The International Monetary Fund criticized the Pakistan government’s budget as insufficient to meet the goals of its bailout program, a sign that a deadline this month to unlock aid will not be met. The nation’s dollar bonds declined.

The tax policies in the new budget, unveiled last week, miss “an opportunity to broaden the tax base in a more progressive way, and the long list of new tax expenditures reduces further the fairness of the tax system,” Esther Perez Ruiz, the IMF’s resident representative in Pakistan, said in a statement.

“The new tax amnesty runs against program’s conditionality and governance agenda and creates a damaging precedent,” she said. The IMF is ready to work with Pakistani authorities to refine the budget ahead of its passage.

The criticism from the Washington-based lender comes as a June 30 deadline nears for the latest review of a $6.7 billion loan program. While the government has pledged to meet billions of debt obligations, payment risks are growing with Moody’s Investors Service this week saying Pakistan could default without an IMF program.

“It’s looking increasingly unlikely that Pakistan will secure IMF funding before the current program expires,” said Patrick Curran, a senior economist at Tellimer based in Portland, Maine. “A default is likely if Pakistan cannot quickly reach a new agreement with the IMF in the next few months.”

Bond Pressure

The country’s $1 billion bond due in April next year edged lower to about 55 cents on the dollar in Asian trading on Thursday, the lowest in almost two weeks. The South Asian nation faces about $23 billion of external debt payments for the fiscal year which starts in July.

Pakistani officials defended the budget, saying the government is seeking some respite to support the economic recovery.

“We don’t want to take any such step that drags us away from stabilization,” Junior Finance Minister Aisha Ghaus Pasha told reporters in Islamabad on Wednesday. “While remaining within stabilization mode, we seek a breathing space” to bolster economic growth, she said.

Aid has been on hold as the IMF seeks stronger fiscal policies, which are proving politically challenging with elections expected later this year. Meeting a financing gap of $2 billion and refining the exchange-rate policy are also among the biggest hurdles.

“This budget is clearly unacceptable to the IMF,” said Uzair Younus, a director of the Pakistan Initiative at the Atlantic Council’s South Asia Center. “Given political exigencies in Islamabad, it will be very difficult for the government to meet the IMF’s expectations with days to go before the program is over.”

(Updates with analysts comments. An earlier version of the story corrected the date of the IMF program expiration.)

Author: Faseeh Mangi and Karl Lester M. Yap