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Emerging Markets

Pakistan finance chief hits backs at slippage claims

Pakistan’s finance chief has sharply rebutted claims that his government has lost the impetus for economic reforms and is backsliding on commitments under an IMF agreement.

In an interview yesterday with Emerging Markets, Shaukat Tarin, finance adviser to the prime minister, said Pakistan is on track to meet its fiscal deficit targets – bolstered by international donor support.

He added that the government has resolved to bring down the fiscal deficit to 3.4% this year. “We’re sticking to that and we will frankly do that,” he said.

He cited the fact that whereas the 2007/8 fiscal deficit was 7.6% of GDP, it dropped to 5.2% the previous year. He said this year’s target was achievable “with or without” overseas help.

“I don’t understand why people get the idea that we are truncating our stabilization programme. We are following it, and following it vigorously,” he said.

Tarin’s comments follow allegations that the government has lost its grip on economic policy, in the wake of the IMF’s $11 billion programme.

Ashfaque Khan, a former economic adviser to the finance ministry wrote in Emerging Markets last Sunday that the government has “embarked on an expansionary fiscal policy and a relatively easy monetary policy” – a stance that was “not viable – at all – in the face of high fiscal and current account deficits as well as the rising price of oil”.

But Tarin shot back that finance officials would hold fast on critical reforms. “How can people say we’re going to abandon that? We’re not going to abandon caution because we have achieved stability, with a lot of pain for the people of this country. We’re not going to throw this away for short term gains.”

Structural tax reforms will have boosted revenues – a key goal of its reform efforts – from 8.8% of GDP in 2008 to 10.6% this year, Tarin said. The government plans to introduce VAT next year.

He added that the government is making headway in reforming the inefficient power sector, which has been a major drag on the economy in recent years.

Moreover, Pakistan’s central bank last week kept its benchmark interest rate unchanged at 13%, waiting to see if two cuts earlier this year are enough to revive economic growth. “All these things are happening,” Tarin said.

Khan slammed the IMF for having “allowed its resources to be used for budgetary reasons instead of balance of payments support. This is a major departure from the past – it is as if the IMF has changed its religion.”

He described the Fund programme as being “extraordinarily benign – asking for little reforms and with a generous waiver for non-observance of performance criteria.” But Tarin said that “none of the IMF money is being used for budgetary support”.

He noted that $1.2 billion of funds lent by the IMF in August – under a $3.2 billion augmentation to last November’s $7.6 standby agreement – could be used “on a temporary basis as a bridge”, but that forthcoming donor pledges would plug the gap. “When we get the money [from donors] we’ll put it in the central bank.” But he added: “We’ve got to spend money on poverty reduction.”

Pakistan has so far failed to tap any of the $5.28 billion over three years pledged by donors at a so-called Friends of Democratic Pakistan (FODP) in Tokyo in April. But Tarin said that “we have firmed up these commitments in the past two months” and expects at least $1.8 billion by year end.

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