An International Monetary Fund (IMF) mission led by Mr. Milan Zavadjil, Assistant Director in the Middle East and Central Asia Department, today concluded its discussions with the Pakistan authorities on recent economic developments, prospects, and policies under the annual Article IV Consultation.

Pakistan's economy registered a remarkable broad-based acceleration of growth in 2004-05, and the growth prospects remain strong for 2005-06. This performance and outlook reflect the government's efforts of the past five years aimed at macroeconomic stabilization, rebuilding investors' confidence, and implementing far-reaching structural reforms. There are growing indications that the strong economic recovery over recent years, which is an important part of the government's Poverty Reduction Strategy, is improving living standards.

The mission saw two immediate challenges confronting the policy makers: (1) addressing the higher than targeted rate of inflation; (2) dealing with the adverse implications of persistently higher international prices for oil, which have resulted in a deterioration in the terms of trade and put pressure on the budget. To meet these challenges, the mission and the authorities concurred on the need to continue to focus on macroeconomic stability.

The mission appreciated the efforts of the State Bank of Pakistan to tighten monetary policy by allowing a significant rise in policy interest rates over recent months in order to bring inflation down. Given the current domestic and external environment, the process may need to be sustained for some time, until the growth in monetary aggregates slows and inflation is on a clear downward trend.

The government' s fiscal program, as detailed in the 2005-06 Budget rightly focuses on strengthening infrastructure, the social sectors, and human development. Consistency with the landmark Fiscal Responsibility law recently approved by Parliament, strong growth, and a relatively favorable interest rate environment will ensure a further decline in the government's debt burden. However, the mission pointed out that, with the economy facing capacity constraints and inflationary pressures, and given the need to adjust to the terms of trade loss, there was little room for a more accommodating fiscal policy stance.

For the medium-term, the key challenge will be to sustain high growth rates while maintaining macroeconomic stability. This will require higher rates of private-sector investment in addition to public sector investment, as well as a significant investment in human capital and skills development. In this context, the mission welcomed the government's agenda of Second Generation Reforms, and looked forward to its timely implementation. In this regard, the mission and the authorities concurred on the importance of resolving shortly outstanding issues that have hampered energy sector reform. The need to improve public services delivery, capacities, and accountability was stressed. The mission also congratulated Pakistan for its successful privatization program, which has dramatically accelerated in recent months.

Finally, the mission highlighted the importance of domestic resource mobilization. An improvement in the tax collection effort during coming years is essential to enable the government to implement its ambitious social and infrastructure programs. In this context, the mission stressed the need for the on-going tax policy and administration reform to result in a significant improvement in tax compliance and broadening of the tax net.