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Pakistan: Twelfth and Final Review Under the Extended Arrangement, Request for Waivers of Nonobservance of Performance Criteria, and Proposal for Post-Program Monitoring

Author(s):
International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
October 2016
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Progress Under the Eff-Supported Program and Challenges Ahead

1. Macroeconomic resilience has improved and short-term vulnerabilities have declined under the program, supported by policy discipline and the pronounced decline in oil prices. Since the start of the program in September 2013, economic growth has gradually increased, inflation has declined, and external buffers have been bolstered, supported by the authorities’ policies and the benefits of lower oil prices. Moreover, the fiscal deficit has been reduced, while social safety nets have strengthened, supporting the poor. However, public debt remains high and further fiscal consolidation is needed to reduce fiscal vulnerabilities. International reserves, while having tripled over the program period to cover 4.2 months of imports, have not yet reached comfortable levels (76 percent of the ARA metric).2 In addition, pronounced real appreciation of the rupee over the program period, despite the SBP’s significant purchases in the foreign exchange market to rebuild external buffers, has negatively affected trade competitiveness. Further accumulating foreign exchange reserves is needed to bolster external buffers, strengthen investor confidence, and support private sector-led growth.

Pakistan: Macroeconomic Performance under the Three-year EFF Program
FY2012/13FY2015/16
Real Sector
Real GDP growth
3.74.7
CPI inflation (annual average)
7.42.9
Fiscal
Overall fiscal balance (excluding grants, percent of GDP)
−8.5−4.6
Structural primary balance (percent of GDP)
−4.50.4
Public debt (percent of GDP)
62.364.8
Tax-to-GDP
10.012.4
Energy subsidies (percent of GDP)
2.00.6
Social Spending under BISP (per beneficiary per quarter, in rupees)
3,0004,700
Coverage of BISP (million beneficiaries)
3.785.36
BOP and Exchange rate
Exports (y-o-y growth)
0.4−8.6
GIR ($U.S. billions)
6.018.1
NIR($U.S. billions)
−2.47.5
REER (2000=100)
100.7118.3
Monetary
Private sector credit (y-o-y growth)
−0.611.1
Change in borrowing from the SBP (percent of reserve money)
23.2−16.3
Financial
Capital Adequacy Ratio
15.516.1
Non-performing Loans to gross loans
14.811.1

Program Achievements

(FY2015/16)

Source: Pakistani authorities; IMF staff calculations

2. Inflation has declined, the monetary policy framework has been strengthened, and some progress has been made in strengthening the State Bank of Pakistan’s (SBP’s) autonomy. Headline inflation declined to 2.9 percent (on average) in FY 2015/16, from about 7½ percent in FY 2012/13, reflecting lower food and fuel prices, a prudent monetary policy stance, and reduced budget financing by the SBP. Furthermore, the authorities amended the SBP law, introduced a number of administrative measures to increase the SBP’s autonomy, put in place an independent monetary policy committee, and improved the interest rate corridor and the SBP’s internal operations. However, a number of important recommendations from the 2013 Safeguard Assessment remain to be addressed to further strengthen the SBP’s autonomy (¶22).

3. The authorities achieved sizeable fiscal consolidation on the back of tax and energy subsidy reforms, while increasing priority social and capital spending. The overall budget deficit (excluding foreign grants) narrowed by 3.9 percent of GDP under the three-year program and the structural primary balance turned into surplus, bolstering macroeconomic resilience.3 The tax-to-GDP ratio increased by nearly 2½ percentage points of GDP owing to a significant reduction in tax concessions and exemptions, increased withholding taxes on nonfilers of income tax returns, and improvements in tax compliance and enforcement. Moreover, the administrative authority to grant new tax concessions was markedly restricted. In parallel, energy subsidies were reduced by about 1½ percent of GDP, while capital expenditure increased by about 0.5 percent of GDP, and targeted cash transfers to the poor under the Benazir Income Support Program (BISP) were increased by about 0.1 percent of GDP.

Headline and Cyclically Adjusted Fiscal Balances

(Excluding grants, in percent of GDP)

Sources: Ministry of Finance; Federal Board of Revenue; State Bank of Pakistan; and IMF staff calculations.

4. However public debt has remained high and further fiscal consolidation is needed to ensure medium-term sustainability. Public debt increased by about 2½ percent of GDP over the course of the program and remains high at about 65 percent of GDP (430 percent of revenue) as of end-June 2016, well above the emerging market average.4 Pakistan’s tax-to-GDP ratio remains below comparator emerging market countries, and advancing reforms of tax policy and administration is needed to mobilize additional revenues to support fiscal consolidation and create fiscal space for growth-supporting priority spending. Furthermore, prudently managing current nonpriority public expenditures would be important to support medium-term fiscal consolidation. The FY 2016/17 budget and recent amendments to the Fiscal Responsibility and Debt Limitation (FRDL) Act strengthen the anchor for near- and medium-term fiscal policy and can support fiscal consolidation efforts.

5. The stability and resilience of the financial sector are being reinforced. The performance of the banking sector improved, as reflected in higher profitability, strengthened liquidity indicators, robust capital adequacy, and declining (though still substantial) nonperforming loans (NPLs). The Deposition Protection Corporation Act to establish deposit insurance has been enacted (August 2016, SB), steps have been taken to strengthen the framework for NPL recovery, and the regulatory and supervisory framework is being reinforced, including through phased implementation of Basel III standards. Next steps in the reform agenda include finalizing the introduction of the deposit insurance scheme, ensuring that all banks are in compliance with regulatory requirements, and addressing the still high level of NPLs (¶¶ 23–25).5

6. Key structural weaknesses are being tackled, and reforms will need to continue after the program ends. The implementation of growth-supporting structural reforms has advanced, albeit with some delays. Continuing these reforms beyond the end of the program—notably in the energy sector, business climate and PSEs reform—will be key to foster higher and more inclusive medium-term growth and limit fiscal risks.

  • Power sector. Widespread electricity outages, while still present, were gradually reduced through improved supply and demand management, and untargeted subsidies were lowered. The accumulation of arrears was significantly reduced (though a substantial stock of arrears still remains), helped by lower oil prices, improved performance of distribution companies (DISCOs), tariff rationalization, and the introduction of surcharges. However, additional efforts are needed to further reduce the accumulation of arrears and address the outstanding stock.

  • Gas sector. Gas shortages were reduced through supply and demand measures. Supply was increased through better incentives to domestic producers and Liquefied Natural Gas (LNG) imports, tariffs were rationalized to bring them closer to cost recovery and strengthen demand management, the regulatory framework was improved, and legislation to tackle gas theft was strengthened. However, further efforts are needed to address the still high gas system losses.

  • Restructuring and privatization of PSEs. Several capital market transactions, one strategic sale, and the corporatization of Pakistan International Airlines (PIA) have been completed, and significant preparatory work toward restructuring and seeking strategic private sector participation for a number of PSEs has been conducted. However, following labor tensions and political opposition, the authorities revisited in early 2016 their strategy for PSE reform, scaling back planned privatization transactions while continuing to seek private sector participation and implementing measures to contain PSE financial losses. Further efforts at restructuring and/or divesting PSEs are needed, as a number of them remain loss-making, absorbing scarce fiscal resources and imposing fiscal risks while operating inefficiently.

  • Business climate, governance and simplifying the trade regime. After Pakistan slipped in the 2016 Doing Business ranking, a new comprehensive country-wide strategy to improve the business climate was developed in early 2016 and is now being implemented (Box 1). Furthermore, import tariff slabs were reduced to simplify the trade regime. Sustained efforts will be needed to improve the business climate, which will be important to promote competitiveness and attract private investment. The AML/CFT framework has been strengthened but requires further enhancement.

7. With the program coming to an end, significant challenges remain and continued commitment to strong policies and reforms is pivotal. Exports are small in relation to GDP and have been declining; private investment (including foreign direct investment) is too low to support higher growth; public debt is still too high; fiscal revenue, while having increased significantly, remains insufficient to support needed spending on public investment, health and education; and international reserves, despite having tripled over the course of the program, remain below comfortable levels. Unemployment remains relatively high at 6 percent (10½ percent among the youth and 9½ percent among women), the informal economy remains large, 30 percent of the population lives below the poverty line, and income and gender inequality are significant (Box 2). Reinforcing macroeconomic resilience and a strong structural reform drive will be important to make further inroads in addressing these challenges.

Pakistan Relative to Emerging Market Economies

(In percent of GDP, unless otherwise indicated)

Sources: IMF WEO Database, and SPR VEE Database.

Performance Under the Twelfth Review

8. Program performance at end-June 2016 has been satisfactory with most performance criteria, all indicative targets, and most structural benchmarks met.

  • Fiscal performance was broadly in line with the program targets at end-June 2016, although the deficit was higher than programmed. The performance criterion (PC) on the general government budget deficit (excluding foreign grants) was missed by PRs 57 billion (0.2 percent of GDP), due to higher-than-expected expenditures at the provincial level, while the federal government compensated for a shortfall in nontax revenue by rationalizing expenditure. Tax revenue grew by more than 20 percent and the Federal Board of Revenue (FBR) met the indicative target (IT) on tax collections with a small margin. The IT on targeted cash transfers through the Benazir Income Support Program (BISP) was met with a significant margin, reflecting higher stipends and further expansion of coverage. The IT on the accumulation of power sector arrears was met with a large margin (achieving a net reduction in outstanding payables) owing to favorable oil prices and the authorities’ continued efforts to improve DISCOs’ performance.

  • Monetary performance was satisfactory in the fourth quarter of FY 2015/16. The end-June PC on net international reserves (NIR) was met by a large margin, supported by the SBP’s stepped-up spot purchases of US$1.4 billion. The SBP’s net short position of swap/forward contracts remained within the program’s bounds. Government borrowing from the SBP remained below the end-June 2016 ceiling by PRs 388 billion as the government continued to build financing buffers. However, the end-June PC on Net Domestic Assets (NDA) was missed by a small margin of PRs 6 billion (0.2 percent of NDA) due to higher-than-expected demand for currency, mostly driven by the financial transactions tax on nonfilers of income tax returns and strong precautionary demand for liquidity in advance of the Eid holidays in early July.

  • Progress with structural reforms was satisfactory with three out of four structural benchmarks (SBs) met. The Deposit Protection Corporation Act to establish a deposit insurance was enacted (end-August 2016 SB). The authorities solicited expressions of interest for the divestment of Kot Addu Power Company (KAPCO), a major power generation company (July 15, 2016 SB). They also updated their plan to further limit the accumulation of new payables and gradually eliminate the outstanding stock of payables arrears in the power sector (July 15, 2016 SB). However, the notification of multi-year tariffs for three distribution companies (FESCO, LESCO and IESCO) was further delayed due to an ongoing dispute with the regulator over benchmark distribution losses and collection targets used in the determination of the FY 2015/16 tariff (missed end-July 15, 2016 SB; ¶30).

Figure 1.Pakistan: Structural Reforms under the Three-Year EFF Program

Sources: Pakistani authorities; and IMF staff calculations.

9. The authorities have agreed to implement corrective measures for the two missed end-June PCs and request waivers of nonobservance on this basis. The authorities will contain public expenditures by an additional 0.3 percent of GDP in order to achieve the agreed FY 2016/17 fiscal target (¶13) and will use the meetings of the Fiscal Coordination Committee (FCC) to monitor budget implementation at the federal and provincial levels, to achieve the government’s fiscal targets (¶15). Furthermore, the authorities committed to bring the stock of NDA of the SBP below PRs 3,100 billion by end-August 2016 to address the small overrun relative to the end-June PC and ensure an appropriate pace of monetary expansion (prior action). This prior action was met with a considerable margin of PRs 288 billion.

Outlook and Risks

10. The economic recovery will likely continue to strengthen on the back of improved macroeconomic stability. Despite a weak cotton harvest and a continued decline in exports, growth is estimated at 4.7 percent in FY 2015/16, supported by buoyant construction activity and healthy expansion of the service sector. Strengthening domestic demand is also indicated by rising domestic machinery imports. Pakistan has been benefitting from lagged effects of the pronounced fall in oil prices and a marked reduction in domestic interest rates, which has been accompanied by strengthened private sector credit growth. Growth will likely increase moderately to 5 percent in FY 2016/17, also supported by an investment upturn related to the China Pakistan Economic Corridor (CPEC). After declining to 2.9 percent (on average) during the last fiscal year, headline inflation is expected to remain contained at 5.2 percent in FY 2016/17, well-anchored by prudent monetary policy.

Credit to the Private Sector and Economic Activity

(In y-o-y percent change)

Exports, Cotton Production and Manufacturing

(In y-o-y percent change)

Machinery Imports and Domestic Cement Despatches

(In y-o-y percent change)

Oil Price and Hours of Electricity Load Shedding

(In hours per day, quarterly average)

Sources: Pakistani authorities; Bloomberg; and IMF staff calculations.

1/ Simple average of three spot prices: Brent, WTI, and Dubai oil prices; US$ per barrel.

11. Despite an expected widening of the current account deficit, international reserves will likely strengthen further. The current account deficit remained contained at 0.9 percent of GDP in FY 2015/16. Pakistan’s exports fell by 8.6 percent (y-o-y), reflecting lower international prices of cotton and rice, a weak business climate, and competitiveness losses from an appreciating real exchange rate. However, low oil prices and still robust remittances from the Gulf Cooperation Council (GCC) countries have offset declining exports.6 Foreign reserves increased to about 4.2 months of imports (76 percent of the ARA metric) at end-June 2016, also reflecting SBP’s increased spot purchases. The partial recovery in oil prices, higher CPEC-related imports and an expected slowdown in remittances growth will likely widen the current account deficit to about 1.5 percent of GDP in FY 2016/17. However, increased mobilization of external financing from international markets and the SBP’s continued foreign exchange purchases will likely allow for further foreign reserves accumulation (to about 4.5 months of imports).

Contribution to CPI Inflation

(In y-o-y precent change)

Sources: SBP; and IMF staff calculations.

Reserve Accumulation

(In billions of U.S. dollars)

Sources: Pakistani authorities; and IMF staff calculations.

12. Risks to the outlook are tilted to the downside. Lower growth in advanced countries, such as in the UK and possibly the EU owing to the prospective Brexit, and in emerging market economies (including China and GCC) could weaken exports, remittances and FDI. Continued appreciation of the real effective exchange rate, in the context of an appreciating U.S. dollar vis-a-vis the pound and euro, would further erode export competitiveness and affect remittances. Tighter global financial conditions could have an adverse impact on capital inflows. By contrast, lower oil prices and a slower pace of increase in international interest rates, owing to the impact of Brexit on advanced economy growth, would be beneficial for Pakistan’s external position and growth. Medium-to long-term risks could arise from CPEC-related repayment obligations and profit repatriation (Box 3); lower remittances if the slowdown in the GCC lasts longer than expected; and a more pronounced recovery of oil prices. Domestically, policy slippages, further delays in restructuring or privatizing PSEs, ongoing legal challenges to electricity surcharges and revenue measures, political uncertainty, and the still difficult security conditions could affect economic activity and undermine fiscal consolidation.

Policy Discussions

Discussions focused on preserving hard-won macroeconomic stability gains and advancing growth-supporting structural reforms beyond the end of the program. Continuing to pursue gradual fiscal consolidation, bolstering external buffers within the context of adequate exchange rate flexibility, maintaining a prudent monetary policy stance, and strengthening the resilience of the financial sector will be key to preserve macroeconomic stability. Furthermore, moving ahead with structural reforms, especially restructuring and privatizing PSEs and the energy sector and business climate reforms will be key to foster higher and more inclusive growth.

A. Fiscal Policy

13. Fiscal consolidation needs to stay the course. The authorities remain committed to fiscal consolidation beyond the program horizon and to their budget deficit target of 3.8 percent of GDP (excluding foreign grants) in FY 2016/17, based on continued gradual consolidation both at the federal and provincial levels. The composition of fiscal adjustment is designed to boost tax revenue by ½ percent of GDP (to about 13 percent of GDP) and further rationalize noncritical current expenditures (by 0.1 percent of GDP), while creating room for an increase of 0.2 percent of GDP in development spending. In response to the latest projections which indicate a shortfall of about PRs 100 billion (or 0.3 percent of GDP) in the combined collection of the Gas Infrastructure Development Cess (GIDC) and federal nontax revenue relative to budgeted amounts, the authorities have agreed to cut nonpriority expenditures to maintain the planned fiscal stance (LOI, ¶7), while continuing to target an increase in capital expenditure from last year’s level. Staff noted that the provinces’ contribution to the targeted fiscal deficit could again fall short of expectations, and that there was a significant statistical discrepancy in the fiscal accounts (amounting to 0.7 percent of GDP in FY 2015/16), which, if reversed, could entail pressure on this year’s deficit. The authorities agreed to manage spending prudently, coordinating closely with the provinces, to ensure the achievement of both revenue and deficit targets. They also requested IMF technical assistance to further strengthen their fiscal accounting.

