ISLAMABAD, Nov 8 (Reuters) - The International Monetary Fund said on Friday it was broadly satisfied with Pakistan's economic progress after stepping in to save the country from a possible default earlier this year.
The IMF has agreed to loan Pakistan $6.7 billion over three years as part of the programme, but its condition of quarterly reviews means the cash is not guaranteed.
A team led by the IMF's regional adviser, Jeffrey Franks, visited Islamabad this month to assess if Pakistan was working hard enough to meet conditions intended to promote reforms.
"Under the IMF programme the government is making strong efforts to increase tax collections over time to bring down the deficit," he told reporters in Islamabad after completing his mission.
"That will leave them in a much better position two or three years down the road to absorb any decline in other sources of funds."
Pakistan has already once averted a balance of payments crisis in 2008 after securing an $11-billion IMF loan package, which was suspended two years ago after economic and reform targets were missed.
This time around, Prime Minister Nawaz Sharif, who was elected in May, promised the IMF to privatise loss-making state industries, reform a faltering energy sector, expand Pakistan's tiny tax base and cut government borrowing.
But the financial situation remains dire. 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.
Tax collection is a huge hurdle in a country where 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 also 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.
Franks said his team had adjusted upwards its forecasts for Pakistan's financials, to reflect its more optimistic view of the economy.
"We are slightly more optimistic on the growth scenario that we are using for the programme," he said, adding that the economic growth forecast had been revised to 2.8 percent from 2.5 percent for the current fiscal year.
"The growth number is going to accelerate in 2014/15 and in 2016/17 as the tough fiscal consolidation eases and as the structural reforms that are going to boost growth take hold."
He added: "We are anticipating that growth will accelerate significantly in the medium term to something in the order of 5 percent."
But many remain sceptical the programme will succeed. Eleven of 12 IMF programmes since 1998 have been scrapped or abandoned because Pakistan failed to institute reforms.
Economists also argue that the IMF stepped in this time because the West considers Pakistan, a nuclear-armed nation of 180 million next to Afghanistan, too important to fail.
(Editing by Clarence Fernandez)