(Refiling to fix typo in fourth paragraph)
By Sahar Ahmed
KARACHI, Nov 20 (Reuters) - Pakistan faces more austerity whether or not its government keeps the promises made to the International Monetary Fund in return for a $7.6 billion bailout from a balance of payments crisis.
The cash-strapped country expects the first $3-4 billion tranche of the IMF loan, spread over 23 months, by the end of November, saving it from almost certain default on an international bond maturing in February.
Pakistan has entered several IMF programmes in the past, but the only one it completed was during the tenure of former army chief Pervez Musharraf, who retired in September, and the country has a reputation for falling short on commitments to the Fund.
"The IMF is a life-saving injection to a patient, but then you have to go into proper rehabilitation in order to regain health, so thats the analogy here," said Asad Saeed, an independent economist.
"There can be no two ways about stabilisation in a situation where your external and fiscal deficits are completely out of sync."
The IMF's patience is likely to be tried once again as the eight-month-old civilian government struggles to hold a firm policy line.
"The bottom line is that the IMF programme will be tested severely from the beginning as the economy continues to face unrelenting pressure from many directions," Deutsche Bank economist Taimur Baig said in a note on Wednesday.
ENORMOUS CHALLENGES
The coalition, led by President Asif Ali Zardari's Pakistan People's Party, has been at pains to say it went to the IMF on its own terms, even though the only alternative was to default.
The IMF, it says, backed policies for economic adjustment needed to correct unsustainable external and fiscal deficits that have put Pakistan on the verge of bankruptcy.
"Even with an IMF programme now finally announced, the challenges facing Pakistan beyond the 23-month term of the SBA (stand-by agreement), indeed, even beyond the next few months are enormous," said David Fernandez, head of emerging Asia economic and sovereign research at JPMorgan in a note.
While IMF funding provides a short-term answer to Pakistan's external debt problems, its balance of payments will remain stressed without serious structural reforms.
Pressures on its foreign currency reserves and on the rupee exchange rate will resurface by the end of the fiscal year next June if efforts are not made to bridge the trade gap, said Asad Farid, economist at AKD Securities Ltd.
If the IMF had its way interest rates would have gone up by far more than the 200 basis point hike in the central bank's discount rate to 15 percent announced last week. Most analysts expect another rate hike of up to 200 basis points in January.
A panel of economists on Tuesday presented a stabilisation policies labelled "economic stabilisation with a human face" which was endorsed by Prime Minister Yousaf Gilani.
The proposal includes a 200 billion rupee ($2.5 billion) spending cut, made up of a 115 billion cut in current expenditure and a 63 to 100 billion reduction in development spending, according to economist Asad Saeed, who was on the panel.
UMPOPULAR DECISIONS
He said revenues would be increased by 75 billion rupees through duties on non-essential imports. The report projected gross domestic product growth at 4.4 percent for fiscal 2008/09 against the government's target of 5.5 percent.
The government has already taken unpopular decisions by removing subsidies on food and fuel, but it will have to go further by slashing spending, curtailing borrowing from the central bank, and cutting non-essential imports.
Government promises to reduce net borrowing from the central bank to zero may have looked good, but the IMF probably knows the target will be missed, analysts say.
Persuading a powerful army that defence, one of the top items on the budget, should also take a hit will be hard so long Islamist militancy and fears of Indian hegemony haunt generals.
The government knows it has to increase the tax to GDP ratio, which at at 9.6 percent of GDP is one of the lowest in the world. The government plans to raise it above 15 percent by 2015.
Income tax revenues could be raised, and a farming tax that Pakistan's influential landowners have long resisted could be introduced, while a service tax on property and the stock market would be welcomed by many economists.
Food inflation running close to 32 percent has pushed living conditions for the very poor to extremes.
Early this year, the U.N. World Food Programme said soaring food prices and shortages of staples had rendered about 77 million of Pakistan's 170 million people food insecure, a 28 percent increase over last year.
The resulting erosion of society, particularly in those parts of the northwest where an Islamist insurgency is already challenging the writ of the state, exacerbates the threat to Pakistan's future. (Editing by Simon Cameron-Moore & Jan Dahinten)