14. Revenue mobilization and improving the composition of spending are central pillars in the fiscal strategy. The authorities plan to accelerate the implementation of administrative reforms and policy measures aimed at broadening the tax base and modernizing the tax system, refrain from granting concessions, exemptions, and any form of amnesty, and reduce the outstanding stock of tax refund claims to a level consistent with no more than a three-month flow.7 Staff pointed out that going forward, containing the wage bill growth, untargeted subsidies, and non-priority transfers will also be necessary to facilitate the targeted shift in the composition of expenditures towards social and capital spending across all tiers of the government.

15. Staff stressed that strengthening intergovernmental fiscal policy coordination is needed to support macroeconomic stability beyond the program. Given the extent of devolution in revenue and expenditure assignments, staff stressed the need to strengthen fiscal policy coordination across all layers of the government. To this end, the newly established FCC, comprising the provincial and federal finance secretaries, will continue to hold quarterly meetings to synchronize policy guidance and monitor budget implementation to achieve the government’s fiscal targets. Furthermore, staff recommended rebalancing revenue and expenditure responsibilities between the federal and provincial governments and bring underdeveloped tax bases that are under the purview of provincial governments, such as agriculture, services, and property, more effectively into the tax base.8 This would entail modernizing agriculture taxation by introducing a presumptive income tax, improving property tax collection by developing electronic fiscal cadasters and strengthening property valuation at the provincial level, and improve sales tax collection on services.

16. The revised fiscal responsibility framework will be key to ensure that medium-term fiscal policy is well-anchored. Recent amendments to the FRDL Act provide better operational guidance for fiscal policymaking and safeguard debt sustainability over the medium term by imposing a limit on the federal government budget deficit of 4 percent of GDP excluding foreign grants for FY 2017/18–FY 2019/20, and 3½ percent of GDP thereafter; and maintaining a limit of 60 percent of GDP on the general government debt until FY 2017/18, and adopting a 15-year transition path toward 50 percent of GDP. With these targets, fiscal policy will be anchored at a prudent stance, leading to additional gradual consolidation and strengthening long-term debt sustainability. Staff called for further strengthening the medium-term fiscal framework by improving the compilation of fiscal accounts in line with international standards, introducing an expenditure rule to avoid pro-cyclical fiscal policy, and strengthening the budget preparation and approval process in support of fiscal discipline. Staff also reiterated the importance of an independent fiscal council to enhance transparency and accountability.

17. The forthcoming public-private partnership (PPP) law can support investment and provide for appropriate management of associated fiscal risks. The draft PPP law that is under discussion at the National Assembly makes PPPs a part of the overall budget process and medium-term planning exercise and gives the Ministry of Finance an explicit role as gatekeeper in all stages of PPP projects. While the law provides the overall legal framework to manage fiscal risks originating from PPPs, staff stressed the need to develop strong secondary legislation. In this context, staff highlighted that in order to contain fiscal risks it would be important to conduct a detailed feasibility study and value-for-money analysis for PPPs, strengthen the risk management system, bring all PPPs’ contracting agencies into the regular coverage of fiscal accounts and debt statistics, establish a public register of PPP projects, and publish data on all PPP commitments to safeguard transparency and accountability.

18. Further strengthening public debt management remains a priority. The authorities are committed to continue improving the effectiveness of the Debt Policy Coordination Office (DPCO) by enhancing its staffing capacity. They adopted a medium-term debt management strategy in March 2016 with target ranges for currency, refinancing, and interest rate risk. In FY 2016/17, they are envisaging to continue borrowing from external sources, including development partners and capital markets. Over the medium term, the authorities are planning a gradual reduction in external borrowing while containing the share of short-term debt. The domestic borrowing strategy is focused on lengthening the average maturity and reducing spikes in the maturity profile. Staff underscored that, despite having declined over the program period, the share of short-term debt is still elevated and reliance on short-term financing remains a vulnerability. Staff welcomed the authorities’ commitment to continue diversifying domestic and external financing sources, further lengthening the maturity profile, and reducing rollover risks to reduce debt-related vulnerabilities.

19. Further expanding the coverage of BISP while strengthening its targeting and efficiency will be important to protect the most vulnerable and reduce poverty. The coverage of unconditional cash transfers (UCTs) has expanded markedly during the IMF-supported program, reaching 5.36 million beneficiaries at end-June 2016 (from 3.78 million beneficiaries in FY 2012/13) and stipends have been increased by more than 60 percent. The coverage of education-conditional cash transfers (CCTs) has also continued to expand, reaching 1.3 million children. Staff welcomed the authorities’ plans to further expand the coverage of the UCT and CCT programs and to further strengthen the program’s targeting and efficiency (LOI ¶13).

B. Monetary and Exchange Rate Policies

20. Staff welcomed the authorities’ continued commitment to strengthen external buffers. The authorities are committed to further accumulating international reserves through the SBP’s spot purchases and continuing to take advantage of still favorable oil prices. Staff emphasized that, in parallel, greater downward exchange rate flexibility would contribute to strengthening external buffers and supporting competitiveness, which has been affected by significant real effective exchange rate appreciation (about 17.5 percent over the three-year program period).

Nominal and Real Effective Exchange Rate

(Indices, 2010=100)

Sources: Pakistani authorities; and IMF staff calculations.

21. The monetary policy stance needs to remain prudent to keep inflation well-anchored and preserve macroeconomic stability. Following the accommodative policy rate cut in May 2016 (by 25 bps), the SBP should be prepared to tighten in case inflationary pressures intensify, and continue maintaining clearly positive real interest rates. Moving forward, higher foreign reserve accumulation and the normalization of deposit growth (following a decline linked to last year’s introduction of a financial transactions tax for nonfilers of income tax returns) would reduce the need for ongoing SBP’s liquidity injections. Staff also emphasized that the stock of government borrowing from the SBP should continue to be contained and kept in line with recently achieved prudent levels.

22. Staff stressed the need to further strengthen central bank autonomy. In August 2016, the SBP developed a time-bound legislative action plan to address remaining recommendations of the 2013 Safeguards Assessment. Staff stressed that the proposed amendments to the SBP law represent good progress towards clarifying the SBP’s objectives, enhancing its financial autonomy, and limiting its scope for providing credit to the government, but several recommendations—in the areas of institutional autonomy, governance, and personal autonomy of SBP board members—are not addressed in the action plan. Staff encouraged the authorities to pursue more ambitious reforms in line with recent technical assistance and to move swiftly with implementation.

C. Financial Sector Issues

23. While the banking system continues to be profitable and well-capitalized, efforts are under way to strengthen the capitalization of some small banks. The SBP is actively engaging with three small undercapitalized banks to bring them into regulatory compliance by end-2016. To this end, one bank has received a partial capital injection and is in the process of raising additional equity, a second, publicly-owned, bank is in the divestment process, and a third bank is seeking to merge with a larger peer. Staff stressed the need for the SBP to continue engaging closely with affected banks to ensure their regulatory compliance.

24. Advancing financial sector reforms is needed to further strengthen resilience and enhance financial deepening. Following the enactment of the Deposit Protection Corporation Act, the authorities plan to make the new deposit insurance operational by end-2016, which will help enhance the stability of the banking system. Furthermore, continuing to strengthen the legal and regulatory framework for the financial sector, including with the phased implementation of Basel III capital and liquidity requirements by 2019, strengthening the supervision of systemically important banks, and developing consolidated banking supervision will be important.9 Staff stressed that the Pakistan Development Fund—a state-owned development bank for which the authorities are aiming to mobilize the participation of international development partners—should operate on a commercial basis and have a strong governance framework to mitigate financial risks and avoid quasi-fiscal activities.

25. Addressing the still high level of NPLs can help support banks’ credit to the economy and private sector-led growth. Enhancing the debt enforcement regime, developing an appropriate insolvency framework, and continuing to strengthen the market infrastructure for distressed debt are needed for more efficient NPL resolution. In this context, staff welcomed the enactment of the Corporate Restructuring Companies (CRC) Act and the amendments to the Financial Institutions (Recovery of Finances) Ordinance, which strengthen the NPL recovery and resolution framework and will support the provision of credit to the economy. Staff also stressed that moving ahead with the adoption of an appropriate Corporate Rehabilitation Act would be important to strengthen the bankruptcy framework.

26. Further enhancing the effectiveness of the anti-money laundering and combating the financing of terrorism (AML/CFT) framework will be important. Following the amendments to the AML Act to subject the proceeds of serious tax crimes (including income tax) to AML legislation, staff welcomed the authorities’ commitment to put in place implementation measures that will bolster the reporting of suspicious transactions related to tax evasion and enhance the cooperation between the Financial Monitoring Unit and the FBR to address tax evasion. Staff stressed the importance of strengthening the effectiveness of the AML/CFT framework in line with international standards, including by tackling the proceeds of corruption and strengthening the effective implementation of the relevant United Nations Security Council Resolutions related to terrorism and terrorist financing.

D. Structural Issues

Public Sector Enterprises

27. Staff stressed that restructuring and attracting private sector participation in ailing PSEs will be important to restore their financial viability and reduce fiscal costs. While planned privatization transactions had been scaled back in early 2016 owing to political opposition and widespread strikes, the authorities reiterated their commitment to attract private sector participation in PSEs while continuing, in parallel, to contain their financial losses. Staff welcomed the authorities’ commitment to advance their reform agenda (LOI, ¶21):

  • Pakistan International Airlines (PIA). While legislation requires the government to maintain a majority of shares and management control, the authorities are committed to attract private sector participation in the company and finalize the transaction structure for a minority sale by end-2016. In parallel, measures to reduce PIA’s financial and operating costs will continue to be implemented.

  • Pakistan Steel Mill (PSM). Following inconclusive discussions with a provincial government over a transfer of ownership, the authorities resumed, in July 2016, the privatization process for PSM and aim to conclude the bidding process by end-June 2017. In parallel, the authorities will continue to implement measures to limit PSM’s financial losses.

  • Pakistan Railways. Staff welcomed further improvements in the company’s revenue performance and the authorities’ commitment to move forward with the restructuring plan.

  • Energy sector. The authorities have solicited expressions of interest for the divestment of KAPCO, a major generation company (July 15, 2016 SB) and plan to finalize the transaction by March 2017. Furthermore, preparatory work has started to conduct an Initial Public Offering (IPO) for FESCO by February 2017, to be followed by IPOs for IESCO and LESCO by the end of FY 2016/17. The authorities expressed their commitment to seek strategic private sector participation in DISCOs in the medium term.

Energy Sector

28. Favorable oil prices and efforts to further strengthen DISCOs’ performance have continued to contain the accumulation of new arrears in the power sector. The end-June 2016 IT on the accumulation of power sector arrears was met with a large margin, reflecting favorable oil prices, a strengthening in DISCOs’ payments collection, and a reduction in distribution losses. In particular, most DISCOs met their quarterly performance targets in terms of collection and distribution losses at end-June 2016. With this, there was no new accumulation of arrears in the fourth quarter of FY 2016/17 and the stock of outstanding arrears declined slightly.

Loss Reduction and Revenue Collection

(In percent)

Sources: Pakistani authorities; and IMF staff calculations.

29. Further limiting the accumulation of power sector arrears and gradually reducing the outstanding stock is needed to ensure the soundness of the sector. The authorities have updated, in consultation with development partners, their power sector arrears reduction plan (July 15, 2016 SB) to take into account changes in the privatization strategy for DISCOs. In order to contain the accumulation of new arrears, the authorities will continue to strengthen DISCOs’ performance by further reducing distribution losses, increasing payment collections, and continuing to set quarterly performance targets. Furthermore, they are seeking to revise the regulatory benchmarking for tariff determination and are working to resolve outstanding issues with regional governments. In parallel, proceeds from the planned IPOs of FESCO, IESCO and LESCO will be used to reduce the stock of outstanding arrears.

30. Moving forward with establishing a multi-year tariff framework for DISCOs will be key to attract investors and strengthen the regulatory framework. The notification of the multi-year tariffs for FESCO, IESCO and LESCO was further delayed (missed July 15, 2016 SB), owing to the DISCOs’ unresolved dispute with the regulator. Notably, DISCOs have requested the regulator to revise benchmark distribution losses used for the FY 2015/16 tariff determination in order to reflect higher distribution losses. Staff reiterated the importance of establishing a multi-year tariff framework in preparation for DISCOs’ IPOs and called for the swift resolution of the ongoing litigation and, subsequently, for the resumption of regular tariff notification while underscoring the importance of preserving the independence of the regulator. The authorities indicated their commitment move ahead with setting multi-year tariffs for FESCO, IESCO and LESCO, to be followed by the other DISCOs.

31. Staff called for resuming regular gas tariff notification to ensure cost recovery, avoid the build-up of losses and strengthening the regulatory framework. The authorities committed to finalize the delayed notification of the FY 2016/17 gas tariff by October 2016 and resume regular gas notification moving forward. Staff welcomed the authorities’ strategy to further reduce gas shortages by stepping up imports of Liquefied Natural Gas (LNG) while continuing to fully pass through the price of imported LNG to consumers. Staff stressed that continuing efforts to reduce still high distribution losses, including by strengthening network infrastructure and tackling gas theft, is needed to improve the sector performance. Staff welcomed the authorities’ plan to move ahead with restructuring and unbundling the gas sector.

Business climate, governance and trade policy

32. Moving ahead with the swift implementation of the new business climate reform strategy will be key to foster much needed investments and support private sector-led growth. Staff commended the authorities’ progress in the implementation of key short-term measures to ease the process of starting new businesses, paying taxes and trading across borders, and to facilitate access to credit. Staff stressed that sustained implementation of the new business climate reform strategy beyond the end of the program will be important to effectively strengthen the business climate and attract much needed growth-supporting private sector investment. Staff also welcomed the simplification of the import tariff structure from five to four slabs in July 2016.

Program Modalities and Other Issues

33. Financing and capacity to repay the Fund. Pakistan’s capacity to repay the Fund remains strong, owing to supportive macroeconomic policies and increasing foreign exchange reserves. Pakistan will continue to benefit from disbursements from multilateral and bilateral partners beyond the end of the EFF-supported program and has access to international markets, which limits short-and medium-term financing risks. The Fund’s exposure to Pakistan continued to increase with the purchase made upon completion of the eleventh review, reaching SDR 4.32 billion (about US$6.01 billion; Table 11) and would further increase with the final disbursement under the arrangement (Table 9). While the materialization of risks to the outlook could erode Pakistan’s capacity to repay to the Fund, the debt sustainability analysis shows that external debt would remain on a medium-term downward trend under most stress scenarios, with external financing needs below the risk assessment benchmark. However, under an extreme stress scenario in which downside risks simultaneously materialize, external debt would rise over the medium-term and external financing would peak at 8 percent of GDP, above the medium-vulnerability risk benchmark (though still below the high-vulnerability risk benchmark). 10

34. After completion of the EFF-supported program, close Fund engagement will continue through policy dialogue and technical assistance. The authorities have indicated that they will not request a follow-up arrangement after the EFF-supported program expires on September 30, 2016. Given that Pakistan’s outstanding credit to the Fund exceeds 200 percent of the quota and SDR 1.5 billion, staff supports Pakistan entering into Post-Program Monitoring.11 Staff also recommends that Pakistan returns to the 12-month cycle for Article IV Consultations. Technical assistance is planned in the areas of national accounts and price statistics, fiscal reporting, debt management, and central bank consolidated supervision and contingency planning.

35. Safeguards Assessment. An updated safeguards assessment with respect to the EFF was completed in December 2013 and concluded that legal amendments are needed to strengthen the central bank’s autonomy and governance arrangements. The authorities have implemented the 2013 safeguards recommendations, except for legal amendments to the SBP Act, which were only partially addressed. The authorities are taking steps to address a number of the remaining recommendations, including in the areas of the SBP’s objectives, its financial autonomy, and its limits for providing credit to the government. However, several other recommendations—in the areas of institutional autonomy, governance, and personal autonomy of SBP board members—still remain to be addressed (¶22).

Staff Appraisal

36. Over the course of the program, macroeconomic stability has been restored, vulnerabilities have been reduced, and progress has been made in tackling key structural challenges. At the start of the program in September 2013, growth prospects were weak, inflation was high, fiscal imbalances were large, and international reserves were low. Over the program period, helped by policy discipline and favorable oil prices, economic growth has gradually increased, inflation has been contained, and external buffers have been strengthened. Moreover, the fiscal deficit has been reduced, social safety nets have been strengthened, and the resilience of the financial sector has been reinforced. On the structural front, tax policy and administration reforms allowed further revenue mobilization; the SBP’s autonomy started to be strengthened; the AML/CFT framework was improved; the energy sector reform reduced power outages, energy subsidies, and the accumulation of new power sector arrears; and a country-wide strategy to improve the business climate started to be implemented.

