Pakistan to reduce cabinet, but sales tax still opposed

Pakistan's ruling party decided on Friday to dissolve the cabinet, a party official said, a concession to the opposition unlikely to help win its support for wholesale economic reform as demand by the IMF.

The main opposition party, the Pakistan Muslim League-Nawaz(PML-N) faction, has demanded a smaller cabinet as part of a 10-point economic agenda accepted by the ruling Pakistan People's Party (PPP) in early January.

But the faction continues to oppose plans to impose are formed general sales tax (RGST) -- a key condition of the International Monetary Fund for continued financial aid.

"President Asif Ali Zardari has given the authority to Prime Minister Yusuf Raza Gilani ... to dissolve the cabinet whenever he wants," PPP Secretary General Jehangir Bader told reporters after the meeting of the party's central executive committee.

"All the ministers have submitted their resignations to the president." He did not say when Gilani would act.

Political stability in Pakistan, a vital U.S. ally, is crucial to the war effort in neighbouring Afghanistan and to combating militancy in northwest Pakistan's ethnic Pashtun lands along the Afghan border.

Pakistan's already feeble economy was battered by devastating floods last year that inflicted nearly $10 billion in damage. Foreign aid has been slow in coming, in part because of concern about the government's ability and willingness to implement financial reform.

Pakistan's main financial problem is a chronic lack of tax revenue. The country taxes only about 10 percent of its economy, one of the lowest tax-to-GDP ratios in the world.

The IMF says widening the tax base and implementing the RGST is key for securing the next tranche of an $11 billion emergency loan, which has propped up Pakistan's economy since 2008.

"The government thinks that if they demonstrate that they are reducing expenditure (by reducing the cabinet) they can mobilise support for the (RGST)," said Hasan Askari Rizvi, an independent political analyst.

But the PML-N says Gilani is making too many concession to international donors. Despite the planned cabinet reduction, the prospects of passing the RGST seems more remote than ever.

The PML-N has also demanded a 30 percent cut in spending, the removal of corrupt officials and a plan to control inflation.

Gilani is likely to reduce his cabinet of 52

ministers, one of the largest in the world, to between 20 and 30, a senior party official said. Most of the shed portfolios will devolve to Pakistan's four provinces under a recently passed constitutional amendment.

(Additional reporting by Mubashir Bokhari in Lahore, and Augustine Anthony and Rebecca Conway in Islamabad; Editing by Nick Macfie)