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© 2001 International Monetary Fund

December 2001

IMF Country Report No. 01/222

Pakistan: Request for a Three-Year Arrangement Under the Poverty Reduction Growth Facility (PRGF)—Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director

In the context of the request for a three-year arrangement under the PRGF, the following documents have been released and are included in this package:

• the staff report for the request for a three-year arrangement under the PRGF, prepared by a staff team of the IMF, following discussions that ended on October 26, 2001 with the officials of Pakistan on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on November 26, 2001. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

• a staff statement of December 6, 2001 updating information on recent economic developments.

• a press release summarizing the views of the Executive Board as expressed during its December 7, 2001, discussion of the staff report that completed the review.

• a statement by the Executive Director for Pakistan.

The documents listed below have been separately released.

Letter of Intent by the authorities of the member country^*

Memorandum of Economic and Financial Policies by the authorities of the member country^*

Technical Memorandum of Understanding^*

^*May also be included in Staff Report.

The policy of publication of staff reports and other documents by the IMF allows for the deletion of market-sensitive information.

To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to Publicationpolicy@imf.org.

Copies of this report are available to the public from

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International Monetary Fund

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INTERNATIONAL MONETARY FUND

PAKISTAN

Request for a Three-Year Arrangement Under the Poverty Reduction Growth Facility

Prepared by the Middle Eastern Department and the Policy Development and Review Department

(In consultation with other departments)

Approved by P. Chabrier and M.T. Hadjimichael

November 26, 2001

Contents

• List of Acronyms

• Executive Summary

• I. Introduction and Background

• II. Recent Developments

• III. Pakistan’s Adjustment and Reform Strategy

  • A. The Medium-Term Strategy and Post-September 11 Scenario

  • B. Macroeconomic Policies for 2001/02

  • C. Fiscal Reform

  • D. Exchange System and Financial Sector Reform

  • E. Governance Reforms and Private Sector Development

  • F. Social Impact and Safety Net Programs

  • G. The External Sector and Balance of Payments Outlook

• IV. Program Monitoring and Implementation Capacity

• V. Statistical Issues

• VI. Staff Appraisal

• Text Boxes

• 1. External Financing After Gap September 11

• 2. Tax Reforms Under the PRGF-Supported Program

• 3. Social Safety Net Initiatives

• 4. Structural Conditionally

• Figures

• 1. Output and Inflation, 1995/96–2000/01

• 2. External Sector Developments, 1995/96–2000/01

• 3. Exchange Rate and Stock Market Developments, 1995–2000

• 4. Fiscal Developments, 1993/94–2000/01

• 5. Monetary Developments, 1993–2001

• Tables

• 1. Selected Economic and Financial Indicators, 1998/99–2003/04

• 2. Social Indicators, 1970–1999

• 3. Phasing of Disbursements and Reviews, 2001–2004

• 4. Consolidated Government Budget, 1999/2000–2003/04

• 5. Monetary Developments, 1997/98–2001/02

• 6. Accounts of the State Bank of Pakistan, 1997/98–2001/02

• 7. Balance of Payments, 1999/2000–2003/04

• 8. Gross Financing Requirements, 2001/02–2003/04

• 9. Summary of Public External Debt and Debt Service, 1998/99–2003/04

• 10. Indicators of External Vulnerability, 1999/2000–2000/01

• 11. Indicators of Fund Credit, 2000/01–20014/15

• 12. Summary Accounts of Seven Key Public Sector Enterprises, 1997/98–2001/02

• Appendices

• I. Fund Relations

• II. World Bank Relations

• III. Statistical-issues

• IV. External Debt Sustainability Analysis

• Attachment

• I. Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding

List of Acronyms

Executive Summary

Performance under the recently expired Stand-By Arrangement has established a good track record of macroeconomic policy and structural reform implementation. However, Pakistan has yet to build a viable modern tax system and tackle widespread poverty, and weaknesses in basic social services.

The reform agenda under the proposed PRGF arrangement and the I-PRSP is aimed at raising growth closer to Pakistan’s potential of at least 6 percent within a few years, while ensuring that the benefits are widely shared by the poor. The authorities’ strategy centers on the continued pursuit of sound macroeconomic policies, in particular sustained fiscal adjustment, while increasing the share of poverty-reduction related public spending; strengthening governance, with specific focus on efficiency, transparency and accountability in public resource management; tax policy and administration reform; public enterprise restructuring and privatization; and financial sector and foreign exchange market reforms.

The envisaged fiscal consolidation over the medium term, combined with external support through grants and debt relief, will allow a substantial reduction in the public debt-to-GDP ratio. While the deficit excluding grants in 2001/02 of 5.3 percent of GDP is slightly less ambitious than the original budget objective, reflecting the impact of the September 11 shock, it will have a positive impact on public debt dynamics while allowing for additional social spending. Achieving the fiscal targets will depend critically on measures to widen further the tax base, and a fundamental reform of the tax administration.

The central bank will maintain a prudent monetary policy under the floating exchange rate regime to keep its 5 percent inflation target and build up international reserves to at least three months of imports at the end of the program period. The program envisages further exchange rate liberalization and integration of the interbank and kerb markets.

The main risks to the program would arise from a prolongation of the regional conflict, which could adversely affect growth, trade and investment and intensify budgetary pressures. Other risks include resistance from interest groups affected by the planned reforms, and limited administrative capacity to implement certain aspects of the program. However, recognizing such uncertainties, the program includes a number of contingency measures to protect fiscal and external balances.

The success of the economic reform program depends, to a considerable extent, on measures to address the large external debt burden. The staff is encouraged that the government will seek a debt rescheduling with bilateral creditors at the Paris Club with a view to reduce the debt burden towards sustainable levels. Financial support by creditors and donors will remain crucial over the medium term.

The authorities have requested financial support from the Fund under an arrangement supported by the PRGF. Access under the new arrangement, as proposed in this paper, would be SDR 1033.7 million or 100 percent of quota, disbursed in equal quarterly installments over three years.

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December 6, 2001

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Press Release No. 01/51

FOR IMMEDIATE RELEASE

December 7, 2001

International Monetary Fund

Washington, D. C. 20431 USA

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December 6, 2001