Bloomberg News

Pakistan Needs Budget Deficit Cuts to Reduce Risks, IMF Says

February 07, 2012

(Updates with Moody’s analysis in seventh paragraph.)

Feb. 7 (Bloomberg) -- Pakistan must stem risks to a “highly vulnerable” economy that include inflation projected at 12 percent, a widening budget deficit and declining currency reserves, the International Monetary Fund said.

The Washington-based IMF called on Pakistan to broaden the tax base, eliminate some subsidies and curtail central bank financing of a budget shortfall that may rise to 7 percent of gross domestic product this fiscal year.

Floods in August that forced more than 1 million people from their homes have added to the woes of the world’s second- largest majority-Muslim nation, a key U.S. partner in the battle against al-Qaeda. Economic growth estimated at 3.4 percent in the fiscal year ending in June 2012 will fall short of the 7 percent pace needed to provide work for the 2 million people who enter the labor force each year, the fund said in a report release yesterday.

“Two major floods, difficulties in implementing key policy reforms, and a more challenging global environment have combined to limit growth and employment creation and made the economy highly vulnerable, with few buffers to absorb shocks,” the fund said.

The government of Prime Minister Yousuf Raza Gilani has struggled to revive an economy hurt by political instability and militant attacks that have killed at least 35,000 people since 2006, according to estimates from the government. Gilani himself faces a contempt of court charge that threatens to force him from office.

Rupee Weakens

Pakistan’s rupee weakened to a record low against the dollar on Jan. 9 on concern foreign reserves will shrink as international aid dwindles. Reserves have fallen by about $2 billion in the last six months and may weaken further, the IMF said. The local currency slipped to 90.5988 per dollar as of 4:30 p.m. in Karachi yesterday, from 90.4713 on Feb. 5, according to data compiled by Bloomberg.

A continuing decline in the reserves “would be credit negative,” Moody’s Investors Service said in a statement yesterday, adding they stood at $12.5 billion at the end of January. While the outlook on Pakistan’s B3 rating is stable, the nation hasn’t eliminated economic imbalances that arose after the 2008 global financial crisis, Moody’s said.

The U.S., the country’s largest export market and aid provider, held back $800 million in military assistance in July out of $2 billion pledged for this fiscal year because of disputes over how to combat terrorism.

U.S., Pakistan Ties

Relations between the U.S. and Pakistan are critical to the Obama administration’s battle with al-Qaeda’s leaders in Pakistan and its plans to end the American combat role in Afghanistan within two years. Ties have become strained since U.S. special operations forces killed Osama bin Laden in a compound in the Pakistani city of Abbottabad last May.

An $11.3 billion IMF loan to Pakistan expired in September, with disbursements suspended in May 2010 after the country failed to meet conditions attached to it. The South Asian nation turned to the IMF for aid in 2008 after its foreign reserves shrank.

Pakistan needs to start repaying the loan this month, and authorities have not requested another one, IMF mission chief Adnan Mazarei said on a conference call yesterday.

“The way we recommended to the authorities to address these vulnerabilities is to recognize that we are all, including Pakistan, living in a more dangerous environment because of the deteriorating global environment and to build buffers,” Mazarei said.

‘Too Accommodative’

The Washington-based IMF last month lowered its estimate for global growth this year and next and warned that the European debt crisis could plunge the world into another recession if it were to worsen.

The IMF report said Pakistan’s “monetary policy is now too accommodative, and should be tightened if inflation or external pressures increase.” It added that “central bank financing of the budget needs to be curtailed, and greater operational independence of the central bank needs to be secured.”

Emerging markets from India to Thailand have eased policy as Europe’s debt crisis hampers the global economy. Pakistan’s central bank left the discount rate at 12 percent in November, pausing to gauge the impact of a 2 percentage-point reduction since the end of July. The next rate decision for the $175 billion economy is due Feb. 11.

Pakistan’s gross domestic product rose 2.4 percent in the year through June 2011, one of the smallest expansions in a decade.

--With assistance from Sunil Jagtiani in Singapore. Editors: Kevin Costelloe, Christopher Wellisz

To contact the reporters on this story: Sandrine Rastello in Washington at srastello@bloomberg.net; Haris Anwar in Islamabad at hanwar2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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