WASHINGTON: Pakistan needs to take immediate steps to tackle growing budget pressures and raise interest rates to contain inflation, the International Monetary Fund said on Monday. The IMF projected a widening of Pakistan's budget deficit in fiscal 2011/12 to 7 percent of gross domestic product, much higher than the government's revised budget target of 4.7 percent.
"Unless there are measures taken to rein in the fiscal deficit, and the monetary policy tightening that is probably needed right now, pressures on the rupee could continue," IMF mission chief to Pakistan Adnan Mazarei told a conference call. "Much of what is happening in Pakistan's balance of payments and exchange market is affected by the political situation, which has a life of its own," he added. Mazarei said the central bank had been pumping large amounts of liquidity into money market, which would add to price pressures and eventually push interest rates up.
Mazarei said Pakistan should cut non-essential spending from the budget, ensure that monetary policy does not drive up inflation, and introduce more foreign exchange rate flexibility to protect reserves. Mazarei said Pakistan has not requested a new IMF loan program. The previous one fizzled out last year after the government missed economic and reform targets.
Mazarei said that without fundamental changes in energy sector, electricity subsidies will remain large - about 2 percent of annual output - and weigh on the cash-strapped government. "Given the resource base in Pakistan, this is quite high," he added.
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