ISLAMABAD – The International Monetary Fund (IMF) said Thursday Pakistan is facing a challenging economic outlook, as its GDP growth in the current financial year, 2012-13, is projected to be in 3-3.5 per cent range (against the target of 4.2 per cent), which needs to accelerate in order to absorb the growing labour force. “Pakistan’s economic situation was worsening and faces a return to double-digit inflation as the government prints money to finance its deficit,” the IMF observed in a mission report. Led by Jeffrey Franks, an IMF team, during September 26-October 3, held post programme monitoring (PPM) discussions with the Pakistani authorities in Dubai and Islamabad on recent developments, such as the outlook for country’s economy for the rest of the ongoing fiscal year and beyond, and on economic policies to maintain growth and macroeconomic stability in the context of a difficult global economic environment. The IMF team emphasised structural reforms, especially in the energy sector, to lay the foundation for stronger and sustainable economic growth of Pakistan. “Inflation has fallen recently, but is expected to be back in double-digit by the middle of next year, if corrective measures are not taken to reverse monetary financing of the fiscal deficit,” the report said, “Islamabad urgently needs to address deep problems in its energy sector, including costly subsidies and poor distribution, while boosting growth to meet a rapidly growing population.”“Pakistan’s external position is weakening. While the current account deficit is not large by international standards, financial flows have weakened and central bank reserves have fallen. Decisive and far-sighted action is needed to address this challenging outlook.”It said that the discussions on economic policy focused on diligent management of the budget deficit, reducing inflation, and structural reforms. The government and the IMF team agreed on the need for containing the budgetary deficit to help lower the inflation, reduce crowding out of private sector credit, and ensure debt sustainability. In IMF’s view this required significant corrective measures; otherwise the fiscal deficit is likely to exceed the budgetary target by a significant margin. “To rein in the fiscal deficit, both revenue and expenditure measures will be required. On the revenue side, while there has been some improvement in collections, tax revenue should be raised further through sustained policy measures and strengthened administration both at the federal and provincial levels, including a significant step-up in the Federal Board of Revenue’s enforcement activities. On the expenditure side, untargeted subsidies should be reduced, while fully protecting the most vulnerable members of society through targeted assistance schemes.” The mission welcomed the authorities’ intention to prudently manage public spending, despite pressures associated with the electoral cycle, and noted that it was crucial that expenditure restraints also apply to provincial governments, which now had increased spending responsibilities. The authorities also signal;ed their continued commitment to trying to meet their fiscal target, the IMF further said. The report added, “Underlying inflation remains high and represents a regressive tax that disproportionately hurts the poor. The ultimate goal of the State Bank of Pakistan (SBP) should be to bring inflation down significantly by using its policy tools. Reduced recourse to central bank financing by the government is also critical for a durable reduction in inflation. While the banking sector is well-capitalized and profitable, the level of nonperforming loans is relatively high.”“Addressing macroeconomic imbalances will help support higher growth, but the energy problems facing Pakistan today are perhaps the largest single impediment to higher economic growth and are a major factor behind macroeconomic imbalances.” The mission stressed that a comprehensive approach to reform was needed to tackle these problems, including the lack of full cost recovery, resulting in costly and untargeted subsidies, governance and efficiency difficulties in energy distribution, regulatory inadequacies, and insufficient investment in new energy production. Tackling the energy problems will also benefit macroeconomic stabilisation. In addition, other structural reforms are also needed to boost growth, including measures to enhance the business climate and to restructure public sector enterprises beyond the energy sector. “The IMF remains committed to the ongoing dialogue with the Pakistani authorities on their reform program,” concluded the report. TheNation Monitoring adds: The International Monetary Fund urged Pakistan to back away from moves to introduce an amnesty for tax evaders, a step believed to have been planned to lure back billions of rupees in illicit wealth from Pakistani nationals at home and abroad.A senior government official told the Financial Times the amnesty plan would be a one-off opportunity for people with undeclared wealth to reveal their assets without having to disclose the source of their funds.“We want to create a safe passage for people with dodgy means, to allow them to become legitimate players,” he said.Jeffrey Franks, a senior IMF official in Islamabad for talks with the finance ministry, said: “The IMF tends to be sceptical of tax amnesty solutions or offers in a wide range of countries. Even if they work in the short run, it’s not a permanent solution to a budget gap.”Mr Franks added: “We would encourage the Pakistani authorities to concentrate on permanently broadening the tax base, permanently eliminating exemptions and adjusting tax rates.”