Pakistan's central bank warns government of economic debacle

Sunday January 30, 2011 08:15:34 PM, IANS

Islamabad: Pakistan's central bank has warned the government that its borrowing has touched an alarming level while its reluctance to pursue tough economic reforms could hinder efforts to achieve stability.

State Bank of Pakistan's governor Shahid Hafeez Kardar said that the "government needed to take immediate steps to arrest fiscal deficit".

"I agree that inflation will increase by printing new currency notes but the decision in this regard has to be taken by the government," Kardar was quoted as saying by The Nation.

Kardar said, "The decision to revoke increase in fuel prices and the slow progress of the proposed reforms in general sales tax (GST) regime were likely to have a dampening impact on the efforts to revive the economy".

The government last month decided to reduce subsidy on petroleum products and increased fuel prices which caused a huge uproar. A major government ally Muttahida Qaumi Movement (MQM) decided to withdraw its support and the government felt hard-pressed to roll back the proposed hike.

The World Bank has also been pursuading the Pakistan government to reduce subsidy on fuel and electricity and divert these funds towards development projects and building infrastructure.

The reformed GST was also part of this agenda where the government decided to reduce the already imposed GST from 17 percent to 16 percent and levied it across all sectors instead of a select few that were paying this tax already.

The withdrawing of exemptions was aimed at broadening the tax net and bring in around Rs.40-50 billion more to the national exchequer annually. However, in the face of stiff opposition from the industry and political parties, the government has not been able to achieve this objective.

The country's economy is already reeling because of the after-effects of "war on terror" that has devastated infrastructure across the country while the flash floods last year also damaged infrastructure and crops in major parts of Pakistan.

About $9.3 billion would be required to re-build the infrastructure damaged in the floods alone.

With promises of financial help from donor countries largely unfilled yet and the pressure from the International Monetary Fund (IMF) and World Bank mounting to pursue economic reforms before tapping the foreign donors again, the Pakistan government is in a catch-22 situation in its bid to revive its economy.

The central bank governor echoed these views and said that "the government needed to take steps before it is too late".

"We are hopeful that things will improve with political will," he said, adding that the next three months will be crucial.

As per the figures submitted to the national assembly a couple of days ago, Pakistna's foreign debt has risen to $53.5 billion. The figure was about $35 billion when the present regime took over three years ago after the 2008 general elections.

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