* IMF loan to Pakistan is subject to quarterly reviews
* Fund team to discuss reforms with ministers
* Diplomats say improving tax collection is critical
(Adds analyst quote, paras 7-8)
By Katharine Houreld
ISLAMABAD, Oct 28 (Reuters) - Pakistani Prime Minister Nawaz
Sharif faces the first formal test of his economic policies this
week during a visit by the International Monetary Fund. He has a
long way to go.
Sharif swept to a landslide victory in May after promising
to fix a sluggish economy whose growth has averaged 3 percent
over the last five years. Voters are hungry for jobs. Power cuts
and minimal social services trigger frequent violent protests.
Last month, the IMF saved Pakistan from a possible default
by agreeing to loan it $6.7 billion over three years, but its
condition of quarterly reviews means the cash is not guaranteed.
A team led by the IMF's regional adviser, Jeffrey Franks, is
visiting this week to see if Pakistan is trying to meet
conditions intended to promote reforms.
The government has begun to tackle Pakistan's fiscal
problems, but diplomats say true success will come only when tax
evaders are punished.
Yousaf Nazar, a former head of Citigroup's equity
investments unit, said previous governments had secured IMF help
by emphasing the country's role as a vital ally in the
NATO-led war in Afghanistan against Taliban insurgents.
"No government in Pakistan over the last 20 years has ever
shown any intent to carry our serious reforms," Nazar said.
"The government is just exploiting Pakistan's position -
playing the Taliban card - to get the U.S. and IMF to continue
to bail it out."
Eleven of 12 IMF programmes since 1998 have been scrapped or
abandoned because Pakistan failed to institute reforms.
"Governments have tried to 'game' the IMF, and achieved
partial success each time," two former Fund officials concluded
in a recent paper.
This time round, Sharif has promised the IMF to privatise
loss-making state industries, reform a faltering energy sector,
expand Pakistan's tiny tax base and cut government borrowing.
Just 0.57 percent of Pakistani citizens paid income tax last
year, contributing to one of the lowest tax-to-GDP ratios in the
world. Public services are woefully underfunded.
Sharif plans to privatise 32 state-run companies, including
two huge gas companies, the state oil company, several banks,
the national airline and power distribution companies.
During Sharif's previous term as prime minister - ended by a
coup in 1999 - he helped privatise several banks, said Muhammad
Jameel, executive vice president at United Bank.
"Now we have a good banking sector that is about 85 percent
private," he said. "The global financial crisis hardly touched
Pakistan's foreign exchange reserves have dwindled to about
$4 billion, or the equivalent of four week's worth of imports,
and several large repayments fall due in the next six months.
Many economists argued that the IMF loan package had aimed
to save Pakistan from the consequences of its financial
recklessness because the nuclear-armed nation of 180 million was
considered too important to fail.
WEST SEEKS STABILITY AS TROOPS LEAVE AFGHANISTAN
But considerations over Afghanistan also matter. Western
allies want to use Pakistan as a route to withdraw equipment
from Afghanistan during the NATO drawdown in 2014, and are keen
to ensure political stability.
Daily blackouts have crippled the economy, knocking two
percentage points off annual GDP last year.
Sharif has started to tackle the problem by paying off
government debts to energy companies and slashing populist
subsidies for power. But the debts are already piling back up.
Potential investors worry that the country's gas and
electricity regulators move at a glacial pace. Some also fear
the government may hold a fire sale, with state-owned assets
stripped of liabilities and sold cheaply to cronies.
Industrial power customers now pay higher rates but hikes
for domestic consumers are being held up by an activist Supreme
Court. Rival political parties have denounced the increases.
"The previous government took little action over the last
five years, but this one seems to be trying to come to grips
with the problem," said Jamil Masud, director of energy
consultancy Hagler Bailly Pakistan. "It's unclear yet if they
will or not."
(Editing by Clarence Fernandez and Ron Popeski)