The Executive Board of the International Monetary Fund (IMF) has approved a three-year arrangement for Pakistan under the Poverty Reduction and Growth Facility (PRGF)1 totaling SDR 1.034 billion (about US$1.322 billion). As a result of today’s decision, Pakistan will be able to draw SDR 86.16 million (about US$109.6 million) under the arrangement.
Following the Board discussion on Pakistan, Eduardo Aninat, Deputy Managing Director and Acting Chairman, said:
“Over the last two years, Pakistan has established a record of sound macroeconomic management and timely implementation of structural reforms, as confirmed by the recent completion of a Stand-By Arrangement with the Fund. However, a move to higher sustainable growth and a better sharing of the fruits of growth remain essential to tackle Pakistan’s widespread poverty and weak social development indicators.
“The government, in broad consultation with local communities and other stakeholders, has prepared an Interim Poverty Reduction Strategy Paper (I-PRSP), which provides a sound basis for concessional assistance from the Fund and the World Bank. In preparing the full PRSP, the authorities will need to develop a more thorough costing of poverty alleviation and social programs, and a fuller articulation of strategies in key sectors, particularly for human development. Solid support by domestic stakeholders, clear allocation of responsibilities, a detailed devolution plan, accountability at all levels of the administration, and continued donor assistance will be key in achieving the strategy’s objectives.
“Under the PRGF-supported program and in line with the objectives stated in the I-PRSP, the government will implement an ambitious reform agenda aimed at raising growth and reducing poverty, while consolidating macroeconomic stability and external viability. The strategy centers on sustained fiscal adjustment supported by a major reform of tax administration and a widening of the tax net, while increasing public spending for poverty alleviation. A cautious monetary policy, under the floating exchange regime, will aim at keeping inflation below 5 percent and raising official reserves to three months of imports by the end of the three-year program.
“Medium-term fiscal consolidation, combined with significant external assistance, will allow a substantial reduction in the public debt as a share of GDP and free up resources for growth-enhancing and poverty-reducing expenditure. However, in order to achieve the targeted social outcomes, the government will need to complement higher resource mobilization with better prioritization of public expenditure allocation, so as to allow higher outlays on social sectors, especially health and education. Enhanced governance and transparency in public finances, particularly in the context of the devolution of responsibility for most social service delivery to local governments, will also be important.
“Over the program period, the government will pursue a broad agenda of restructuring and privatization of public enterprises, reducing the government’s role in agricultural marketing, ensuring that administered gas and electricity prices broadly reflect market conditions, deepening the liberalization of the financial sector, and integrating the kerb and interbank foreign exchange markets.
“Pakistan’s economic outlook is now clouded by considerable uncertainty in view of the impact of September 11 events and the ongoing slowdown in world demand, which adversely affect Pakistan’s prospects for growth, exports, and capital flows. Achieving the objectives of the program will be highly dependent on a rapid return to regional stability. At the same time, the international community has indicated its strong support for the reform program over the next three years, with exceptional financial assistance of about US$9.5 billion in form of bilateral support, including debt relief, and assistance from international financial institutions. In this connection, and in line with the Managing Director’s statement that the Fund is prepared to provide advice and additional support to members that adopt suitable policies, as part of a joint international effort to strengthen confidence in the global economy, we will keep under review Pakistan’s PRGF program and Fund support for it,” Mr. Aninat said.
Recent Economic Developments
In FY 2000/01, Pakistan’s performance under the Stand-By Arrangement (see Press Release No. 00/64) was generally good, despite a severe drought and weakening external conditions. While the economy grew by only about 2.7 percent in the period, manufacturing growth was strong, partly offsetting an estimated 3 percent decline in agricultural output. The fiscal deficit was held to the program target of 5.2 percent of GDP even though the improvement in tax revenue collection fell short of the program goal. A cautious monetary policy helped slow the 12-month rate of consumer price inflation to 2.5 percent by end-June 2001. The floating of the rupee led to an effective real depreciation in 2000/01 of 2.6 percent, which strengthened the competitiveness of Pakistan’s exporters amid weakening external demand. The current account deficit, excluding official transfers, declined to 3.3 percent of GDP, driven by strong export growth. Progress was made with a range of structural reforms during 2000/01, including in the areas of tax reform, fiscal management, restructuring of the enterprise and banking sectors, and governance, which strengthened the foundation for sustainable growth and poverty reduction.
