KARACHI: International Monetary Fund (IMF) has said that broadening of tax base in Pakistani government is facing political challenges despite initial success after convincing opposition on reforms.
In the country report on Pakistan, the IMF said that economic prospects of the country are improving, but Pakistan remains vulnerable to economic and security challenges, as well as risks to program implementation.
As reserves have recovered, the exchange rate strengthened, and the fiscal balance has improved, short-term crisis risks have begun to recede, it said.
“Initial success in stabilizing the economy seems to have attenuated opposition to program reforms somewhat, but the government faces political challenges in broadening the tax net, and in important structural and monetary policy reforms,” the IMF said.
The government authorities also face challenges in their administrative capacity to carry out many complex reforms simultaneously.
“Finally, security conditions remain difficult and constitute a significant downside risk to the economy,” the IMF said.
In its report, the IMF said that the economy is showing signs of improvement.
The FY2013/141 growth projection has been revised upward from 3.1 percent to 3.3 percent, as economic indicators continue to show better-than-expected performance.
For FY2014/15, the economy is forecast to expand by around 4 percent, some 0.3 percent higher than initially projected, and growth will accelerate further in the medium term as fiscal adjustment eases and structural reforms help alleviate binding constraints in the energy sector, improve efficiency, and enhance the investment climate.
IMF’s inflation forecast has been adjusted slightly downward. The IMF expects FY2014/15 inflation to be around 7.5 percent.
The IMF has shown satisfaction on program performance. All quantitative performance criteria (PC) were met with the exception of the ceiling on NDA of the SBP, which was missed by a small margin. Since end-March 2014, the SBP has taken corrective actions, and now is on track to meet the end-June target.
The indicative target on social transfer payments was also met. The fiscal deficit target was comfortably met and the government is on track to meet its end-June objective.
Progress on structural reform is mostly satisfactory. Of three structural benchmarks for this review, two were fully met—those on tax administration notices and the audit of NEPRA.
The third benchmark—on hiring privatization advisers—was not met, as advisers were hired for only three firms rather than six.
The government has agreed on a new benchmark to push forward the privatization process with completed share offers for two firms by end-June 2014.
The balance of payments situation is improving, but remains delicate. SBP Reserves have improved, boosted by bilateral inflows, including grants, Eurobond issue by the government, and official disbursements from development partners.
These inflows contributed to an appreciation of the rupee by almost 7 percent against the dollar during the third fiscal quarter despite accelerated spot market purchases by the SBP.
“Despite these developments, the reserve position remains insufficient, covering less than two months of imports,” the IMF said