March 30, 2001

1. This statement reports on the implementation of prior actions that have been specified in the Memorandum on Financial and Economic Policies (MEFP) and provides an update on the main recent economic developments and financing issues. The information contained in the statement does not alter the analysis and appraisal contained in the staff report (EBS/01/39).

2. The two remaining prior actions at the time of the circulation of the staff report to the Board have been implemented. Increases in the average electricity tariff rates of the Water and Power Development Authorities (WAPDA) and of the Karachi Electricity Supply Corporation (KESC) of 4.5 percent and 13.2 percent, respectively, were approved by the National Electric Power Regulatory Authority (NEPRA) in decisions dated March 18, March 22, and March 24, and became effective on March 27, 2000. In addition, formula-based automatic fuel price adjustment clauses for electricity tariffs were introduced.

3. Official reserves are improving without undue pressure on the rupee. As of March 28, the level of usable gross official reserves amounted to US$735 million. The buildup of reserves over the last month (from US$566 million at end-February) was mainly achieved through purchases of foreign exchange in both interbank and kerb markets, without any recourse to short-term swap and forward contracts. The rupee has depreciated by 0.7 percent since the beginning of the month and the spread between the interbank and kerb rates remains at about 5 percent.

4. Monetary policy stance has been tightened. To mitigate the pressure on the exchange rate from the foreign exchange purchases and to meet the NDA target of the State Bank of Pakistan for end-March, the central bank has started to mop up rupee liquidity and raised interest rates on March 21. Treasury bill rates have risen by 32-65 basis points. With the parallel loosening of the U.S. Federal Reserve’s monetary policy stance, the spread in favor of the rupee has increased even more. At 11.3 percent, the rate on three-month treasury bills is now above the comparable U.S. rate by more than 700 basis points, against 430 points in November 2000.

5. The Central Board of Revenue (CBR) has continued to implement the short-term action plan to improve tax administration broadly as scheduled. Over the past few weeks the authorities have focused especially on sales tax audits, arrears, and nonfilers. In particular, the CBR has increased the number of sales tax audits to 620 in February (from a monthly average of 240 during July-December 2000, and 510 in January 2001); reassigned 400 auditors from tax survey work to sales tax audits; and stepped up supervision of auditing and follow-up on nonfilers in collectorates. In addition, effective March 15, the establishment of Appellate Tribunal benches has been simplified to allow more and faster hearings of sales tax arrears cases. The final report of the Committee to Revise the Income Tax Ordinance has been submitted to the government by end-March as scheduled and the authorities have requested further technical assistance from LEG and FAD with the objective to have the new income tax ordinance ready for promulgation with the 2001/02 budget in July. The submission of the final report of the Task Force on Tax Administration has been delayed until mid-April.

6. The SBP has approved a further cut in subsidies under the Export Finance Scheme (EFS) and withdrawn the restriction on commercial banks’ placement of foreign currency deposits abroad, effective April 1. EFS rates will increase from 9 percent per annum to 10.5 percent; the authorities intend to eliminate the remaining EFS subsidies by end-June 2001. The SBP has put in place a reserve requirement of 25 percent on foreign currency deposits, as well as other measures to protect the interest of depositors, as envisaged in the MEFP.

7. The mobilization of exceptional financing is proceeding as envisaged in the MEFP. All the prior actions required by the Asian Development Bank related to two loans have been implemented, and US$80 million are expected to be disbursed shortly. Preparation for the World Bank’s Structural Adjustment Credit (SAC) is under way. Drafts of the President’s Report and of the Country Assistance Strategy Update are under review by the World Bank’s Operation Committee. The US$350 million credit is expected to be considered by the Executive Board of the World Bank by end-May 2001.