Following the September 11 events, available data point to a deterioration of the real economy. In the period July-October 2001, sluggish export growth of 1.9 percent in U.S. dollar terms, compared to the same period a year earlier, reflects a slowdown in world demand, as well as a significant rise in freight and insurance costs. Cancellations of export orders since mid-September, especially from the United States, have affected export prospects and appear to have slowed investment and production. Imports dropped by 9.9 percent (in U.S. dollar terms) compared to the year-earlier period. Price developments through October have remained benign and the 12-month CPI inflation rate remained at 2.7 percent.
Preliminary indications are that the budget deficit for the quarter July-September 2001 was slightly higher than programmed, reflecting mainly shortfalls in non-tax revenue, and even though overall expenditure was on track. Tax collection in recent months has been negatively affected by the large decline in imports and higher-than-expected tax refunds to exporters, but was in line with program assumptions through October. Preliminary indications are that revenues in November were more adversely affected.
International reserves reached US$2.8 billion in early December, the highest level in a number of years. This reflects large disbursements of foreign grant assistance and repatriation of holdings abroad by Pakistani residents in recent months, allowing the State Bank of Pakistan (SBP) to step up, in October-November, its foreign exchange purchases on the interbank market.
The central goal of Pakistan’s PRGF-supported economic program is to gradually raise growth closer to a medium-term objective of at least 6 percent annually, while ensuring that the benefits of stronger growth are widely shared by the nation’s poor. Though global economic conditions raise significant uncertainties about Pakistan’s outlook, during the first year of the program (FY 2001/02), Pakistan is targeting a moderate increase in growth to 3.7 percent from 2.7 percent last year. Inflation is expected to be limited to 5 percent over the three-year the IMF-supported program.
Monetary policy is to remain geared to keeping inflation in check, while supporting the targets for international reserves. The exchange rate will continue to be fully flexible, and the SBP intends to proceed towards unification of the kerb and interbank foreign exchange markets. Fiscal adjustment, centered on strengthening revenue collection through tax and tax administration reforms, remains a pillar of the government’s macroeconomic adjustment efforts, and is key to Pakistan’s debt-reduction strategy.
Pakistan will need to mobilize large financial support from the international community to cover its external financing gap over the next three years, which has been substantially revised upward following the events of September 11. The expected support of around US$9.5 billion includes multilateral financing, grants and loans from bilateral donors, and debt rescheduling by bilateral creditors. A key objective of the authorities is to achieve sustainable external debt levels by the end of the three-year PRGF-supported program.
Pakistan’s I-PRSP, which was endorsed by the World Bank and IMF Executive Boards on December 4, 2001, and December 6, 2001, respectively, sets out the main elements of the authorities’ approach over the next three years to broader structural reform and poverty reduction. The I-PRSP, which has been published on the Government of Pakistan’s website, outlines a range of measures designed to improve access to basic social services such as primary education and preventive health care, along with steps aimed at increasing efficient delivery of public services and addressing governance issues. The I-PRSP is the result of a consultative process that has involved district and provincial governments, civil society organizations and bilateral and multilateral development agencies.
As part of the poverty reduction effort, the authorities envisage a range of structural reform measures to enhance growth and poverty-reducing outlays, along with steps to address governance issues that present obstacles to higher growth and better social services. Under the PRGF-supported program, the focus will be on improving monitoring and transparency in public finances; the reform of tax policy and tax administration; public enterprise restructuring and privatization; and financial sector and foreign exchange market reforms.
