June 7 (Reuters) – Wedged in by IMF demands for fiscal austerity, Pakistan’s unpopular civilian government has presented a budget that may fail to please both voters hit by tax hikes and investors wary about its optimistic economic forecasts.

Saturday’s budget underscores how hard it will be for the government to appease frustrated Pakistanis hit by food inflation, unemployment and tax hikes seen as helping fuel an Islamist insurgency and discrediting civilian authorities.

The government’s predictions for a lower budget deficit of 4 percent of GDP may also be simply too ambitious, putting off hard decisions on spending and revenues for later, as well as almost guaranteeing a continued unpopular IMF bailout. [ID:nLDE654057]

“To be honest, I think this government is surviving not so much because of its popularity but more so by default, ” said Rashid Rehman, editor of the Daily Times newspaper.

“The government’s hands are tied and one must not forget, given the fact that we’re in the IMF programme, that there is little fiscal space for the government to manoeuvre. It’s in survival mode.”

President Asif Ali Zardari’s Pakistan People’s Party formed a coalition government after defeating former President Pervez Musharraf’s supporters in a 2008 election, but an economic downturn and political infighting quickly made it unpopular.

On the brink of default, Pakistan turned to the IMF in November 2008 for a $10.66 billion loan package to help put its economy back on track. It received the fifth tranche of $1.13 billion last month.

The budget raised taxes on sectors such as capital gains, increased a sales tax and slashed some subsidies on energy and food, while trying to provide some social relief for the roughly third of the 170 million population that lives in poverty.

“The government now has very few levers to provide relief,” said Asad Sayeed, director at Collective for Social Science Research.

BETWEEN A HARD ROCK AND A STONE

Key to meeting IMF conditions is cutting the deficit, targeted at 5.1 percent this year and seen as posing a serious inflation risk and hurting the economy just as it tentatively recovers from its lowest growth rate in decades.

“The tax collection target is grossly over-ambitious,” said Ashfaque Hasan Khan, dean of Islamabad’s NUST Business School.

Pakistan’s tax-to-GDP ratio which is around 9.5 percent, is one of the lowest in the world.

“A country like Pakistan, where fiscal indiscipline is all around, then it should be in an IMF programme to learn discipline,” he said, adding the government would have to go back to the IMF for more money this year.

But continued IMF assistance could become politically unpopular if it is associated with austerity and may fuel further resentment in Pakistan against perceived Western meddling.

“People here sometimes portray the IMF as if its holding a baseball bat and making the country do whatever it wants,” Finance Minister Abdul Hafeez Shaikh told reporters.

Meanwhile, the government raised defence spending by 17 percent, a sign of the military’s influence in politics.

Commentators questioned why an increase was needed, given the army’s battle against militants in the northwest was mostly funded by the United States.

The country’s main stock exchange was unfazed by the budget as analysts said all the measures had been priced in and there were no surprises and the uncertainty was over.

The KSE-index rose 1.6 percent on Monday, even as most other Asian markets fell.

The government has targeted 1.778 billion rupees in tax revenue, which is almost 21 percent higher than the current fiscal year’s target, one that is likely to be unmet as well.

Pakistan collected 1.026 billion rupees in the first ten months of the 2009/10 fiscal year.

Pakistan is also aiming to generate more than 51 billion rupees, which would be 0.3 percent of GDP, from an auction of 3G spectrum licences that analysts said was unlikely to materialise.

The inflation target of 9.5 percent for fiscal year 2010/11 was unlikely to be met if there were slippages in the fiscal target, analysts said.

“Considering we will probably not meet the tax collection target for the current fiscal year, we will definitely see fiscal slippages in the next fiscal year,” said Asif Qureshi, director at Invisor Securities Ltd. (Additional reporting by Kamran Haider; Editing by Alistair Scrutton and Alex Richardson)