While Pakistan's financial stabilisation programme is on track but faces risk, the country missed its end-March fiscal deficit and borrowing from the central bank targets, top officials said this month.
In a letter of intent dated May 3 but posted on the International Monetary Fund's website over the weekend, the country's top economic adviser and central bank governor wrote that according to preliminary information, Pakistan missed its 2009/10 third-quarter fiscal deficit and net government borrowing by the central bank targets by 0.4 per cent and 0.2 per cent of gross domestic product, respectively.
The letter was written before the IMF approved the fifth tranche of a $10.66 billion emergency loan to Pakistan.
"We continue to face challenges to our stabilisation programme due to a widening of the military operations, revenue shortfalls and delays in disbursements of pledged donor support, which has complicated fiscal management, while inflation has picked up," the officials wrote.
Pakistan is battling Al-Qaeda-linked Islamist insurgents while struggling with a chronic power shortage, stubborn inflation and a dearth of investment.
The IMF granted waivers for the spending and borrowing targets and revised the fiscal deficit target for the entire 2009/10 fiscal year to 5.1 per cent of GDP, compared with an earlier target of 4.9 per cent of GDP.
Pakistan turned to the IMF in November 2008 for an emergency package to avert a balance of payments crisis and shore up reserves and received the fifth tranche this month amounting to $1.13 billion of a $10.66 billion loan.
Pakistan also assured the IMF that it has taken the necessary steps to introduce a value-added tax (VAT) to replace a general sales tax by July 1, 2010.
Inflation had been more persistent than expected and the State Bank of Pakistan (SBP) will continue to monitor the monetary policy carefully "and if inflationary pressures persist, it will tighten monetary policy as needed," the officials wrote.
The consumer price index (CPI), a key indicator of inflation, rose 13.26 per cent in April from a year ago, and was up 1.73 per cent over March.
The SBP kept its key policy rate unchanged last week at 12.5 per cent for the next two months to counter rising inflation and a widening fiscal deficit.