ISLAMABAD - International Monetary Fund (IMF) in its recent programme note on Pakistan observed that delays in tax and expenditures reforms and impact of floods would keep budget deficit higher during the current fiscal year 2010-11. Moreover, very little progress has been made in reforms in the electricity sector and commodity operations, which are urgently needed to eliminate financial losses that impose a burden on public finances and pose a threat to macroeconomic stability, IMF programme note on Pakistan stated. Meanwhile, the adverse security developments continue to hurt domestic and foreign investors confidence, while electricity shortages continue to prevent the economy from achieving its potential. According to the note, the catastrophic floods, which hit Pakistan in the summer 2010, reduced growth and posed a further challenge to public finances by depressing budget revenues and necessitating additional spending to meet the humanitarian and reconstruction needs. However, some progress has also been made recently in modifying the existing general sales tax by reducing exemptions and strengthening the refund mechanism. However, this reform has been delayed and its scope has been far narrower than earlier envisaged. Prior to the floods, modest signs of recovery in manufacturing (mainly in the textile sector) and exports suggested that the Pakistani economy was regaining momentum. Real GDP growth remained four per cent in fiscal year 2009-10. However, as a result of floods, real GDP growth is unlikely to exceed 2.75 per cent in current financial year 2010-11. Pakistans economy had initially made progress toward stabilisation under the programme. Macroeconomic imbalances shrank and inflation fell below 10 per cent in mid-2009. More recently, however, the budget deficit has increased, reaching 6.3 per cent of GDP in 2009-10, and inflation has been on the rise, recording 13 per cent in March 2011. The external position has strengthened, the exchange rate has been stable, and the current account deficit has narrowed considerably, helped by lower import growth, higher exports, and a robust increase in workers remittances. Foreign currency reserves have increased from US$3.3 billion in November 2008 (before the SBA approval) to over US$14 billion at present. To make progress under the programme, economic reforms need to be reinvigorated. They are needed to strengthen public finances and improve financial intermediation, and to raise economic confidence to stimulate higher savings, investment, growth and employment. Stronger public finances are needed to allow for higher spending on development and poverty reduction, and to increase much-needed social outlays over the medium term. Economic reforms will also mobilise financial support from external donors and spur greater private capital inflows. According to the note, the legislation needed to strengthen bank supervision and central bank autonomy has not yet been enacted, strengthening of the social safety net is still not complete, and the reform of petroleum pricing has been partially reversed in recent months.