37. However, continued efforts will be needed to strengthen macroeconomic resilience and advance growth-supporting structural reforms. Despite sizable fiscal consolidation, public debt has remained high; foreign reserves remain below comfortable levels; there has been significant appreciation of the real exchange rate; and the structural reform agenda needs to be completed. To reinforce Pakistan’s macroeconomic resilience, the authorities need to continue pursuing gradual fiscal consolidation, bolstering external buffers, maintaining a prudent monetary policy stance, and strengthening the resilience of the financial sector. In addition, advancing structural reforms beyond the end of the program will be important to generate stronger and more inclusive growth. The agenda should include advancing tax reforms to mobilize revenues needed to support higher priority social and investment spending, further strengthening the SBP’s autonomy and the effectiveness of the AML/CFT framework, restructuring and privatizing PSEs, completing the energy sector reform, and improving the business climate.

38. Continuing to pursue gradual fiscal consolidation is needed to firmly put debt on a downward path. Staff supports the authorities’ objective to reduce the overall fiscal deficit (excluding foreign grants) to 3.8 percent of GDP in FY 2016/17 while increasing capital expenditure and strengthening social safety nets. The authorities’ additional measures to achieve their fiscal target are welcome. The fiscal consolidation strategy should continue beyond this fiscal year: the authorities should enhance revenue mobilization by broadening the tax base and contain nonpriority spending to support fiscal consolidation and create fiscal space to increase priority social and investment spending. The revised fiscal responsibility framework will help anchor fiscal policy in support of medium-term fiscal consolidation, and the new PPP framework can foster investment while managing associated fiscal risks. Strengthening fiscal policy coordination between the federal and provincial governments will be important to support medium-term fiscal consolidation. Moreover, further reducing the share of short-term debt will be important to strengthen Pakistan’s macroeconomic resilience.

39. Monetary and exchange rate policies should continue to focus on bolstering external buffers and maintaining price stability. The authorities should continue to accumulate international reserves at a steady pace while allowing for greater downward exchange rate flexibility. This will help strengthen macroeconomic resilience and contain real exchange rate appreciation pressures which have affected competitiveness. The monetary policy stance should remain prudent to maintain low inflation and support macroeconomic stability, and the SBP should continue maintaining clearly positive real interest rates and be prepared to tighten monetary policy in case inflationary pressures intensify. While some progress has been made in strengthening the SBP’s autonomy, more ambitious steps are required to address the remaining recommendations of the 2013 Safeguards Assessment.

40. Financial policies should continue to focus on enhancing the sector’s resilience. To this end, it will be important to make the new deposit insurance scheme operational, ensure all banks’ compliance with regulatory capital requirements, further strengthen the regulatory and supervisory framework, and continue with policies to reduce the still high level of NPLs. The PDF should operate on a commercial basis to strictly limit any fiscal risks. While the expansion of the coverage of tax crimes as predicate offenses to money laundering was welcome to support the enforcement of revenue collection and strengthen governance, the authorities should continue enhancing the AML/CFT framework in line with international standards.

41. An acceleration in structural reforms is needed to support higher and more inclusive growth. Restructuring and seeking private sector participation in PSEs remain key to ensure their financial viability and reduce fiscal costs. Following setbacks earlier this year, the authorities’ continued commitment to attract private sector participation in PSEs is welcome, while, in parallel, efforts to contain their financial losses continue. Power sector reforms need to be completed to strengthen the soundness of the sector, eliminate outages, and address the system’s arrears. The updated arrears reduction plan is welcome, including the authorities’ commitments to further improve DISCOs’ performance and use the proceeds of planned IPOs to reduce outstanding arrears. Resuming regular tariff notification and establishing a multi-year tariff framework for DISCOs will be important to ensure cost recovery, attract private investors, and strengthen the regulatory framework. In addition, continuing with the swift implementation of the business climate reform strategy will be important to foster investment and support private-sector-led growth and job creation.

42. On the basis of Pakistan’s performance under the extended arrangement and corrective actions, staff supports the authorities’ request for completion of the twelfth review under the arrangement and for waivers for nonobservance of the end-June PCs on the budget deficit and NDA. Staff supports Pakistan entering into PPM and recommends a return to the 12-month cycle for Article IV Consultations.

Box 1.Strengthening the Business Climate

Pakistan’s weak business climate continues to constrain private investment and economic growth.

Despite several measures to improve the business climate, Pakistan’s position in the World Bank Doing Business ranking further slipped to 138 in 2016 (out of 189 economies) from 136 in 2015, reflecting Pakistan’s slower pace of reforms compared to other countries. Notably, Pakistan’s ranking in starting a business, getting credit, and trading across borders worsened. Thus, lengthy procedures and high costs for opening a new business and paying taxes, limited access to credit notably for small and medium enterprises (SMEs), complex border trading requirements, constraints in accessing electricity, and weak contract enforcement continue to weigh on Pakistan’s business climate, which ranks below the South Asia average and comparator emerging markets countries.

Ease of Doing Business

(rankings, 1=best)

Source: World Bank Doing Business Database.

Doing Business Rankings, 2016

(out of 189 countries)

An Action Plan was adopted in 2014 and a number of measures to improve the business climate were implemented under the program during 2014–15. An integrated virtual One-Stop-Shop (VOSS) for investors was launched allowing to streamline procedures for new business registration and physical OSSs became operative in Lahore and Islamabad. The number of procedures for paying taxes was reduced by introducing an integrated web-based platform (IRIS) covering the full spectrum of business processes, and tax filing for traders was simplified. Pilot Alternative Dispute Resolution (ADR) mechanisms were introduced to facilitate the resolution of commercial disputes. A new National Financial Inclusion Strategy was adopted to foster the provision of credit to SMEs and marginalized segments of society, and the credit information system was strengthened. Furthermore, a web-based portal (WeBOC) was launched to facilitate the processing of export/imports documents, and an electronic export form was introduced.

Efforts to strengthen the business climate were redoubled in early 2016 with the adoption of a new strategy. Following consultation with key stakeholders and World Bank technical assistance, the authorities adopted a new and comprehensive country-wide reform strategy in February 2016. Building on the reforms undertaken under the 2014 Action Plan, the new strategy defines specific time-bound measures (short-term, medium-term and longer-term), both at the federal and provincial level, to tackle constraints to business creation, expansion and operations and targets the ten areas covered by the World Bank’s Doing Business indicator. In the short term, the new strategy focuses on addressing constraints in key areas by easing procedures to start a new business and paying taxes, facilitating access to credit and trading across borders, and strengthening the regulatory framework.

Key short-term measures under the new 2016 business climate reform strategy have been implemented. Notably, the utilization and accessibility of VOSS was enhanced and the fee structure was rationalized to reduce the costs to open a new business. The capacity of the IRIS web portal was strengthened and a new electronic tax filing procedure was developed. The Secured Transaction Act to use movable property as collateral for getting credit and amendments to the Credit Bureau Act 2015 were approved by the National Assembly, regulations for credit bureaus were issued, the Corporate Restructuring Companies Act to set up companies to take over assets of bankrupt firms was enacted and the Corporate Rehabilitation Act to establish a mechanism for the organization and rehabilitation of distressed companies was submitted to the parliament. Furthermore, an electronic form for imports was rolled out and the Real Time Electronic Data Exchange to facilitate trade with China has become operational.

Further advancing the new business climate reform strategy is pivotal to foster private sector investment and higher growth. Completing the automation of VOSS, expanding the physical OSSs, amending the 1984 Companies Ordinance to reduce start-up procedures for small-sized companies, consolidating payments at the provincial level and facilitating the use of digital signatures would ease the creation of new businesses. Completing the roll-out of electronic tax filing and new simplified tax forms, and implementing an associated electronic payment system would ease paying taxes. Enacting the amendments to the Credit Bureau Act 2015, licensing private credit bureaus under the new Bureau Act, and enacting and developing secondary regulations to implement the Secured Transaction Act would support better access to credit. Expediting the execution and registration of a deed, digitalizing maps and providing online access to land records would facilitate registering a property. Further expanding the use of ADR mechanisms, rolling out case management systems in district courts, establishing specialized commercial courts, and enacting the Corporate Rehabilitation Act to strengthen the bankruptcy framework would improve contract enforcement. Finally, completing the roll-out of WeBOC and strengthening the underlying IT infrastructure, implementing an integrated platform for clearance of goods, and rationalizing physical inspections would ease cross border trading.

Box 2.Improving Living Standards and Inclusiveness

Despite improvements, poverty and unemployment remain significant. GDP growth averaged 4.3 percent during 2000–15 and, after decelerating during 2009–12, it has gradually recovered. During the same period, Pakistan’s per capita income increased by 40 percent (but remains below the South Asia average), the poverty headcount dropped by more than 40 percent, and unemployment gradually decreased. However, unemployment remains high at nearly 6 percent, the informal economy is large, and about 30 percent of the population is still below the poverty line.

20002005201020112012201320142015
PakistanSouth Asia 1/
GDP growth (% at constant factor costs)3.99.02.63.63.83.74.16.94.0
GNI per capita (in 2005 US dollars)6127297908008158338581,496..
Unemployment (% of total labor force)7.87.75.66.06.06.26.03.95.9
Employment to population ratio (%)47.348.851.251.351.551.651.754.0..
Infant mortality rate (per 1,000 live births)87.780.073.572.170.669.167.442.065.8
Poverty headcount ratio (% of population)..50.436.836.3..29.5......
GINI index..32.729.6........31.4..
Sources: World Bank; and IMF staff estimates and projections.

South Asia is defined as Afghanistan, Bangladesh, Bhutan, India, Nepal, Pakistan, and Sri Lanka.

Sources: World Bank; and IMF staff estimates and projections.

South Asia is defined as Afghanistan, Bangladesh, Bhutan, India, Nepal, Pakistan, and Sri Lanka.

Access to education and health has improved but significant further efforts are needed. During 2000–14, the primary gross enrollment ratio and the youth literacy rate improved, reaching 94 percent and 73 percent, respectively. Infant mortality decreased to 66 per 1,000 live births, with life expectancy slightly increasing to 66.4 years. In parallel, public expenditure on education increased from 1.8 to 2.5 percent of GDP and public expenditure on health from 0.6 to 0.9 percent of GDP, although at these levels, public spending is still very low compared to other EMDCs. Access to improved water sanitation facilities increased markedly to about 60 percent of the population, with access to improved water sources reaching about 90 percent. Despite these improvements, Pakistan continues to rank low on the Human Development Index (147 out of 188 countries in 2015, unchanged from 2009).

Health and education

Source: World Bank

Gender inequality has decreased but remains high. Pakistan ranks poorly in the Gender Gap Index (144 out of 145 countries in 2015), well below comparator countries.1 The gaps between male and female labor force participation and unemployment remain substantial, even if they slightly decreased to 58 percent and 5 percent, respectively, in 2014, while the primary gross enrollment ratio differential is high at 15 percent.

BISP, the main social safety net program, effectively contributed to reduce poverty. Launched in 2008, BISP provides a minimum income to the poorest through unconditional cash transfers (UCTs) and supports primary school enrollment and attendance through conditional education cash transfers (CCTs). During the EFF-supported program, UCTs were increased by more than 60 percent and coverage was broadened to 5.36 million beneficiaries while CCTs’ coverage increased to 1.3 million children. Impact evaluation analysis indicates that UCTs contribute to reduce poverty among BISP beneficiaries (20 percent reduction in the proportion of beneficiaries living below the poverty line from 2011 to 2014 in the sample) and strengthen women’s empowerment by providing the cash transfer to any ever-married woman in a BISP-eligible household. However, the impact of CCTs on education remains more limited since the size of the transfer is low compared to the cost of schooling (Oxford Policy Management, 2015).

1/ The Gender Gap Index (World Economic Forum, 2015) measures the gap between men and women in four categories: economic participation and opportunity, educational attainment, health and survival and political empowerment.

Box 3.The Macroeconomic Impact of the China-Pakistan Economic Corridor

The China-Pakistan Economic Corridor (CPEC) is an opportunity for Pakistan to boost investment and growth. CPEC is a large package of investment projects in energy and transport infrastructure, financed by China. The total size of CPEC is estimated at around US$44½ billion (about 16 percent of FY 2015/16 GDP), of which more than half (US$28 billion) is allocated to “early harvest” projects over the next few years, with the remainder of the investments expected to materialize up to 2030 and beyond. Of the early harvest projects, about $10 billion is allocated to road, rail, and port infrastructure, which the government plans to execute within its regular development spending envelope. The remaining $18 billion (6 percent of GDP) will largely cover energy projects provided through FDI. Some CPEC priority projects are already under way, which contributed to a pickup in FDI, imports of machinery and industrial materials, and the government’s external financing in FY 2015/16.

Financing modalities vary across sectors and projects. In the energy sector, power plant projects will be funded through FDI by Chinese firms with commercial loans borrowed from Chinese banks. These firms will operate as Independent Power Producers (IPPs) and have their electricity sales guaranteed through pre-negotiated power purchase agreements including guaranteed tariffs. In the transport sector, financing will be provided by the Chinese government and state banks mostly as concessional loans. Other, smaller CPEC infrastructure projects are expected to be financed through a mix of concessional loans and grants.

Estimated Financing for “Early Harvest” Projects
US$, millionsFDIConcessional loanCommercial loanGrantTotal
Energy18,00000018,000
Transportation1,2476,4651,62009,332
Other infrastructure02590228487
Total19,2476,7241,62022827,819
Sources: Pakistani authorities; various media reports; and IMF staff estimates.
Sources: Pakistani authorities; various media reports; and IMF staff estimates.

The direct impacts on the external balance are expected to be substantial. During the investment phase, as the “early harvest” projects proceed, Pakistan will experience a surge in FDI and other external funding inflows. A concomitant increase in imports of machinery, industrial raw materials, and services will likely offset a significant share of these inflows, such that the current account deficit would widen, with manageable net inflows into the balance of payments. While precise quantification of these impacts is difficult due to uncertainty and lack of available information, staff projects CPEC-related capital inflows (FDI and external borrowing) to reach about 2.2 percent of the projected GDP in FY 2019/20, and CPEC-related imports to about 11 percent of the total projected imports in the same year.1

The broader positive impacts on the economy would be considerable. If implemented as envisaged, CPEC could go a long way towards alleviating Pakistan’s long-standing supply-side bottlenecks and lifting its long-term potential output. Priority energy sector projects are expected to add significant power-generation capacity within the next few years, and subsequent energy projects could further expand the capacity over the long term. This would help mitigate Pakistan’s chronic electricity load-shedding problem and provide a reliable support for domestic economic activities and exports. CPEC transport infrastructure projects (e.g. roads, railways, port facility upgrade) would allow easier and lower-cost access to domestic and overseas markets, promoting inter-regional and international merchandise trade. Service exports would also benefit from the increased trade traffic from China. Furthermore, these CPEC projects could catalyze private business investment and boost productivity—e.g., by facilitating more efficient allocation of productive inputs across regions.

Over the longer term, Pakistan will need to manage increasing CPEC-related outflows. As Chinese IPPs start their operations, profit repatriation by these companies would begin to rise in the subsequent years. While the path and the size of the repatriation would depend on factors such as the timing of project completion and the terms of power purchase agreements with the Pakistani government, it could add up to a significant level given the magnitude of the FDI. Repayment obligations to CPEC-related government borrowing, including amortization and interest payments, are expected to rise after FY 2020/21 due to the concessional terms of most of these loans. Combined, these CPEC-related outflows could reach about 0.4 percent of GDP per year over the longer run.

Pro-growth reforms and prudent macroeconomic policies will be essential to unlock CPEC’s full potential. Supported by increased energy supply and transportation capacity, CPEC has the potential to catalyze higher private investment and exports, which would help cover the CPEC-related outflows that are expected over the longer term. Reaping the full potential benefits of CPEC will require forceful pro-growth and export-supporting reforms. These include improvements in the business climate, and strengthening governance and security. Real effective exchange rate appreciation should be contained by allowing greater downward exchange rate flexibility and keeping inflation well anchored. Finally, fiscal policy should remain prudent and debt management should be strengthened to keep the long-term public debt path sustainable. The authorities noted that additional Chinese investment over the longer term, building on CPEC as a platform, could also help cover the projected CPEC-related outflows.

