IMF warns about Pakistan's deteriorating economy

The International Monetary Fund has warned Pakistan about its state of economy saying it is far worse that estimated and asked Islamabad to take steps to cut its spiralling budget deficit.

The Wall Street Journal quoting a senior Pakistani official who had seen the IMF missive, also said the global funding body urged immediate fiscal belt-tightening measures.

The IMF withheld $3.5 billion this year from its $11.3 billion loan package for Pakistan in a bid to pressure the country to take action, the report said.

A spokesperson for the IMF declined to comment on the matter.

The IMF, World Bank and their most influential members ?" the US, European countries and Japan ?" are worried that unless Pakistan boosts tax revenue, its economy may suffer through escalating inflation.

Pakistan finances much of its budget by borrowing from the central bank, essentially printing money, the report said.

Other than $450 million in flood relief, the IMF has not disbursed any loans to Pakistan since May and neither have other donors.

The US has been trying to help the IMF pressure the Pakistan government to make changes but the effort stalled with the death of special envoy Richard Holbrooke, who pushed President Asif Ali Zardari to revamp the economy.

Zardari has tried to convince donors to forgo Pakistani debt and provide more economic aid in exchange for help in the war in Afghanistan, the report said.

Pakistan called in the IMF in 2008 amid a balance-of-payments crisis.

The IMF's support was supposed to end on December 31 but the world body recently extended the loan by nine months to give the country more time to implement reforms.

Pakistan's budget deficit is already six per cent, above a target of four per cent, due to failure to implement general sales tax reforms and curb expenditures in line with promises made by the government to the IMF in return for lending.

The budget deficit could go up to eight per cent in this fiscal if the government borrowing continues at the same pace, according to Finance Ministry officials.

Pakistan also needs to do more to strengthen the independence of its central bank, the IMF says.

As far as the tax payers in the country are concerned, only two million Pakistanis - mostly middle-class professionals and government workers - out of a population of 180 million pay tax.

Analysts said further delay in implementing tax reforms could lead to an even larger deficit.

The government says it has pushed the general sales tax reforms but has been blocked by the opposition PML-N and other parties.

Even some members of the ruling coalition have argued the government should implement broader tax reforms, not merely the general sales tax that will hit mainly urban voters and businessmen.

In Pakistan, the agricultural sector is still exempt from tax.

“The leaders are still not willing to take critical measures hoping that Washington would bail the country out," the senior government official said.