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Structural Problems Sap Pak Economy of Vigour
Structural Problems Sap Pak Economy of Vigour
government securities have accommodated higher deficits at the cost of higher inflation and
currency depreciation.
Citing declining inflation and weak investment, the State Bank has also lowered its policy rate by a
cumulative 200 basis points since July 2012.
The IMF, however, acknowledged that financial sector appeared healthy based on standard
indicators, but financial stability risks existed.
Banks nonperforming loans remain high at 15.9 per cent at end-June 2012, and capital and liquidity
indicators are being boosted by large holdings of government securities.
At the same time, private sector credit growth remains subdued, with adverse consequences for
growth. The governments large financing needs, considerable commodity operations, together with
risk aversion by banks, has contributed to a diversion of credit from the private sector.
IMF directors noted that while some progress had been made, Pakistan continued to face difficult
macroeconomic challenges as growth remains insufficient, underlying inflation is high, and the
external position is weakening.
The situation is compounded by an uncertain global environment and a difficult domestic situation,
as well as adverse effects of natural disasters.
IMF directors emphasised that strong policy measures and deeper reforms are critical to addressing
vulnerabilities, boosting sustainable growth, and reducing poverty.
The directors underscored that reducing the large fiscal deficit was essential for restoring
macroeconomic and external stability. To achieve the governments 2012-13 deficit target, they
called for short-term revenue and expenditure efforts, including broadening key taxes and reducing
subsidies, while protecting the most vulnerable.
To strengthen the fiscal position in the long run and create space for capital and poverty-related
spending, the directors called for comprehensive revenue and expenditure reforms.
Fiscal consolidation should focus on changes in tax policy and improvements in compliance, the
directors said.
Some directors urged reconsideration of the tax amnesty schedule currently being contemplated.
Recognising the political difficulties in implementing a full VAT, they advised the authorities to
consider credible alternative revenue measures including a modified GST and strengthening the
income tax.
The IMF directors considered that Pakistans monetary and exchange rate policy needed to better
contain inflation and external risks. They noted that the achievement of durably lower inflation would
require more prudent monetary policy, accompanied by substantial fiscal adjustment to ease the
governments funding requirement, which has been driving inflation.
Greater central bank independence will be important in this regard. Directors recommended more
exchange rate flexibility to facilitate external adjustment and safeguard foreign reserves.
The IMF directors noted that the banking system appeared healthy. However, they urged vigilance
about risks arising from high NPLs and banks large and rising exposure to the sovereign.