Sound project management and monitoring system should be in place to ensure timely implementation and mitigate risks. There is a need to ensure sound project evaluation and prioritization mechanisms based on effective cost-benefit analysis and realistic forecasts of macroeconomic and financing conditions. The procurement process should be transparent and competitive, and there is a need to ensure transparency and accountability in project management and monitoring.2 Power purchase agreements with Chinese IPPs should be negotiated with terms that would adequately incentivize investment while ensuring that the cost of generated power remains favorable for the distribution system and consumers. Moreover, capacity improvements in the power transmission network will be needed to keep up with the increasing supply.

1 This baseline projection is predicated on the assumption that the completion of “early harvest” projects would extend up to FY 2020/21, given large uncertainties and Pakistan’s absorptive capacity.2 International Monetary Fund, 2015, “Making Public Investment More Efficient.”

Figure 2.Pakistan: Selected Economic Indicators, 2008–16

Sources: Pakistani authorities; IMF World Economic Outlook Database; and IMF staff calculations.

Figure 3.Pakistan: Selected Financial Indicators, 2008–16

Sources: Pakistani authorities; Bloomberg; and IMF staff calculations.

Figure 4.Pakistan: Selected Banking and Financial Indicators

Sources: Pakistani authorities; Bloomberg; and IMF staff calculations.

Table 1.Pakistan: Quantitative Performance Criteria and Indicative Targets for FY 2014/15 and FY 2015/16(In billions of rupees, at program exchange rates, unless otherwise specified)
FY2014/15FY2015/16
end-Juneend-Septemberend-Decemberend-Marchend-June
Program
Twelfth Review
TargetAdj. TargetActual
Performance Criteria
Floor on net international reserves of the SBP (millions of U.S. dollars) 4/5,3546,9556,8826,17211,0506,3107,560
Ceiling on net domestic assets of the SBP (stock, billions of Pakistani rupees)2,4422,6612,6332,7912,7313,0233,029
Ceiling on overall budget deficit (cumulative, excluding grants, billions of Pakistani rupees) 2/1,4893295411,0091,2921,2921,349
Ceiling on SBP’s stock of net foreign currency swaps/forward position (millions of U.S. dollars)1,7001,3851,6501,8852,0002,0001,985
Ceiling on net government budgetary borrowing from the SBP (stock, billions of Pakistani rupees) 1/, 3/1,8871,5891,4571,3611,8001,8001,412
Continuous Performance Criterion
Accumulation of external public payment arrears by the general government (continuous)0000000
Indicative Targets
Cumulative floor on Targeted Cash Transfers Spending (BISP) (billions of Pakistani rupees)942448759595101
Floor on net tax revenues collected by the FBR (cumulative, billions of Pakistani rupees)2,5886001,3852,1033,1043,1043,112
Ceiling on power sector payment arrears (flow, billions of Pakistani rupees)571304.91818(10)
Sources: Pakistani authorities; and Fund staff estimates.

All items as defined in the TMU. Fiscal year runs from July 1 to June 30.

Excluding grants, FY2012/13 overall budget deficit is a stock.

FY 2012/13, total stock of government debt as of June 30, 2013.

Adjustors are presented on a cumulative basis since the beginning of the program (September, 2013).

Sources: Pakistani authorities; and Fund staff estimates.

All items as defined in the TMU. Fiscal year runs from July 1 to June 30.

Excluding grants, FY2012/13 overall budget deficit is a stock.

FY 2012/13, total stock of government debt as of June 30, 2013.

Adjustors are presented on a cumulative basis since the beginning of the program (September, 2013).

Table 2.Pakistan: Structural Benchmarks, Twelfth and Last Review 2016
ItemMeasureTime Frame (by End of Period)StatusMacroeconomic rationale
Prior Actions
1Bring the stock of NDA of the SBP to or below PRs 3,100 billion by end-August 2016.end-August 2016MetConduct prudent monetary policy
Structural Benchmarks
Financial sector
2Enact the Deposit Protection Corporation Act, in line with Fund staff advice.end-August 2016MetEnhance the resilience of the financial sector.
Structural Policies
3Notify multi-year tariffs for FESCO, IESCO and LESCO.July 15, 2016Not MetPrepare for DISCO privatization.
4Update the plan to further limit the accumulation of new payables and gradually eliminate the outstanding stock of payables arrears in the power sector.July 15, 2016MetStrengthen the financial perfomance of the power sector.
5Solicit expressions of interest for the divestment of Kot Addu Power Company (KAPCO).July 15, 2016MetStrenghten private sector participation in the energy sector.
Table 3.Pakistan: Selected Economic Indicators, 2010/11–2016/171/

Population: 189.9 million (2014/15)

Per capita GDP: US$1,510 (2014/15)

Poverty rate: 12.7 percent (2010/11)

Main exports: Textiles ($13.5 billion, 2014/15)

Unemployment: 5.9 percent (2014/15)

2012/132013/142014/152015/162016/17
Eleventh ReviewActualProj.
(Annual percentage change)
Output and prices
Real GDP at factor cost3.74.14.04.74.75.0
GDP deflator at factor cost7.17.44.62.02.05.2
Consumer prices (period average)7.48.64.53.02.95.2
Consumer prices (end of period)5.98.23.24.03.25.3
Pakistani rupees per U.S. dollar (period average)8.46.4−1.5
(In percent of GDP)
Saving and investment
Gross saving13.913.414.514.214.314.2
Government−5.1−1.4−1.6−0.6−0.70.2
Nongovernment (including public sector enterprises)19.014.716.114.815.014.0
Gross capital formation 2/15.014.615.515.215.215.7
Government3.23.53.73.53.73.8
Nongovernment (including public sector enterprises)11.711.111.811.711.511.9
Public finances
Revenue and grants13.515.214.515.615.216.0
Expenditure (including statistical discrepancy)21.919.819.119.518.919.6
Budget balance (including grants)−8.4−4.9−5.2−4.1−4.3−3.6
Budget balance (excluding grants)−8.5−5.7−5.4−4.4−4.6−3.8
Primary balance−3.9−0.3−0.50.2−0.10.5
Total general government debt62.362.562.062.764.862.9
External general government debt19.619.217.718.918.718.8
Domestic general government debt42.843.344.343.846.044.1
(Annual changes in percent of initial stock of broad money, unless otherwise indicated)
Monetary sector
Net foreign assets−3.43.72.12.41.72.3
Net domestic assets19.38.811.110.111.99.9
Broad money (percent change)15.912.513.212.513.712.2
Reserve money (percent change)15.812.99.817.026.512.0
Private credit (percent change)−0.612.55.99.011.113.0
Six-month treasury bill rate (period average, in percent)9.89.78.8
External sector
Merchandise exports, U.S. dollars (percentage change)0.41.1−3.9−8.8−8.63.5
Merchandise imports, U.S. dollars (percentage change)−0.63.8−0.9−4.4−2.07.4
Current account balance (in percent of GDP)−1.1−1.3−1.0−1.0−0.9−1.5
(In percent of exports of goods and services, unless otherwise indicated)
External public and publicly guaranteed debt140.7161.2159.7192.0192.9199.4
Debt service21.626.222.524.222.129.9
Gross reserves (in millions of U.S. dollars) 3/6,0089,09613,53418,37818,12920,847
In months of next year’s imports of goods and services1.52.23.44.34.24.6
Memorandum items:
Real effective exchange rate (annual average, percentage change)−1.30.910.9
Terms of trade (percentage change)−1.90.27.09.610.7−0.6
Real per capita GDP (percentage change)2.12.62.03.03.03.3
GDP at market prices (in billions of Pakistani rupees)22,38625,16927,49329,59829,59833,130
GDP at market prices (in billions of U.S. dollars)231.2244.4271.0
Sources: Pakistani authorities; World Bank; and IMF staff estimates and projections.

Fiscal year ends June 30.

Including changes in inventories.

Excluding gold and foreign currency deposits of commercial banks held with the State Bank of Pakistan.

Sources: Pakistani authorities; World Bank; and IMF staff estimates and projections.

Fiscal year ends June 30.

Including changes in inventories.

Excluding gold and foreign currency deposits of commercial banks held with the State Bank of Pakistan.

Table 4.Pakistan: Medium-Term Macroeconomic Framework, 2010/11–2019/20
2010/112011/122012/132013/142014/152015/162016/172017/182018/192019/20
Eleventh ReviewActualProjections
(Annual percentage change)
Output and prices
Real GDP at factor cost3.63.83.74.14.04.74.75.05.25.55.5
Consumer prices (period average)13.711.07.48.64.53.02.95.25.05.05.0
(In percent of GDP)
Saving and investment balance0.1−2.1−1.1−1 3−1.0−1 0−0.9−1.5−2.2−2 2−1.9
Government−6.7−8.6−8.4−4.9−5 2−4.1−4 3−3.6−2.9−2.7−2 5
Non-government (including public sector enterprises)6.86.67 33.64.33 13.52 10 70 50.6
Gross national saving14.213 013.913 414 514.214 314.213.914.415 1
Government−4.2−5.3−5 1−1.4−1.6−0.6−0.70 21 01 31.8
Non-government (including public sector enterprises)18.418.319.014 716.114.815 014.012.913.113 3
Gross capital formation14.115 115 014.615 515 215.215 716.016.617.0
Government2.53.43.23 53.73.53 73.83.84 04 3
Non-government (including public sector enterprises)11.611 711 711.111.811 711.511.912 212.612.7
(In billions of U.S. dollars, unless otherwise indicated)
Balance of payments
Current account balance0.2−4.7−2.5−3 1−2.6−2.9−2 5−4 7−7.1−7.6−7 1
Net capital flows 1/2.31 40 57.05 35.85.17.48.48.07.3
Of which: foreign direct investment 2/1.60.71.31.60.81 31 32.63 34 46.0
Gross official reserves14.810.86.09.113 518.418.120.822.021.821 2
In months of imports 3/3.62 71 52 23.44 34 24.64 54 24.0
External debt (in percent of GDP)31.129.226.326.724 025.625.725 124.924.222 7
Terms of trade (annual percentage change)7.3−9.7−1.90 27.09.610 7−0.6−0.9−0 2−0.9
Real effective exchange rate (annual percentage change)6.13 0−1 30.910.9
(In percent of GDP)
Public finances
Revenue and grants12.613.013.515 214 515.615.216.016.717.017 3
Of which: tax revenue9.510 410 010.511.012 312 412.913.613.914.3
Expenditure, of which:19.321.721.820 119.719.819.619.619.619.619.8
Current16.517.916.816.416.616.516.615.815 715 715 5
Development and net lending2.63 55 04 03.83 53 73.83.84.04.3
Primary balance (including grants)−2.9−4.2−3.9−0.3−0 50.2−0.10 51 51 71.6
Primary balance (excluding grants)−3.2−4 4−4 1−1 1−0.70 0−0 30.31.31.61.6
Overall fiscal balance (including grants)−6.7−8.6−8.4−4.9−5 2−4.1−4.3−3.6−2.9−2 7−2 5
Overall fiscal balance (excluding grants)−7.0−8.9−8.5−5 7−5.4−4 4−4.6−3.8−3 0−2.8−2.5
Total public debt (including obligations to the IMF)58.963.364.263.763.664.366.964.261.759.356.4
Sources: Pakistani authorities; and IMF staff estimates and projections.

Difference between the overall balance and the current account balance.

Including privatization.

In months of next year’s imports of goods and services.

Sources: Pakistani authorities; and IMF staff estimates and projections.

Difference between the overall balance and the current account balance.

Including privatization.

In months of next year’s imports of goods and services.

Table 5.Pakistan: Balance of Payments, 2013/14–2019/20(In millions of U.S. dollars, unless otherwise indicated)
2013/142014/152015/162016/172017/182018/192019/20
Eleventh ReviewActualQ1Q2Q3Q4
Projections
Current account−3,130−2,627−2,885−2,480−1,053−1,409−1,346−874−4,684−7,079−7,645−7,063
Balance on goods−16,701−17,318−17,622−18,567−5,257−5,381−5,107−5,034−20,779−22,260−23,356−22,965
Exports, f.o.b.25,06824,08321,96122,0035,3225,6815,7805,98422,76724,11626,07129,027
Imports, f.o.b.41,76941,40139,58340,57010,57911,06310,88711,01843,54746,37649,42651,992
Services (net)−2,551−2,842−2,424−2,285−456−569−661−438−2,124−3,170−3,210−3,769
Services: credit5,3225,8765,0005,4551,4511,3781,2841,6065,7195,3865,8646,320
Of which: Coalition Support Fund1,0501,4529379373641861754001,125000
Services: debit7,8738,7187,4247,7401,9071,9461,9452,0447,8438,5579,07410,089
Income (net)−3,943−4,565−5,014−4,745−1,101−1,327−1,280−1,364−5,072−5,705−6,165−7,108
Income: credit541681604585138157142178615646678735
Income: debit4,4845,2465,6185,3301,2391,4841,4221,5425,6866,3526,8437,842
Of which: interest payments1,5521,9362,1252,1145075756615682,3102,7762,9563,269
Of which: income on direct investment2,9323,3083,4833,2027329097619743,3763,5753,8874,573
Balance on goods, services, and income−23,195−24,725−25,059−25,597−6,814−7,277−7,048−6,836−27,975−31,136−32,731−33,842
Current transfers (net)20,06522,09822,17423,1175,7615,8675,7025,96223,29124,05725,08626,779
Current transfers: credit, of which:20,22222,33722,30523,2635,8005,9075,7416,00223,45024,21625,24526,938
Official380349540527137143491044333271212
Workers’ remittances15,83718,72019,18619,9155,0005,0444,9325,18620,16220,90022,04923,529
Other private transfers4,0053,2682,5792,8216647207617112,8562,9893,1833,397
Current transfers: debit15723913114640404040159159159159
Capital account1,85737842634266775993295436291222
Capital transfers: credit1,85737843234866775993295436291222
Of which: official capital grants35236742634266775993295436291222
Capital transfers: debit006600000000
Financial account5,5535,0045,6874,7641,0682,2082,0331,7747,0837,9327,6627,058
Direct investment abroad−128−72−38−15−4−3−4−3−14−13−13−13
Direct investment in Pakistan1,7008521,3851,2825226655948162,5973,3434,4106,010
Of which: privatization receipts3107640000000000
Portfolio investment (net), of which:2,7601,90346−43085836873371,345678135−969
Financial derivatives (net)000000000000
Other investment assets211102219−82−33−33−33−23−120102138145
Monetary authorities000000000000
General government5−31−41−4600000000
Banks8−634601691717171770707070
Other sectors198196−200−205−50−50−50−40−190326875
Other investment liabilities1,0102,2194,0764,0094987431,3896463,2763,8222,9931,886
Monetary authorities1465633400000000
General government, of which:1,6108934,2373,6264666631,3514342,9133,6142,8761,647
Disbursements4,3493,7047,6306,3391,6141,4032,8012,4178,2349,3508,7028,734
Amortization2,7342,8093,3932,7131,1487401,4501,9835,3215,7365,8277,087
Banks−2934803237415161717657996116
Other sectors−453283−196517642219529813022123
Net errors and omissions−422−119−3151400000000
Reserves and related items−3,858−2,636−2,912−2,640−81−876−745−993−2,695−1,289−308−218
Reserve assets−2,464−4,044−4,830−4,547−166−855−724−973−2,718−1,124146603
Use of Fund credit and loans−1,3941,4081,9181,90784−20−20−2024−165−454−821
Memorandum items:
Current account (in percent of GDP)−1.3−1.0−1.0−0.9−1.5−2.2−2.2−1.9
Current account (in percent of GDP; excluding fuel imports)4.83.51.91.81.61.01.31.8
Exports f.o.b. (growth rate, in percent)1.1−3.9−8.8−8.63.55.98111.3
Imports f.o.b. (growth rate, in percent)3.8−0.9−4.4−2.07.46.56.65.2
Oil imports (in million US$, cif)14,77412,1678,1507,6689,65410,46212,20513,954
Terms of trade (growth rate, in percent)0.27.09.610.7−0.6−0.90−1
External debt (in millions of U.S. dollars)65,36565,10371,87072,97876,92581,87685,34685,843
o/w external public debt51,99851,93556,21059,02360,83263,77964,68362,171
Gross external financing needs (in millions of U.S. dollars) 1/9,5367,4457,2976,44010,90113,17615,74617,475
End-period gross official reserves (millions of U.S. dollars) 2/9,09613,53418,37818,12918,29519,15019,87420,84720,84721,97121,82521,222
(In months of next year’s imports of goods and services)2.23.44.34.24.24.34.44.64.64.54.24.0
GDP (in millions of U.S. dollars)244,361271,050284,185
Sources: Pakistani authorities; and IMF staff estimates and projections.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

Excluding foreign currency deposits held with the State Bank of Pakistan (cash reserve requirements) and gold.

