Pakistan must reform tax system, curb inflation: IMF

WASHINGTON (October 08 2010): Even as Pakistan digs out of catastrophic floods, the government
must push through politically difficult tax reforms and curb government borrowing that spurs inflation, a
senior IMF official said on Thursday. Adnan Mazarei, the IMF mission chief for Pakistan, told reporters
that inflation has crept up to 13 percent this year after having been brought down to single digits in 2009,
and government borrowing could aggravate the problem.

"Because the government doesn't get revenues, it has to finance its deficit, as it is doing now, through
borrowing from the central bank .... by printing money," he said. "Sooner than later it will reflect itself in
a sizeable increase in the inflation rate," said Mazerei.

The IMF, which gave Pakistan $450 million in unconditional emergency funds to help it cope with
summer floods that destroyed much of the country's infrastructure, wants Islamabad to boost tax receipts
and cut subsidies for electricity and state firms, he said. "Pakistan has one of the lowest levels of taxation
in the world, at less than 10 percent of gross domestic product," said Mazarei, calling the country's system
"very unfair and inequitable" because the wealthy often avoid taxes.

Beyond stoking inflation by state borrowing, the tax shortfall means the government can't spend money
on health and education that underpin its legitimacy in a country facing an Islamist insurgency. "This
inability of the government to provide basic services is one of the core problems underneath the social
problems of Pakistan," he said.

Mazarei said the IMF, in discussions with the government over terms of an $11.3 billion Pakistan loan
program, is urging Islamabad to reduce and retarget subsidies, including $2 billion spent annually for
electricity that often goes to corporations or to consumers who can afford to pay their electric bills.

"Left unchecked, these subsidies will again be in the billions of dollars in 2010-11," he said. The IMF
hopes its $450 million in funds will spur other donors to help Pakistan recover from floods, but
nevertheless expects that "a good part of reconstruction will have to come from domestic resource
mobilisation."

This makes fiscal reforms critical, and despite the political difficulties, "postponing them will only make
these social and political problems worse," said Mazarei. "Perhaps the difficulties, which are compounded
these days because of the floods, are actually an opportunity to build political consensus to do
something," he said.