The government has adopted a high-risk economic strategy based on growth, effectively suspending a standby IMF loan and hoping for a fresh agreement in six months. The new reform package was expected to be announced by the end of March.
Finance Minister Sartaj Aziz said on 21 March the government plans bold reforms, including tax and tariff cuts, to revive growth and stimulate exports. Speaking after a week-long visit by an IMF mission to discuss the future of an $831 million standby loan agreement, Aziz said the agreement had been effectively suspended because targets could not be met, and the IMF had agreed to negotiate a medium-term loan later in the year.
Local markets reacted relatively calmly to the announcement. Officials said the government of Prime Minister Nawaz Sharif was anxious to avoid uncertainty in international markets which would make it hard for the country to raise some of the $2,000 million it needs by June for debt repayments.
One official said Sharif 'had decided to play for high stakes rather than indulge in piecemeal reforms. He would unveil a substantial package in one go.' Local observers say the government's agreement to a new deal came after it became clear that Pakistan might fail to meet the fund's condition of reducing its budget deficit to 4 per cent of gross domestic product (GDP) this year.
The government has given no indication on the extent of the tariff cuts, but one official said that they might be in the 10-20 per cent range. Tariffs of up to 65 per cent have been the source of criticism from Western lenders. Tax rates of up to 38.5 per cent for personal income and 36 per cent for corporate income are also a target.
Western banks and investors operating in Pakistan gave a qualified response to the government's plans, most of them saying they would wait and see for the next few months. They described the government moves as inevitable, but some said they feared higher inflation and a worsening of both fiscal and balance of payments deficits.
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