Sources: Pakistani authorities; and IMF staff estimates and projections.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

Excluding foreign currency deposits held with the State Bank of Pakistan (cash reserve requirements) and gold.

Table 6a.Pakistan: General Government Budget, 2008/09–2016/17(In billions of Pakistani rupees)
2008/092009/102010/112011/122012/132013/142014/152015/162016/17
Eleventh ReviewActualProjection
Revenue and grants1,8782,1302,3062,6113,0113,8373,9844,6254,5125,293
Revenue1,8512,0792,2612,5672,9823,6313,9374,5564,4475,248
Tax revenue1,3311,5001,7382,0762,2312,6403,0243,6433,6604,265
Federal1,2851,4451,6731,9692,0812,4502,8183,3773,3773,921
FBR revenue1,1571,3291,5581,8811,9362,2722,5943,1043,1123,621
Direct taxes4405296027327368841,0291,2841,1921,461
Federal excise duty116121137122119145170183191245
Sales tax/VAT4525176338098411,0021,0891,2621,3241,498
Customs duties148162185218240241306375406417
Petroleum surcharge112898360110104131135149150
Gas surcharge and other16283227354335383640
GIDC0.00.00.00.00.0325710080110
Provincial465565107151190206265283344
Nontax revenue520579523491751990913913786983
Federal436511461443680941838823693874
Provincial846862487149769093110
Grants275046452920647696645
Expenditure2,5443,0243,5364,3414,8855,0585,4265,8485,7966,498
Current expenditure2,0932,4813,0123,5793,7574,1234,5564,8824,9075,248
Federal1,5471,8532,2272,6112,6472,9503,1693,4023,3573,554
Interest6386426988899911,1481,3041,2891,2631,362
Domestic5595786308219201,0731,2081,1701,1511,231
Foreign79646868717596119113132
Other9091,2111,5291,7221,6561,8021,8662,1132,0932,192
Defense330375450507541623698781758860
Other5798361,0781,2151,1161,1791,1681,3321,3361,332
Of which: subsidies 1/244227493556368336265165218154
Of which: grants 2/136359259291305372401616563581
Provincial5466277869681,1101,1731,3871,4801,5501,694
Development expenditure and net lending4175714776961,1129971,0471,0401,1021,250
Public Sector Development Program3985184656757218781,0131,0401,0891,255
Federal196260216299348435489510496620
Provincial202258249376373443524530592635
Net lending2053122139111934013−5
Statistical discrepancy (“+” = additional expenditure)34−28466716−62−178−74−2120
Overall Balance (excluding grants)−693−944−1,276−1,775−1,903−1,427−1,489−1,292−1,349−1,250
Overall Balance (including grants)−666−894−1,230−1,730−1,873−1,221−1,442−1,223−1,284−1,205
Financing6668941,2301,73018731,2211,4421,2231,2841,205
External861581446038351166493331424
Of which: privatization receipts1000012000
Of which: IMF0000000000
Domestic5807361,0861,67018368701,276730953782
Bank3533056141,1401457322910511780547
Nonbank227431471529378548366219173234
Memorandum items:
Primary balance (excluding grants)−56−302−577−886−912−279−185−3−86112
Primary balance (including grants)−28−252−532−841−882−73−13866−21157
Total security spending330375450507541623698781758860
Energy sector circular debt clearance00039132200251619
Total government debt7,3138,33110,00512,00813,94815,73017,05918,56219,16520,836
Domestic debt3,8604,6546,0177,6389,57110,90212,18812,95613,61914,621
External debt3,4533,6773,9884,3704,3764,8284,8715,6065,5466,215
Total government debt including guaranteesn.a.8,93410,58412,54014,57316,29117,695
Total government debt including IMF obligations7,7319,02010,77312,69914,38016,02817,47719,04319,79721,278
Nominal GDP (market prices)13,20014,86718,27620,04722,38625,16927,49329,59829,59833,130
Sources: Pakistani authorities; and IMF staff estimates and projections.

Includes Rs 391 billion in FY2011/12 for the payment of energy and food subsidies delivered in previous years.

Additional spending on security and internally-displaced people is recorded under transfers (“grants”) instead of development expenditure as reported in the original FY2015/16 budget.

Sources: Pakistani authorities; and IMF staff estimates and projections.

Includes Rs 391 billion in FY2011/12 for the payment of energy and food subsidies delivered in previous years.

Additional spending on security and internally-displaced people is recorded under transfers (“grants”) instead of development expenditure as reported in the original FY2015/16 budget.

Table 6b.Pakistan: General Government Budget, 2009/10–2016/17(In percent of GDP, unless otherwise indicated)
2009/102010/112011/122012/132013/142014/152015/162016/17
Eleventh ReviewActualProjection
Revenue and grants14.312.613.013.515.214.515.615.216.0
Revenue14.012.412.813.314.414.315.415.015.8
Tax revenue10.19.510.410.010.511.012.312.412.9
Federal9.79.29.89.39.710.211.411.411.8
FBR revenue8.98.59.48.69.09.410.510.510.9
Direct taxes3.63.33.73.33.53.74.34.04.4
Federal excise duty0.80.80.60.50.60.60.60.60.7
Sales tax3.53.54.03.84.04.04.34.54.5
Customs duties1.11.01.11.11.01.11.31.41.3
Petroleum surcharge / Carbon tax0.60.50.30.50.40.50.50.50.5
Gas surcharge and other0.20.20.10.20.20.10.10.10.1
GIDC0.10.20.30.30.3
Provincial0.40.40.50.70.80.70.91.01.0
Nontax revenue3.92.92.43.43.93.33.12.73.0
Federal3.42.52.23.03.73.02.82.32.6
Provincial0.50.30.20.30.20.30.30.30.3
Grants0.30.20.20.10.80.20.20.20.1
Expenditure20.319.321.721.820.119.719.819.619.6
Current expenditure16.716.517.916.816.416.616.516.615.8
Federal12.512.213.011.811.711.511.511.310.7
Interest4.33.84.44.44.64.74.44.34.1
Domestic3.93.44.14.14.34.44.03.93.7
Foreign0.40.40.30.30.30.30.40.40.4
Other8.18.48.67.47.26.87.17.16.6
Defense2.52.52.52.42.52.52.62.62.6
Other5.65.96.15.04.74.24.54.54.0
Of which: subsidies 1/1.52.72.81.61.31.00.60.70.5
Of which: grants 2/2.41.41.51.41.51.52.11.91.8
Provincial4.24.34.85.04.75.05.05.25.1
Development expenditure and net lending3.82.63.55.04.03.83.53.73.8
Public Sector Development Program3.52.53.43.23.53.73.53.73.8
Federal1.71.21.51.61.71.81.71.71.9
Provincial1.71.41.91.71.81.91.82.01.9
Net lending0.40.10.11.70.50.10.00.00.0
Statistical discrepancy (“+” = additional expenditure)−0.20.30.30.1−0.2−0.6−0.2−0.70.0
Overall Balance (excluding grants)−6.4−7.0−8.9−8.5−5.7−5.4−4.4−4.6−3.8
Overall Balance (including grants)−6.0−6.7−8.6−8.4−4.9−5.2−4.1−4.3−3.6
Financing6.06.78.68.44.95.24.14.33.6
External1.10.80.30.21.40.61.71.11.3
Of which: privatization receipts0.00.00.00.00.00.00.00.00.0
Of which: IMF0.00.00.00.00.00.00.00.00.0
Domestic4.95.98.38.23.54.62.53.22.4
Bank2.13.45.76.51.33.31.72.61.7
Nonbank2.92.62.61.72.21.30.70.60.7
Memorandum items:
Primary balance (excluding grants)−2.0−3.2−4.4−4.1−1.1−0.70.0−0.30.3
Primary balance (including grants)−1.7−2.9−4.2−3.9−0.3−0.50.2−0.10.5
Total security spending2.52.52.52.42.52.52.62.62.6
Energy sector circular debt clearance0.00.02.01.40.00.00.10.10.1
Total government debt56.054.759.962.362.562.062.764.862.9
Domestic debt31.332.938.142.843.344.343.846.044.1
External debt24.721.821.819.619.217.718.918.718.8
Total government debt including guarantees60.157.962.665.164.764.4
Total government debt including IMF60.758.963.364.263.763.664.366.964.2
Nominal GDP (market prices, billions of Pakistani rupees)14,86718,27620,04722,38625,16927,49329,59829,59833,130
Sources: Pakistani authorities; and IMF staff estimates and projections.

Includes 1.8 percent of GDP in FY2011/12 for the payment of energy and food subsidies delivered in previous years.

Additional spending on security and internally-displaced people is recorded under transfers (“grants”) instead of development expenditure as reported in the original FY2015/16 budget.

Sources: Pakistani authorities; and IMF staff estimates and projections.

Includes 1.8 percent of GDP in FY2011/12 for the payment of energy and food subsidies delivered in previous years.

Additional spending on security and internally-displaced people is recorded under transfers (“grants”) instead of development expenditure as reported in the original FY2015/16 budget.

Table 6c.Pakistan: General Government Budget, 2013/14–2016/17(In billions of Pakistani rupees)
2013/142014/152015/162016/17
End-YearQ1Q2Q3Q4End-Year
Eleventh ReviewActualProjection
Revenue and grants3,8373,9844,6254,5121,0221,3391,2281,7045,293
Revenue3,6313,9374,5564,4471,0131,3281,2171,6905,248
Tax revenue2,6403,0243,6433,6608231,0799891,3734,265
Federal2,4502,8183,3773,3777579929101,2633,921
FBR revenue2,2722,5943,1043,1126999168401,1663,621
Direct taxes8841,0291,2841,1922823703394711,461
Federal excise duty14517018319147625779245
Sales tax/VAT1,0021,0891,2621,3242893793474821,498
Customs duties2413063754068010597134417
Petroleum surcharge10413113514929383548150
Gas surcharge and other392634337981135
GIDC32571008021282635110
Provincial190206265283668780111344
Nontax revenue990913913786190249228317983
Federal941838823693169221203281874
Provincial4976909321282535110
Grants206476966911101545
Expenditure5,0585,4265,8485,7961,2541,6441,5082,0926,498
Current expenditure4,1234,5564,8824,9071,0131,3281,2181,6905,248
Federal2,9503,1693,4023,3576868998251,1453,554
Interest1,1481,3041,2891,2632633453164391,362
Domestic1,0731,2081,1701,1512373112853961,231
Foreign759611911325333142132
Other1,8021,8662,0122,0934235555097062,192
Defense623698781758166218200277860
Other1,1791,1681,2321,3362573373094291,332
Of which: subsidies 1/33626516521830393649154
Of which: grants 2/372401616563112147135187581
Provincial1,1731,3871,4801,5503274293935451,694
Development expenditure and net lending9971,0471,1321,1022413162904031,250
Public Sector Development Program8781,0131,1361,0892423182914041,255
Federal435489510496120157144200620
Provincial443524530592123161147204635
Net lending11934013(1)(1)(1)(2)(5)
Statistical discrepancy (“+” = additional expenditure)−62−178−74−212
Overall Balance (excluding grants)−1,427−1,489−1,292−1,349(241)(316)(290)(403)(1,250)
Overall Balance (including grants)−1,221−1,442−1,223−1,284(233)(305)(280)(388)(1,205)
Financing1,2211,4421,2231,2842333052803881,205
External3511664933318210798136424
Of which: IMF0000
Domestic8701,276730953151198181252782
Bank322910511780106138127176547
Nonbank54836621917345595475234
Memorandum items:
Primary balance (excluding grants)−279−185−3−8622282636112
Primary balance (including grants)−73−13866−2130403651157
Total security spending623698781758166218200277860
Energy sector circular debt clearance00251619
Total government debt15,73017,05918,56219,16520,836
Domestic debt10,90212,18812,95613,61914,621
External debt4,8284,8715,6065,5466,215
Total government debt including IMF obligations16,02817,47719,04319,79721,278
Nominal GDP (market prices)25,16927,49329,59829,59833,130
Sources: Pakistani authorities; and IMF staff estimates and projections.

Includes Rs 391 billion in FY2011/12 for the payment of energy and food subsidies delivered in previous years.

Additional spending on security and internally-displaced people is recorded under transfers (“grants”) instead of development expenditure as reported in the original FY2015/16 budget.

Sources: Pakistani authorities; and IMF staff estimates and projections.

Includes Rs 391 billion in FY2011/12 for the payment of energy and food subsidies delivered in previous years.

Additional spending on security and internally-displaced people is recorded under transfers (“grants”) instead of development expenditure as reported in the original FY2015/16 budget.

Table 7.Pakistan: Monetary Survey, 2013/14–2016/17
2013/142014/152015/162016/17
Q1Q2Q3Q4Q1Q2Q3Q4
Projections
(In billions of Pakistani rupees, unless otherwise indicated)
Monetary survey
Net foreign assets (NFA)6018139249638971,0081,0161,1111,1921,301
Net domestic assets (NDA)9,36710,46910,47810,79911,06311,81711,92512,16812,22613,088
Net claims on government, of which: 1/6,0276,9587,1157,1087,3947,8207,7717,9098,0368,212
Budget support, of which:5,4486,3306,4696,5136,8687,1177,2237,3617,4887,664
Banks3,1214,4434,8875,0565,5075,7055,4235,5615,6885,864
Commodity operations492564570523464637548548548548
Credit to nongovernment4,1534,4564,4474,7524,7925,0135,0185,4005,4325,594
Private sector 4/3,7984,0213,9954,3174,3454,4694,4744,8564,8885,050
Public sector enterprises355435452435447544544544544544
Privatization account−3−41−41−41−41−41−41−41−41−41
Other items, net−809−904−1,044−1,021−1,082−974−824−1,101−1,202−677
Broad money9,96811,28211,40211,76211,96012,82512,94113,27913,41914,389
Currency outside scheduled banks2,1782,5552,9702,8803,0133,3343,3653,4533,4893,669
Rupee deposits7,1918,1307,8388,2778,3548,9048,9819,2359,33910,127
Foreign currency deposits599598593605593587595592591593
State Bank of Pakistan (SBP)
NFA4907228739028641,0331,0421,1371,2181,326
NDA2,3722,4202,6112,5742,7122,9413,1782,9272,8733,124
Net claims on government2,3951,9191,6111,4811,3841,4301,7001,7001,7001,700
Of which: budget support2,3281,8871,5821,4571,3611,4121,8001,8001,8001,800
Claims on nongovernment−5−6−6−6−5−5−5−5−5−5
Claims on scheduled banks500401387422423407417416413416
Privatization account−3−41−41−41−41−41−41−41−41−41
Other items, net−5151466617189511,1481,1078578051,054
Reserve money, of which:2,8613,1423,4843,4763,5763,9744,2204,0644,0914,450
Banks’ reserves531413335419383392416401403439
Currency2,3172,7153,1353,0433,1773,5633,8043,6633,6874,012
(Annual percentage change, unless otherwise indicated)
Broad money12.513.214.513.013.513.713.512.912.212.2
NFA, banking system (in percent of broad money) 2/3.72.13.63.01.51.70.81.32.52.3
NDA, banking system (in percent of broad money) 2/8.811.110.910.012.011.912.711.69.79.9
Budgetary support (in percent of broad money) 2/3.78.88.88.39.07.06.67.25.24.3
Budgetary support6.316.215.815.316.112.411.613.09.07.7
Private credit 4/12.55.93.36.48.311.112.012.512.513.0
Currency12.417.331.325.124.930.513.319.915.810.1
Reserve money12.99.824.825.019.226.521.116.914.412.0
Memorandum items:
Velocity2.72.62.62.52.52.52.52.52.52.5
Money multiplier3.53.63.33.43.33.23.13.33.33.2
Currency to broad money ratio (percent)21.822.626.124.525.226.026.026.026.025.5
Currency to deposit ratio (percent)28.029.335.232.433.735.135.135.135.134.2
Foreign currency to deposit ratio (percent)7.76.87.06.86.66.26.26.06.05.5
Reserves to deposit ratio (percent)6.84.74.04.74.34.14.34.14.14.1
Budget bank financing (change from the beginning of the fiscal
year; in Rs billions), of which:3248821391835387878931,0311,1581,334
By commercial banks1641,3234446121,0641,2629801,1181,2451,421
By SBP160−441−304−429−526−475−87−87−87−87
NFA of SBP (change from beginning of the year; in billions of U.S.
dollars) 3/3.62.11.31.51.22.8−0.20.61.32.3
NFA of commercial banks (millions of U.S. dollars)1,130887489584312−243−236−234−234−232
NDA of commercial banks (billions of Pakistani rupees)6,9958,0507,8678,2248,3518,8778,7479,2419,3549,964
Sources: Pakistani authorities; and IMF staff estimates and projections.