Pakistan joined the IMF on July 11, 1950. Its quota2 is SDR 1.0337 billion (about US$1.305 billion), and its outstanding use of IMF resources totaled SDR1.383 billion (about US$1.768 billion) as of end-October 2001.
|(Annual changes in percent)|
|Output and prices|
|Real GDP at factor costs||4.2||3.9||2.7||3.7||5.0||5.2|
|Real GDP at market prices||3.7||4.4||3.4||3.9||5.0||5.2|
|Partner country demand||2.7||4.0||3.2||2.0||2.9||3.8|
|Consumer prices (p.a.)||5.7||3.6||4.4||5.0||5.0||5.0|
|Consumer prices (e.o.p.)||3.7||5.1||2.5||5.9||…||…|
|Rupees per U.S. dollar (p.a.)||17.0||3.0||12.8||11.3||…||…|
|(In percent of GDP)|
|Savings and investment|
|Gross national savings||11.9||13.5||12.8||14.6||14.7||15.5|
|Gross capital formation||15.6||15.6||14.7||15.2||16.2||16.8|
|(In percent of GDP)|
|Budgetary revenue (excluding grants)||16.2||16.5||15.7||16.5||17.3||17.6|
|Budgetary balance (excluding grants)||-6.0||-6.5||-5.2||-5.3||-4.1||-3.2|
|Net public debt||91.6||89.4||95.4||92.4||87.9||84.6|
|Net domestic public debt||40.3||40.8||39.0||36.0||32.7||29.4|
|Implicit interest rate on public debt (percent) 2/||8.9||9.0||8.2||7.8||7.6||7.5|
|(Annual changes in percent of initial stock of broad money)|
|Net foreign assets||1.6||2.0||5.2||2.6||…||…|
|Net domestic assets||4.5||7.4||3.7||6.5||…||…|
|Of which: credit to the private sector||8.5||1.4||3.4||7.7||…||…|
|Of which: net credit to government||-3.8||6.1||-3.4||-2.8||…||…|
|Six-month treasury bill rate (in percent, p.a.)||13.1||8.6||10.4||…||…||…|
|(In percent of GDP)|
|Merchandise trade balance||-3.6||-2.3||-2.1||-2.2||-2.1||-1.7|
|Current account excluding official transfers||-4.6||-3.6||-3.3||-3.6||-3.1||-2.6|
|Current account including official transfers||-3.6||-2.1||-1.9||-0.6||-1.5||-1.3|
|(In percent of exports of goods and services)|
|External public and publicly guaranteed debt||331.6||310.7||319.8||324.0||317.2||304.5|
|Debt service 3/||41.2||38.4||32.1||32.0||28.1||25.8|
|Implicit interest rate (in percent) 4/||3.7||4.2||3.9||3.8||3.5||3.5|
|Gross reserves (in millions of U.S. dollars) 5/||1,672||908||1,681||2,385||3,029||3,895|
|In weeks of next years’ imports of goods and services||7.7||3.9||7.2||9.7||11.6||14.3|
|In percent of short-term external debt 6/||35.2||19.2||63.8||75.1||96.2||130.2|
|ICOR, three-year moving average||4.5||4.7||4.6||4.3||3.4||3.1|
|Real effective exchange rate (percentage change)||-9.1||-0.6||-2.6||-6.1||-3.2||-2.1|
|Terms of trade (in percentage change)||4.1||-9.2||-1.6||-1.0||2.5||4.2|
|Real per-capita GDP (in percentage change)||1.3||2.1||1.1||1.6||2.7||2.9|
|GDP at market prices (in billions of Pakistani rupees)||2,938||3,183||3,472||3,788||4,179||4,623|
PRGF loans carry an annual interest of 0.5 percent, and are repayable over 10 years with a 5 ½ year grace period on principal payments.
A member’s quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.