to displacements of large numbers of people in the areas that provide much of the country's food and mining resources.