Difference between monetary and fiscal tables on banking sector claims on government and bank financing in 2011/12 reflects Rs391 billion in electricty payments.

Denominator is the stock of broad (reserve) money at the end of the previous year.

Includes valuation adjustments.

Items pertaining to Islamic Financing previously reported under “Other assets” have been reclassified as “Credit to private sector” beginning March 2016.

Sources: Pakistani authorities; and IMF staff estimates and projections.

Difference between monetary and fiscal tables on banking sector claims on government and bank financing in 2011/12 reflects Rs391 billion in electricty payments.

Denominator is the stock of broad (reserve) money at the end of the previous year.

Includes valuation adjustments.

Items pertaining to Islamic Financing previously reported under “Other assets” have been reclassified as “Credit to private sector” beginning March 2016.

Table 8.Pakistan: Financial Soundness Indicators for the Banking System(December 2013–June 2016)
Dec.Mar.Jun.Sep.Dec.Mar.Jun. 2/Sep. 2/Dec. 2/Mar. 2/3/Jun. 2/
20132014201420142014201520152015201520162016
Capital adequacy 1/
Regulatory capital to risk-weighted assets15.114.815.115.517.117.417.218.217.316.316.1
Tier I capital to risk-weighted assets12.812.512.513.614.314.214.115.014.413.213.0
Capital to total assets8.98.98.89.010.010.08.38.58.47.97.5
Asset composition and quality
Nonperforming loans (NPLs) to gross loans13.313.412.813.012.312.812.412.511.411.711.1
Provisions to NPLs78.477.879.577.679.880.280.881.884.983.682.4
NPLs net of provisions to capital13.014.012.513.610.19.810.910.07.78.99.7
Earnings and profitability
Return on assets (after tax)1.11.31.41.41.51.71.61.51.51.51.3
Return on equity (after tax)12.414.115.415.916.117.015.915.715.616.314.4
Net interest income to gross income70.369.970.571.471.368.467.569.170.470.070.6
Noninterest expenses to gross income57.456.854.654.853.347.046.146.947.850.651.0
Liquidity
Liquid assets to total assets47.348.347.854.849.251.952.353.753.855.955.2
Liquid assets to total deposits60.063.760.661.464.570.469.574.873.377.377.0
Loans/Deposits48.649.247.748.248.246.945.746.746.646.347.0
Source: State Bank of Pakistan.

As of December 2013, CAR indicators are reported under Basel III.

As required by Basel requirements, the authorities used regulatory capital instead of balance sheet capital to calculate FSI figures.

Changes in the accounting treatment in capital in one bank resulted in a downward revision in regulatory capital to risk-weighted assets and Tier 1 capital to risk weighted assets. This change is not expected to affect other banks.

Source: State Bank of Pakistan.

As of December 2013, CAR indicators are reported under Basel III.

As required by Basel requirements, the authorities used regulatory capital instead of balance sheet capital to calculate FSI figures.

Changes in the accounting treatment in capital in one bank resulted in a downward revision in regulatory capital to risk-weighted assets and Tier 1 capital to risk weighted assets. This change is not expected to affect other banks.

Table 9.Pakistan: Indicators of Fund Credit, 2015–23(In millions of SDR unless otherwise specified)
Projections
201520162017201820192020202120222023
(Projected Level of Credit Outstanding based on Existing Drawings and Prospective Drawings)
Total3,600.04,393.04,393.04,243.03,823.03,163.02,400.81,698.7966.5
Of which:
ECF, SBA, and ENDA0.00.00.00.00.00.00.00.00.0
Extended Fund Facility3,600.04,393.04,393.04,243.03,823.03,163.02,400.81,698.7966.5
In percent of end-period gross official reserves37.433.829.426.924.420.814.511.67.2
As a share of external debt7.88.48.07.26.25.13.92.91.7
(Projected Debt Service to the Fund based on Existing and Prospective Drawings)
Total338.127.258.1207.0470.1699.2793.7726.0748.4
Of which:
Principal303.00.00.0150.0420.0660.0762.2702.2732.2
Interest and charges35.127.258.157.050.139.231.523.916.2
SBA and ENDA Principal0.00.00.00.00.00.00.00.00.0
Extended Fund Facility Principal0.00.00.0150.0420.0660.0762.2702.2732.2
In percent of end-period gross official reserves3.50.20.41.33.04.64.85.05.6
As a share of total external debt service7.00.61.03.35.97.17.87.89.2
Memorandum items
Quota (millions of SDRs)1,0342,0312,0312,0312,0312,0312,0312,0312,031
Gross official reserves (millions of U.S. dollars)13,53418,12920,84721,97121,82521,22223,10820,39518,731
Total External Debt (millions of U.S. dollars)65,10372,97876,92581,87685,34685,84384,79580,67480,480
Total External Debt Service (millions of U.S. dollars)6,7546,0748,5288,87311,05613,68114,14813,05711,398
Source: IMF staff projections.
Source: IMF staff projections.
Table 10.Pakistan: Selected Vulnerability Indicators, 2010/11–2019/20
2010/112011/122012/132013/142014/152015/162016/172017/182018/192019/20
Projections
Key economic and market indicators
Real GDP growth (factor cost, in percent)3.63.83.74.14.04.75.05.25.55.5
CPI inflation (period average, in percent) 1/13.711.07.48.64.52.95.25.05.05.0
Emerging market bond index (EMBI) secondary market spread (basis points, end of period)8571,136703501
Exchange rate PRs/US$ (end of period)85.894.398.798.6
External sector
Current account balance (percent of GDP)0.1−2.1−1.1−1.3−1.0−0.9−1.5−2.2−2.2−1.9
Net FDI inflows (percent of GDP)0.70.30.50.60.30.40.81.01.21.6
Exports (percentage change of U.S. dollar value; GNFS)25.0−4.56.0−3.6−1.4−8.33.73.68.210.7
Gross international reserves (GIR) in billions of U.S. dollars14.810.86.09.113.518.120.822.021.821.2
GIR in percent of ST debt at remaining maturity (RM) 2/306.6209.575.4106.1177.1233.6185.3178.2151.8115.6
GIR in percent of ST debt at RM and banks’ foreign exchange (FX) deposits 2/160.9109.945.662.1100.2135.6125.1121.0106.184.9
Total gross external debt (ED) in percent of GDP, of which:31.129.226.326.724.025.725.124.924.222.7
ST external debt (original maturity, in percent of total ED)1.92.52.14.15.16.25.14.35.14.9
ED of domestic private sector (in percent of total ED)10.810.810.413.415.715.717.618.318.719.4
ED to foreign official sector (in percent of total ED)89.289.289.686.684.384.382.481.781.380.6
Total gross external debt in percent of exports213.2220.2193.2215.1217.3265.8270.0277.5267.2242.9
Gross external financing requirement (in billions of U.S. dollars) 3/2.36.75.36.56.26.310.813.015.316.7
Public sector 4/
Overall balance (including grants)−6.7−8.6−8.4−4.9−5.2−4.3−3.6−2.9−2.7−2.5
Primary balance (including grants)−2.9−4.2−3.9−0.3−0.5−0.10.51.51.71.6
Debt-stabilizing primary balance 5/−7.71.4−1.3−2.8−0.20.0−2.2−1.5−1.10.0
Gross PS financing requirement 6/27.033.036.835.831.831.530.428.827.626.8
Public sector gross debt 7/54.759.962.362.562.064.862.960.458.255.6
Public sector net debt 8/51.755.958.657.157.058.556.654.151.949.2
Financial sector 9/
Capital adequacy ratio (in percent)15.115.415.515.117.2
Nonperforming loans (NPLs) in percent of total loans15.714.514.812.812.4
Provisions in percent of NPLs69.371.873.279.580.8
Return on assets (after tax, in percent)1.51.41.11.41.6
Return on equity (after tax, in percent)15.114.912.415.415.9
FX deposits held by residents (in percent of total deposits)7.27.47.47.76.8
Government debt held by FS (percent of total FS assets)44.655.264.360.561.7
Credit to private sector (percent change)4.07.5−0.612.55.9
Memorandum item:
Nominal GDP (in billions of U.S. dollars)213.6224.4231.2244.4271.0284.2
Sources: Pakistani authorities; and IMF staff estimates and projections.

Inflation after 2009/10 based on new CPI weights, recalculated in September 2011.

Debt at remaining maturity is defined as maturing short-, medium-, and long-term external official debt.

Current account deficit plus amortization of external debt.

Public sector covers general (consolidated) government.

Based on the end of period debt stock in year t-1, and the baseline assumptions for the relevant variables (i.e., growth, interest rates, inflation, exchange rates) in year t.

Overall balance plus debt amortization.

Excludes obligations to the IMF except budget financing, military debt, commercial loans, and short-term debt.

Net debt is defined as gross debt minus government deposits with the banking system.

Financial sector includes all commercial and specialized banks; for government debt also includes nonbanks, but excludes State Bank of Pakistan.

Sources: Pakistani authorities; and IMF staff estimates and projections.

Inflation after 2009/10 based on new CPI weights, recalculated in September 2011.

Debt at remaining maturity is defined as maturing short-, medium-, and long-term external official debt.

Current account deficit plus amortization of external debt.

Public sector covers general (consolidated) government.

Based on the end of period debt stock in year t-1, and the baseline assumptions for the relevant variables (i.e., growth, interest rates, inflation, exchange rates) in year t.

Overall balance plus debt amortization.

Excludes obligations to the IMF except budget financing, military debt, commercial loans, and short-term debt.

Net debt is defined as gross debt minus government deposits with the banking system.

Financial sector includes all commercial and specialized banks; for government debt also includes nonbanks, but excludes State Bank of Pakistan.

Table 11.Pakistan: Schedule of Reviews and Purchases
Amount of Purchase
Date 1/Millions of SDRsPercent of Quota 2/Conditions
September 4, 201336018Approval of arrangement
December 2, 201336018First review and end-September 2013 performance/continuous criteria
March 2, 201436018Second review and end-December 2013 performance /continuous criteria
June 2, 201436018Third review and end-March 2014 performance /continuous criteria
December 2, 201472035Fourth and Fifth reviews and end-June and end-September 2014 performance /continuous criteria
March 2, 201536018Sixth review and end-December 2014 performance /continuous criteria
June 2, 201536018Seventh review and end-March 2015 performance /continuous criteria
September 2, 201536018Eighth review and end-June 2015 performance /continuous criteria
December 2, 201536018Ninth review and end-September 2015 performance/continuous criteria
March 2, 201636018Tenth review and end-December 2015 performance /continuous criteria
June 2, 201636018Eleventh review and end-March 2016 performance /continuous criteria
August 1, 2016734Twelfth review and end-June 2016 performance /continuous criteria
Total4393216
Source: IMF staff estimates.

Date in which resources become available.

Based on Pakistan’s new quota of SDR 2,031 million.

Source: IMF staff estimates.

Date in which resources become available.

Based on Pakistan’s new quota of SDR 2,031 million.

Appendix I. Letter of Intent

September 9, 2016

Ms. Christine Lagarde

Managing Director

International Monetary Fund

Washington, DC, 20431

Dear Ms. Lagarde,

1. Over the past three years, we have been able to significantly reduce economic vulnerabilities and advance key growth-supporting structural reforms under our home-grown economic reform program supported by the IMF. We have rebuilt our external buffers, contained inflation, and reduced fiscal imbalances while strengthening social safety nets to protect the most vulnerable. In parallel, we have strengthened our monetary policy framework, improved the resilience of the financial sector, strengthened our public financial management and tax administration, reduced tax concessions and exemptions and untargeted energy subsidies, significantly reduced the accumulation of power sector arrears, simplified our trade regime and began implementing our strategy to improve the business climate. Despite some delays and slippages, we also advanced in our work toward restructuring and divestment of ailing public sector enterprises (PSEs).

2. Our performance on the twelfth and last review under the three-year EFF-supported program has been satisfactory:

Quantitative performance criteria and indicative targets (Table 1). We met most end-June 2016 quantitative performance criteria (PCs) but the PCs on the budget deficit and Net Domestic Assets (NDA) of the State Bank of Pakistan (SBP) were missed by small margins. We met the indicative targets at end-June 2016 on tax revenue, social spending under the Benazir Income Support Program (BISP), and the accumulation of power sector arrears. We have taken adequate adjustments in our budgetary spending and are stepping up coordination with the provinces to ensure achieving our fiscal deficit target for FY2016/17 (¶¶7 and 11). Moreover, we have adopted measures to ensure a pace of monetary expansion within safe limits (¶15). We request waivers of nonobservance for the two missed performance criteria on this basis.

Table 1.Pakistan: Quantitative Performance Criteria and Indicative Targets for FY 2014/15 and FY 2015/16(In billions of rupees, at program exchange rates, unless otherwise specified)
FY2014/15FY2015/16
end-Juneend-Septemberend-Decemberend-Marchend-June
Program
Twelfth Review
TargetAdj. TargetActual
Performance Criteria
Floor on net international reserves of the SBP (millions of U.S. dollars) 4/5,3546,9556,8826,17211,0506,3107,560
Ceiling on net domestic assets of the SBP (stock, billions of Pakistani rupees)2,4422,6612,6332,7912,7313,0233,029
Ceiling on overall budget deficit (cumulative, excluding grants, billions of Pakistani rupees) 2/1,4893295411,0091,2921,2921,349
Ceiling on SBP’s stock of net foreign currency swaps/forward position (millions of U.S. dollars)1,7001,3851,6501,8852,0002,0001,985
Ceiling on net government budgetary borrowing from the SBP (stock, billions of Pakistani rupees) 1/, 3/1,8871,5891,4571,3611,8001,8001,412
Continuous Performance Criterion
Accumulation of external public payment arrears by the general government (continuous)0000000
Indicative Targets
Cumulative floor on Targeted Cash Transfers Spending (BISP) (billions of Pakistani rupees)942448759595101
Floor on net tax revenues collected by the FBR (cumulative, billions of Pakistani rupees)2,5886001,3852,1033,1043,1043,112
Ceiling on power sector payment arrears (flow, billions of Pakistani rupees)571304.91818(10)
Sources: Pakistani authorities; and Fund staff estimates.

All items as defined in the TMU. Fiscal year runs from July 1 to June 30.

Excluding grants, FY2012/13 overall budget deficit is a stock.

FY 2012/13, total stock of government debt as of June 30, 2013.

Adjustors are presented on a cumulative basis since the beginning of the program (September, 2013).

Sources: Pakistani authorities; and Fund staff estimates.

All items as defined in the TMU. Fiscal year runs from July 1 to June 30.

Excluding grants, FY2012/13 overall budget deficit is a stock.

FY 2012/13, total stock of government debt as of June 30, 2013.

Adjustors are presented on a cumulative basis since the beginning of the program (September, 2013).

Structural benchmarks (Table 2). We met most structural benchmarks for the twelfth review: we have enacted the Deposit Protection Corporation Act, solicited expressions of interests for the disinvestment of the power generation company KAPCO, and updated the power sector arrears reduction plan. However, the notification of multi-year tariffs for three power distribution companies has been further delayed due to the continued dispute with the regulator over FY2015/16 determined tariffs (¶23).

Table 2.Pakistan: Structural Benchmarks, Twelfth and Last Review 2016
ItemMeasureTime Frame (by End of Period)StatusMacroeconomic rationale
Prior Actions
1Bring the stock of NDA of the SBP to or below PRs 3,100 billion by end-August 2016.end-August 2016MetConduct prudent monetary policy
Structural Benchmarks
Financial sector
2Enact the Deposit Protection Corporation Act, in line with Fund staff advice.end-August 2016MetEnhance the resilience of the financial sector.
Structural Policies
3Notify multi-year tariffs for FESCO, IESCO and LESCO.July 15, 2016Not MetPrepare for DISCO privatization.
4Update the plan to further limit the accumulation of new payables and gradually eliminate theJuly 15, 2016MetStrengthen the financial perfomance
outstanding stock of payables arrears in the power sector.of the power sector.
5Solicit expressions of interest for the divestment of Kot Addu Power Company (KAPCO).July 15, 2016MetStrenghten private sector participation in the energy sector.

3. We will continue to strengthen macroeconomic stability and advance our structural reform agenda going forward. With the overall objective to consolidate macroeconomic stability gains achieved in the last three years, we aim to achieve higher, sustainable, and more inclusive growth, which is needed to absorb new entrants in the labor market and improve living standards. We will continue to pursue gradual fiscal consolidation to ensure medium-term debt sustainability, our monetary and exchange rate policies will aim at further bolstering external buffers and preserving low inflation, and we will continue to enhance financial sector stability. In parallel, we will advance our growth-supporting structural reform agenda. We will continue to widen the tax net to generate resources to step up priority spending in areas such as infrastructure, health, and education. In addition, we will further strengthen the performance of the power sector and resolutely address the outstanding stock of arrears. We intend to restructure and attract private sector participation in PSEs to ensure their viability, reduce fiscal risks and improve efficiency. We will continue implementing our strategy to strengthen the business climate to attract private investment, and we will further strengthen our institutional set-up, including by reinforcing the autonomy of the central bank.

