WASHINGTON Pakistan should reduce subsidies and widen the tax base to tackle the government's bloated budget deficit, the International Monetary Fund's board said on Thursday.
The Pakistani government should also reform tax policy and boost tax compliance in the long-term to reduce the fiscal deficit, which is likely to reach 6.5 percent of national income by June 2013, above the government's target of 4.7 percent, Fund directors said.
"(IMF) directors underscored that reducing the large fiscal deficit is essential for restoring macroeconomic and external stability," the IMF said in a summary of the board's discussion on Pakistan last week.
The board also called on Pakistan to discuss its policies with the Fund.
Less than 1 percent of Pakistan's 180 million citizens pay income tax and no one is believed to have been prosecuted for tax evasion in 25 years, to the dismay of Western allies who have contributed billions of dollars in aid.
Pakistan's new tax chief, Ali Arshad Hakeem, has pledged to make the country's elite pay their fair share. To get more people into the program, he also plans to offer a 10-week amnesty that forgives past offenses and only places a small tax burden on participants in the first two years.
But the IMF said some of its directors said Pakistan should reconsider the tax amnesty. It did not provide further details.
Fund directors also urged the government to consider alternative tax measures beyond a VAT tax, which is often difficult to implement, such as strengthening the income tax.
The IMF periodically reviews countries whose IMF programs have lapsed, but who still owe money to the Fund. Pakistan's $11 billion IMF loan program ended in 2011 because of slow implementation of fiscal reforms, and some analysts have since warned about a possible balance of payments crisis.
The IMF board also said Pakistan should have a more independent central bank that will fight inflation, which is likely to return to double digits in the fiscal year ending in June 2013.
The State Bank of Pakistan cut its key policy rate by 50 basis points in October, saying inflation had slowed in recent months.
(Reporting by Anna Yukhananov; Editing by David Gregorio)