Macroeconomic Near-term Outlook

4. Pakistan’s near-term macroeconomic performance is expected to remain robust. Real economic growth increased to 4.7 percent in FY2015/16 and is expected to further accelerate to 5.7 percent in FY2016/17, supported by buoyant construction activity, strengthened private sector credit growth, and an investment upturn related to the China Pakistan Economic Corridor (CPEC). However, in the context of the program, we maintain a growth projection of 5 percent. We expect end-year inflation to remain contained at 5.3 percent in FY2016/17, well-anchored by prudent monetary policy. The current account deficit, which reached 0.9 percent of GDP in FY2015/16, is expected to increase to 1.5 percent of GDP, reflecting rising growth, higher oil prices, and CPEC-related imports. Having reached US$18.1 billion at end-June 2016, we expect foreign exchange reserves of the SBP to continue increasing to $20.8 billion in FY2016/17 (covering 4.5 months of prospective imports), also reflecting our further efforts to bolster external buffers.

Economic Policies

A. Fiscal Policy

5. Over the course of the program, our fiscal consolidation efforts have supported macroeconomic stabilization and public debt sustainability. The FY2015/16 deficit target of 4.4 percent of GDP (including an adjustor of 0.3 percent of GDP for exceptional spending on security and resettlement of internally-displaced persons) was missed by PRs 57 billion (or 0.2 percent of GDP) as the surplus from provincial governments was lower than we expected. The federal government partly compensated for this by containing federal spending despite a shortfall in federal nontax revenue collection. More broadly, over the last three years, we have achieved significant fiscal adjustment (3.9 percent of GDP or 4.2 percent of GDP after excluding exceptional expenditures of 0.3 percent of GDP). This has helped strengthen our public finances and bolster our macroeconomic resilience.

6. We plan to continue a steady pace of fiscal consolidation to further strengthen public finances and improve debt sustainability. As we approach the end of the program, our fiscal policy strategy continues to aim to bring the budget deficit to a sustainable level through revenue mobilization and expenditure rationalization. This will allow us to rebuild fiscal buffers against shocks, put the debt-to-GDP ratio on a downward path, and increase growth-enhancing and poverty-alleviating expenditures.

7. We continue to target a deficit of 3.8 percent of GDP (excluding foreign grants) in FY2016/17. This reflects a baseline deficit of 3½ percent of GDP and extraordinary spending of 0.3 percent of GDP on security and resettlement of internally-displaced persons. However, against the backdrop of slower growth in the collection of the Gas Infrastructure Development Cess (GIDC) and federal nontax revenue, we will manage budgetary spending very prudently and reduce noncritical current and capital expenditures as necessary to achieve our fiscal deficit target (Table 3). In case of any further deviation, we would take additional measures in order to achieve our revenue and budget deficit targets.

Table 3.Pakistan: General Government Budget, 2008/09–2016/17(In billions of Pakistani rupees)
2008/092009/102010/112011/122012/132013/142014/152015/162016/17
Eleventh ReviewActualProjection
Revenue and grants1,8782,1302,3062,6113,0113,8373,9844,6254,5125,293
Revenue1,8512,0792,2612,5672,9823,6313,9374,5564,4475,248
Tax revenue1,3311,5001,7382,0762,2312,6403,0243,6433,6604,265
Federal1,2851,4451,6731,9692,0812,4502,8183,3773,3773,921
FBR revenue1,1571,3291,5581,8811,9362,2722,5943,1043,1123,621
Direct taxes4405296027327368841,0291,2841,1921,461
Federal excise duty116121137122119145170183191245
Sales tax/VAT4525176338098411,0021,0891,2621,3241,498
Customs duties148162185218240241306375406417
Petroleum surcharge112898360110104131135149150
Gas surcharge and other16283227354335383640
GIDC0.00.00.00.00.0325710080110
Provincial465565107151190206265283344
Nontax revenue520579523491751990913913786983
Federal436511461443680941838823693874
Provincial846862487149769093110
Grants275046452920647696645
Expenditure2,5443,0243,5364,3414,8855,0585,4265,8485,7966,498
Current expenditure2,0932,4813,0123,5793,7574,1234,5564,8824,9075,248
Federal1,5471,8532,2272,6112,6472,9503,1693,4023,3573,554
Interest6386426988899911,1481,3041,2891,2631,362
Domestic5595786308219201,0731,2081,1701,1511,231
Foreign79646868717596119113132
Other9091,2111,5291,7221,6561,8021,8662,1132,0932,192
Defense330375450507541623698781758860
Other5798361,0781,2151,1161,1791,1681,3321,3361,332
Of which: subsidies 1/244227493556368336265165218154
Of which: grants 2/136359259291305372401616563581
Provincial5466277869681,1101,1731,3871,4801,5501,694
Development expenditure and net lending4175714776961,1129971,0471,0401,1021,250
Public Sector Development Program3985184656757218781,0131,0401,0891,255
Federal196260216299348435489510496620
Provincial202258249376373443524530592635
Net lending2053122139111934013−5
Statistical discrepancy (“+” = additional expenditure)34−28466716−62−178−74−2120
Overall Balance (excluding grants)−693−944−1,276−1,775−1,903−1,427−1,489−1,292−1,349−1,250
Overall Balance (including grants)−666−894−1,230−1,730−1,873−1,221−1,442−1,223−1,284−1,205
Financing6668941,2301,73018731,2211,4421,2231,2841,205
External861581446038351166493331424
Of which: privatization receipts1000012000
Of which: IMF0000000000
Domestic5807361,0861,67018368701,276730953782
Bank3533056141,1401457322910511780547
Nonbank227431471529378548366219173234
Memorandum items:
Primary balance (excluding grants)−56−302−577−886−912−279−185−3−86112
Primary balance (including grants)−28−252−532−841−882−73−13866−21157
Total security spending330375450507541623698781758860
Energy sector circular debt clearance00039132200251619
Total government debt7,3138,33110,00512,00813,94815,73017,05918,56219,16520,836
Domestic debt3,8604,6546,0177,6389,57110,90212,18812,95613,61914,621
External debt3,4533,6773,9884,3704,3764,8284,8715,6065,5466,215
Total government debt including guaranteesn.a.8,93410,58412,54014,57316,29117,695
Total government debt including IMF obligations7,7319,02010,77312,69914,38016,02817,47719,04319,79721,278
Nominal GDP (market prices)13,20014,86718,27620,04722,38625,16927,49329,59829,59833,130
Sources: Pakistani authorities; and IMF staff estimates and projections.

Includes Rs 391 billion in FY2011/12 for the payment of energy and food subsidies delivered in previous years.

Additional spending on security and internally-displaced people is recorded under transfers (“grants”) instead of development expenditure as reported in the original FY2015/16 budget.

Sources: Pakistani authorities; and IMF staff estimates and projections.

Includes Rs 391 billion in FY2011/12 for the payment of energy and food subsidies delivered in previous years.

Additional spending on security and internally-displaced people is recorded under transfers (“grants”) instead of development expenditure as reported in the original FY2015/16 budget.

8. Revenue mobilization has been—and will continue to be—the most important pillar of our fiscal policy strategy. Over the last three years, our tax revenue-to-GDP ratio increased by 2.4 percent of GDP to 12.4 percent in FY2015/16—the highest level since 1999. The elimination of tax concessions and exemptions made a significant contribution, and, after we significantly restricted the legal authorization to grant tax concessions and exemptions through Statutory Regulatory Orders (SROs), we will maintain a rule-based and transparent framework for tax expenditures. Through a variety of efforts, including the introduction of differential tax rates for filers and nonfilers of income tax and sending of more than 300,000 first notices to nonfilers, the number of tax filers increased by 30 percent over the last three years to more than 1 million. Recently, we also introduced rationalized valuation for real estate taxes. Despite the progress, the full potential of the tax system has still to be realized and requires to generate additional resources to step up critical physical infrastructure, human capital, and social expenditures. To this end, we will refrain from granting concessions, exemptions and any form of amnesty, enhance tax policy measures, and accelerate administrative reforms aimed at broadening the tax base and modernizing our tax system. Over the coming years, we will aim at:

  • Tax policy measures. (i) Broadening the tax base; (ii) modernizing the General Sales Tax (GST) regime on goods and services with few exceptions in close coordination with the provinces; and (iii) establishing a tax policy research and analysis unit outside the FBR.

  • Tax administration reforms. (i) Improving FBR’s access to third-party information; (ii) ensuring data matching between domestic taxes and customs to identify noncompliant taxpayers and minimize under-declarations; (iii) accelerating the implementation of risk-based auditing with a focus on high net worth individuals and large companies; (iv) building a centralized fiscal cadastre (to facilitate market value-based real estate tax); (v) putting in place additional governance and anti-corruption measures at the FBR; (vi) seeking parliamentary approval of the legislation against “benami” transactions by December 2016; and (vii) reducing the outstanding stock of tax refund claims to no more than a three-month flow.

9. We will continue to improve the composition of expenditures to support growth. As part of our multi-year fiscal consolidation strategy, we reduced poorly targeted energy subsidies by about 1 percentage point to 0.6 percent of GDP in FY2015/16, while expanding cash transfers to low-income households by 0.12 percentage points to 0.4 percent of GDP and increasing capital spending by 0.5 percent of GDP. Going forward, as indicated by the FY2016/17 budget, we will lower energy subsidies to 0.4 percent of GDP and continue to rationalize current expenditures across all layers of the general government, while continuing to increase targeted social assistance in real terms and further improving the share of development spending.

10. We have strengthened our public financial management framework to provide better policy guidance and anchor debt sustainability. We have already amended the Fiscal Responsibility and Debt Limitation (FRDL) Act with a limit on the federal government budget deficit and a gradual reduction in the general government debt ratio. We have also submitted to parliament a new public-private partnership (PPP) law to support investments and provide for transparency and better management of associated fiscal risks. The new PPP law makes PPPs a part of the overall budget process and medium-term planning exercise and gives the Ministry of Finance an explicit role as gatekeeper in all stages of PPP projects. While the PPP law provides the overall legal framework to manage fiscal risks originating from PPPs, we will provide detailed guidance through rules and regulations. Going forward, we will continue to enhance our medium-term budget framework and further improve the fiscal accounts across all levels of government.

11. We will strengthen intergovernmental fiscal policy coordination to ensure the sustainability of public finances. Given the extent of devolution in revenue and expenditure assignments, strengthening fiscal policy coordination across all layers of the government is needed. To this end, the newly established Fiscal Coordination Committee (FCC), comprising the provincial and federal finance secretaries, will continue to hold quarterly meetings to synchronize policy guidance and budget implementation. Furthermore, we will seek an agreement to balance devolution of revenue and expenditure responsibilities in a way that allows for internalizing the objectives of macroeconomic stability and fiscal sustainability across all layers of the general government. To this end, we are encouraging provincial governments to enhance their own revenue mobilization by bringing underdeveloped tax bases such as agriculture, services, and property, more effectively into the tax net and improve taxpayer compliance with a particular focus on identifying misdeclarations in agricultural income.

12. We will continue to strengthen debt management. We created the Debt Policy Coordination Office (DPCO) and integrated it in the Ministry of Finance as a middle office. We adopted a medium-term debt strategy and began monitoring it through preparation of quarterly risk reports. We lengthened the average maturity of the domestic debt portfolio and are continuing to diversify our domestic and international financing sources to reduce rollover risks. Looking ahead, we will strive to further lengthen the maturity of our debt profile and increase staffing capacity of the DPCO.

13. We will continue supporting the most vulnerable through BISP and strengthen the targeting and the efficiency of the program. Over the course of our program, we have expanded the coverage of unconditional cash transfers (UCTs) from 3.78 million beneficiaries in June 2013 to 5.36 million at end August 2016. Similarly, we have increased the amount of cash transfers from PRs 3,000 (per beneficiary, per quarter) in June 2013 to PRs 4,700 in FY2015/16 and we will further increase quarterly stipends in line with inflation in FY2016/17, through additional financing mobilized from development partners. We have increased the annual budget allocation to BISP from PRs 75 billion in FY2013/14 to PRs 115 in FY2016/17. We will continue to expand UCT coverage to reach 5.45 million beneficiaries by end-March 2017. In addition, we have strengthened service delivery, reduced costs, and improved the program’s efficiency. We have also rolled out education-conditional cash transfers in 32 districts and expanded coverage to reach 1.3 million children at end-June 2016. We are piloting a biometrics-based transaction system to reduce the possibility for fraud and are updating the BISP beneficiaries’ database (National Socio Economic Registry) by mid-2018 to strengthen the program’s targeting. We will also extend coverage of the CCT to 1.6 million children in FY 2016/17.

B. Monetary and Exchange Rate Policies

14. We have rebuilt our external buffers, contained inflation, and strengthened SBP’s autonomy. On the back of our supportive macroeconomic policies, an improved current account helped by declining oil prices and strong remittances, SBP’s spot purchases in the foreign exchange market, and sustained international official disbursements, we increased our gross international reserves from US$6 billion in FY2012/13 to US$18.1 billion at end-June 2016, covering more than four months of prospective imports. Furthermore, inflation was reduced to less than 3 percent (on average) in FY2015/16 from more than 7 percent in FY 2012/13, reflecting our prudent monetary policy stance and reduced government’s budgetary borrowing from the SBP, and helped also by lower food and fuel prices. We amended the SBP law and put in place a number of administrative measures to increase the SBP’s autonomy, established an independent monetary policy committee, and strengthened the interest rate corridor and the internal operations of the SBP. In this respect, we have already delegated the SBP Board the authority to appropriate and distribute profits, and prohibited the distribution of unrealized gains.

15. Our monetary and exchange rate policy will continue to aim at building external buffers and preserving price stability. We will continue to take advantage of the oil windfall and build reserves while supporting exchange rate flexibility. The increased buffers would help mitigate potential external risks. We will also continue to improve our trade competitiveness, eroded by real effective exchange rate appreciation over the last three years. We will continue to maintain a prudent monetary policy stance to preserve low inflation. To this end, following the minor overrun in NDA relative to our end-June PC, we have brought the stock of NDA to below PRs 3100 billion by end-August 2016 (subject to program adjustors; prior action). We will remain vigilant to any signs of additional inflationary pressures in coming months and will continue to maintain positive real interest rates by setting the policy rate on a forward-looking basis. Furthermore, we will move forward in implementing certain remaining recommendations of the 2013 Safeguards Assessment to further strengthen the SBP’s autonomy. In addition, the SBP will remain autonomous in its decisions regarding profit appropriation, which was delegated to the SBP Board in March 2016.

16. We aim to implement an inflation targeting framework over the medium-term. To this end, we will strengthen the SBP’s analytical capabilities in support of a flexible inflation targeting framework, improve transparency, and disseminate information about inflation expectations and forecasts.

C. Financial Sector

17. In the last three years, we strengthened the resilience and stability of the financial sector and enabled the recovery of credit to the private sector. The performance of the banking system has steadily improved as reflected in higher profitability, robust capital adequacy, strengthening liquidity indicators, declining ratios-and better provisioning-of nonperforming loans (NPLs), and a revival of credit to the private sector. We enacted the Deposit Protection Corporation Act to establish a deposit protection scheme to enhance the stability and soundness of the banking system (end-August 2016 SB). Furthermore, we enacted the Corporate Restructuring Companies (CRC) Act and amended the Financial Institutions (Recovery of Finances) Ordinance to improve recovery and resolution of NPLs and support the provision of credit to the economy. We have also strengthened our regulatory and supervisory framework, among others through the phased implementation of Basel III capital and liquidity requirements.

18. We will continue to protect the stability of the banking sector, further reinforce the regulatory and supervisory framework, and aim to deepen the financial industry. We will implement a broad set of financial reforms elaborated in our strategic plan “SBP Vision 2020” aiming to improve the banking sector’s resilience, enhance supervisory vigilance and improve the risk management framework. We will ensure that three remaining undercapitalized banks are brought into regulatory compliance. To this end, one bank has already injected part of the required capital and is in the process of raising additional equity through a rights issue by end-September. Another publicly owned bank is in the divestment process, expected to be completed by end-2016, while one small bank is seeking to merge with a larger peer, also expected to be completed by end-September 2016. We will also continue to strengthen the legal and regulatory framework for the financial sector and improve macro-prudential measures. In this context we will strengthen the supervision of systemically important banks and develop consolidated banking supervision. Furthermore, we will continue with the phased implementation of Basel III regulatory norms, continue our efforts to resolve NPLs, and work towards early enactment of the Corporate Rehabilitation Act. We will make the new deposit insurance operational by end-December 2016. Furthermore, we will operate the Pakistan Development Fund to finance infrastructure projects on a commercial basis and mobilize the participation of international development partners for the purpose of gaining technical expertise, financing, and ensuring good governance.

19. We will continue enhancing the effectiveness of the anti-money laundering and combating the financing of terrorism (AML/CFT) framework. After amending the AML Act to subject the proceeds of serious tax crimes to AML legislation, we will work on implementation measures that will bolster the reporting of suspicious transactions related to tax evasion by financial and nonfinancial institutions, and enhance the proper use of financial intelligence and sharing of information and cooperation between the Financial Monitoring Unit and the FBR to address tax evasion while improving the enforcement of revenue collection. We will also continue strengthening the effectiveness of the AML/CFT framework in line with international standards to prepare for the upcoming mutual evaluation that will be conducted by the Asia Pacific Group for money laundering in 2018, including by tackling the proceeds of corruption and strengthening the effective implementation of the relevant United Nations Security Council Resolutions related to terrorism and terrorist financing.

D. Reforming Public Sector Enterprises

20. We have made progress in the implementation of our reform agenda to restructure and attract private sector participation in public sector enterprises (PSEs). We resumed our divestment program after a significant gap and raised PRs 173 billion from our divestments, including over US$ 1.1 billion from foreign investors. Transactions included the sale of minority stakes in United Bank Limited (UBL), Allied Bank Limited (ABL), Habib Bank Limited (HBL) and Pakistan Petroleum Limited (PPL), and the strategic sale of National Power Construction Co. (NPCC). We solicited expressions of interest (EOIs) for the disinvestment of the government’s residual stake in Kot Addu Power Company (KAPCO), a major power generation company (July 15, 2016 SB). Alongside, we have completed a significant amount of preparatory work toward restructuring and seeking strategic private sector participation for a number of PSEs. However, owing to labor tensions and political opposition, we revised our strategy for PSEs in early 2016 and amended the timeline and mode of the planned divestment transactions, including for PIA, PSM, and DISCOs. We are implementing a comprehensive restructuring plan for Pakistan Railways and have already significantly improved the company’s revenues by improving freight services, rationalizing tariffs, and strengthening expenditure controls and governance. We solicited EOIs for strategic private sector participation in SME Bank. Furthermore, the bill to corporatize State Life Insurance Corporation (SLIC) has been passed by the National Assembly.

21. We express our resolve to restructure and attract private sector participation in PSEs in order to reduce fiscal costs, ensure their medium-term financial viability, and improve efficiency.

  • Pakistan International Airlines (PIA). While the government will maintain a majority of shares and management control of PIA, we intend to attract private sector participation. To this end, we are in the process of separating PIA’s core and noncore activities and will approve the transaction structure for offering a minority stake to a strategic partner and/or the general public by end-December 2016 and complete the bidding process by August 2017. We will continue to work with PIA management to further contain financial losses by: (i) increasing performance by route rationalization and fleet modernization and expansion, (ii) reducing financial and operational costs, and (iii) providing better services to gain customers’ confidence.

  • Pakistan Steel Mills. In the absence of an agreement with the provincial government of Sindh regarding the transfer of PSM’s ownership, we have resumed in July 2016 the process to attract strategic private sector participation. To this end, we will finalize the transaction structure by September 2016, aiming to conclude the bidding process by end-June 2017. In parallel, we will continue to limit PSM’s financial losses.

  • Pakistan Railways. We will continue to implement our restructuring plan, including further improving freight and passenger services, increasing and diversifying revenues by actively participating in new ventures, strengthening the internal organization, and improving the company’s financial accounting practices to gradually converge toward International Financial Reporting Standards (IFRS).

  • Energy sector. We will move forward with the divestment in KAPCO and finalize the transaction by March 2017. Furthermore, we will conduct an IPO in the capital market for FESCO by February 2017, to be followed by IPOs for IESCO and LESCO by the end of FY 2016/17. We will utilize the IPOs’ proceeds to reduce the stock of outstanding circular debt in the power sector. In parallel, we will continue to improve DISCOs’ performance and reduce the system financial losses. We will continue to divest our stakes in the DISCOs in the medium term.

  • Other companies. We will finalize the transaction of SME Bank by end-December 2016, the divestment of government’s shares in Mari Petroleum Limited (MPCL) to existing shareholders by October 2016 and the IPO for SLIC by end-March 2017.

E. Energy Sector Reforms

22. Over the last three years, we have advanced in tackling key structural weaknesses in the power sector. We reduced unscheduled electricity outages, increased electricity supply by adding new generation capacity and rehabilitating existing generation plants, improved demand management, and strengthened the regulatory framework and governance. We reduced budgetary subsidies and significantly contained the accumulation of new payable arrears in the power sector by (i) improving DISCOs’ performance, (ii) rationalizing tariffs and introducing surcharges to bring prices closer to cost recovery (while maintaining a uniform tariff across the country), and (iii) reducing delays in tariff determination. On the back of a net reduction in payables in the fourth quarter, the stock of circular debt declined to PRs 321 billion at end-June 2016. The stock of debt held in PHCL was maintained at PRs 335 billion. In order to improve DISCOs’ performance, we signed performance contracts, set quarterly performance targets, improved monitoring and enforcement, strengthened legislation to pursue electricity theft, upgraded the electricity transmission and distribution network, improved revenue-based load management and the provision of incentives to collectors. As a result, we reduced DISCOs’ distribution losses to 17.9 percent in FY 2015/16 from 18.9 percent in FY 2012/13 and increased collection rates to 92.6 percent in FY 2015/16, from 87.2 percent in FY 2012/13.

23. We will move further ahead with our reform efforts to ensure the soundness of the power sector which is key to support higher medium-term growth. We intend to further contain the accumulation of new arrears in the power sector and gradually reduce the outstanding stock. To this end, we updated our circular debt reduction plan in consultation with our development partners to reflect the changes in the divestment strategy for DISCOs (July 15, 2016 SB). In line with this plan, we will continue to improve the performance of DISCOs by further reducing losses and increasing recoveries, reduce the system financial losses, use the proceeds from DISCOs’ IPOs and successive divestment to reduce the stock of outstanding circular debt, and will, by September 2016, resolve outstanding issues with Azad Jammu and Kashmir (AJK). Furthermore, after several DISCOs entered in litigation against NEPRA over the determination of FY 2015/16 tariffs, we will continue our dialogue with NEPRA to revise regulatory benchmarking for tariff determination in relation to recoveries and losses, while preserving the integrity of the regulatory framework. We will notify the delayed FY 2015/16 tariffs at the earliest, which will include notification of the multi-year tariffs for FESCO, IESCO and LESCO (missed July 15, 2016 SB). This will be necessary for attracting private sector participation and moving forward with the gradual setting up of a multi-year framework for the remaining DISCOs. Following the notification, we will ensure the resumption of the timely and regular tariff notification process. Finally, we will more than double our electricity generation capacity in the medium term, including through CPEC projects. In this regard, we will ensure to maintain a regulatory framework allowing for cost recovery, strong governance and monitoring of CPEC and other generation projects, and manage associated risks.

24. We have advanced in the implementation of our comprehensive gas sector reform. In order to reduce gas shortages, we implemented a strategy to increase gas supply through gas imports and encouraging domestic production which led to 500 MMCFD (or 13 percent) increase. We started importing Liquefied Natural Gas (LNG) in March 2015 and are in the process of launching LNG terminals and expanding the transportation network. We are passing through the full cost of LNG imports to end-consumers. We improved incentives for local gas production by implementing the Petroleum Policy 2012 and raising producer prices by 50 percent (on average), and we awarded new exploration licenses and converted existing ones. Furthermore, we rationalized the end-user gas price to bring it closer to cost recovery and better guide demand. We started tackling gas system losses (unaccounted-for gas) by formulating and implementing gas loss reduction plans in the two gas utility companies and enacting the Gas (Theft Control and Recovery) Act to better pursue gas theft offenses. We also conducted a comprehensive review of the rules for third party access to the gas network and strengthened governance by publishing periodic monitoring and evaluation reports on performance of the oil and gas sector. We completed a study to examine options for unbundling gas companies and opening up the gas market.

25. We are resolved to move further ahead to address remaining challenges in this sector. We will resume our practice of regular semi-annual gas tariff notification to ensure cost-recovery, avoid the build-up of losses for gas companies, and strengthen the regulatory framework. To this end, we will complete the FY 2016/17 tariff determination by early October 2016 to be followed by notification of the revised tariff, and continue to fully pass through the price of imported LNG to consumers. Furthermore, we will continue to increase LNG imports and required transport infrastructure. We will ensure appropriate incentives to increase domestic production and revise the incentives in nonconventional gas policies. We will reduce system gas losses through network investment measures, managerial, technical and administrative improvements. We will also amend the rules for third party access to the gas transmission system by December 2016 to increase competition. Furthermore, we will unbundle the gas sector within FY 2017–18.

F. Improving the Business Climate and Liberalizing Trade

26. We have made progress towards improving the business climate. After implementing several measures under our 2014 Action Plan, we began implementing in early 2016 a new and comprehensive country-wide reform strategy to improve the business climate with time-bound measures at the federal and provincial level. To this end, we facilitated starting a new business, paying taxes and getting credit, strengthened the regulatory framework and simplified trading across borders. Notably, we introduced one-stop-shops and rationalized the fee structure for opening new businesses. We reduced the number of procedures for paying taxes, introduced Alternative Dispute Resolution (ADR) mechanisms to facilitate the resolution of commercial disputes, and adopted a new National Financial Inclusion Strategy. We also improved credit information systems and the collateral framework, enacted the amendments to the Credit Bureau Act 2015, and issued regulations for credit bureaus. We launched a web-based portal to simplify trade documentation.

27. We will further accelerate the implementation of our new business climate reform strategy to foster private sector investment and higher and more inclusive growth. We will further facilitate the creation of new businesses by completing the automation of the OSSs, and reducing start-up procedures for small-sized companies. Furthermore, we will further improve the electronic payment system to ease paying taxes. We will license private credit bureaus under the new Credit Bureau Act and develop regulations to strengthen the collateral framework. We will continue to encourage provinces to expedite the execution and registration of deeds, digitize maps, and provide online access to land records to facilitate property registration. We will further expand the availability of ADR mechanisms, increase case management systems in district courts, and establish specialized commercial courts. Finally, we will further simplify procedures for trade documentation.

28. We have simplified the import tariff structure and strengthened trade relations, and we will continue to maintain an open trade regime to support economic growth. We have gradually reduced import tariff slabs from seven to four and phased-out trade-related SROs. We took advantage of the three-year Generalized System of Preferences Plus benefits with the European Union from January 2014 and we will start negotiations for its extension.

G. Conclusions

29. Based on our successful program performance and remedial actions, we propose completion of the twelfth and last review under the Extended Arrangement. We express our appreciation to the Fund for their partnership over the last three years in support of our reform agenda for the purpose of turning around the macroeconomic instability, which prevailed in Pakistan in 2013 and to achieve macroeconomic stability. Having concluded the EFF program, we will pursue our consultation and policy dialogue. We are pleased to share our resolve in following prudent economic policies to preserve and consolidate hard-earned macroeconomic stability gains and continue advancing growth-supporting structural reforms. We authorize the International Monetary Fund to publish this Letter of Intent and its attachments, and the related staff report.

/s//s/
Senator Mohammad Ishaq DarAshraf Mahmood Wathra
Minister of FinanceGovernor of the State Bank of Pakistan
PakistanPakistan

Attachment. Performance of the Power Sector

1. Stock and flow of payables in the power sector. The stock of payment arrears includes the payables of PRs 321 billion, and the stock of PHCL of PRs 335 billion at end-June 2016. The evolution of the stock and the flow of payables, including its components, for FY 2014/15 and FY 2015/16 are given in the following table:

(In Billion PRs)1/2015/162014/152015/16
Q1Q2Q3Q4
TargetActualTargetActualTargetActualTargetActualTotalTotal
Non-recoveries163712(6)16.003.0191210446
Accrued Markup23
Excess Line Losses1122(3)(8)0.40(2.7)455017
GST Non Refund14
Late Payment Surcharge1118
Delay Determinations3311
Flow (under arrears plan)315913(13)160.3231721063
Operational deficit/surplus of the system1015363(18)n.a.43
Impact of oil prices(56)(20)(2)(29)(8)(14)n.a.(119)
Others 1/(4)181219n.a.45
Stock clearance47463(14)(15)n.a.(25)
Total flow13015518(10)488
Total (Stock)297326287326341331350321313321

Includes STFC arrears due to court stay, LNG payment arrears due to delay in tariff determination and other costs not recovered.

Includes STFC arrears due to court stay, LNG payment arrears due to delay in tariff determination and other costs not recovered.

2. Performance of DISCOs. In October 2015, quarterly quantitative targets have been determined by MWP and each DISCO for distribution losses, and collection. The performance of DISCOs against targets are given in the tables below:

Target Bill

Collection

(In percent)
Q1Q2Q3Q4FY 2015/16
ActualTargetActualTargetActualTargetActualTargetActual
LESCO95.4107.4108.7111.3112.176.492.796.299.7
GEPCO95.7103.2107.5110111.380.893.695.799.7
FESCO95.9107.1113.6105.5105.988.495.598.5100.4
IESCO79.498.3103.789.190.186.995.387.691.1
MEPCO92105.7113.3112.4106.888.696.598.1100.6
PESCO81.790.994.996.687.781.591.387.188.7
TESCO8.88.712.39.111.3414.9585.875.4444.5
HESCO52.881.790.793.990.972.869.772.672.4
SEPCO4251.364.777.670.664.756.556.255.0
QESCO105.122.974.32783.349.534.557.567.1
TOTAL DISCOs86.995.6101.598.597.383.193.990.294.6
Losses target

(In percent)
Q1Q2Q3Q4FY 2015/16
ActualTargetActualTargetActualTargetActualTargetActual
LESCO15.29.199.19.818.419.114.113.9
GEPCO14.33.12.47.1714.014.410.710.6
FESCO11.95.32.46.75.815.415.510.99.8
IESCO9.61.51.83.15.218.316.39.49.1
MEPCO21.5109.4109.819.520.316.716.4
PESCO41.726.227.226.127.835.234.834.033.8
TESCO21.117.817.514.116.628.320.420.619.0
HESCO29.218.720.423.222.730.330.426.526.5
SEPCO42.630.630.830.530.641.841.638.137.9
QESCO24.919.421.823.522.92725.723.923.9
TOTAL DISCOs21.112.411.913.213.422.222.018.017.9

Pakistan’s new quota is SDR 2,031 million (previously SDR 1,033.7 million).

International Monetary Fund, 2016, “Guidance Note on the Assessment of Reserve Adequacy and Related Considerations,” IMF Policy Paper, June (Washington: International Monetary Fund).

The underlying fiscal adjustment after accounting for clearance of circular debt in the energy sector (1.4 percent of GDP in FY 2012/13) was 2.5 percentage points of GDP over the program period.

The increase in gross public debt in FY 2015/16 was more than projected mainly due to a build-up of government deposits along with exchange rate effects and a higher-than-programmed budget deficit.

Two small banks (1.5 percent of the banking assets) are marginally CAR–noncompliant, in part due to an increase in the CAR requirement, with their overall capital shortfall being less than 0.08 percent of GDP. A third small bank is below the minimum capital requirement (MCR).

The number of Pakistani workers employed overseas rose by more than 25 percent y-o-y in 2015 and was mostly concentrated in the GCC countries.

The total stock of outstanding tax refund claims, increased to PRs 205 billion in June 2016, from PRs 200 billion in June 2015. As part of this total stock, outstanding GST refund claims increased to PRs 133 billion at end-June 2016, from PRs 89 billion at the end of FY2014/15. The authorities explained that this increase reflects, in part, a more systematic effort to register outstanding claims.

The most recent National Finance Commission (NFC) award and the 18th constitutional amendment grant 57.5 percent of most revenues to the provinces, along with devolution of spending responsibilities and sales taxation authority in services in addition to the existing taxation authority in agriculture and property. In the current round of NFC negotiations, the federal government will seek an agreement to better balance devolution of revenue and expenditure responsibilities, in a way that is consistent with the objective of macroeconomic stability.

The SBP has issued industry-wide instructions which pertain to eligible capital and related deductions, capital conservation buffer, and liquidity standards of LCR and NSFR.

The extreme test scenario assumes lower remittances, higher profit repatriation, a sharp decline in FDI and equity portfolio inflows, higher external financing costs, and lower medium-term growth.

Pakistan is projected to fall below the PPM thresholds by 2023.

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