This Statement provides information on developments since issuance of the staff report (EBS/01/197, 11/26/01). These developments do not change the thrust of the staff appraisal.

1. Recent developments are broadly in line with the program. There are indications that activity has been significantly affected by the disruptions related to the conflict in Afghanistan and the global slowdown, mainly through the reduction of export orders, in particular in the textile industry. In the agriculture sector, the cotton crop will probably be lower than expected, due to pest attacks in some areas of Punjab. As measured by the CPI, inflation declined to 2.7 percent over the twelve months ending October 2001, in part owing to the strength of the rupee against the U.S. dollar. On December 3, the dollar traded against the rupee at PRs 61 on both the interbank market and kerb market; any spread has virtually disappeared in recent weeks. In October, broad money and reserve money expansion (10.5 percent and 7.9 percent, respectively, on a twelve month basis) were broadly in line with program projections, in spite of a substantial reduction in key interest rates. The rate on six-month treasury bills dropped to 8.3 percent at the last auction on November 29. The SBP has reduced accordingly the rate applied to credits under the export finance scheme.

2. Provisional fiscal data for the first quarter of 2001/02 suggest that the consolidated budget deficit was 0.3 percent of GDP higher than expected. This reflects mainly lower-than-projected interest receipts from state-owned enterprises (chiefly from WAPDA). Overall tax revenue and expenditure were broadly as expected.

3. Pakistan’s overall external position has been somewhat stronger than expected, with official foreign exchange reserves rising by about US$1 billion in less than two months. The main factor was the rapid disbursement of budget assistance from the United States, as well as short-term private capital inflows that are likely to be temporary and apparently induced by the strength of the rupee, confidence factors following the lifting of sanctions, and stronger enforcement of banking and money-changer supervision rules abroad. A secondary factor was a more pronounced slowdown of imports compared to exports so far; in October 2001, exports increased by 2.2 percent from the same month last year, while imports declined by 14.1 percent.

4. All prior actions (EBS/01/197, Attachment I, Table 1) have been implemented. In particular:

• The Cabinet approved a medium-term strategy and an action plan to reform the Central Board of Revenue (CBR) on November 17, 2000. In line with the strategy described in the MEFP (paragraphs 20–21), the action plan includes a reorganization of the CBR management, entailing the filling of senior staff positions as heads for the newly established functional departments by end-February 2002, and the establishment of one model large taxpayer unit in Karachi by July 2002.

• Monthly sales tax audit targets have been adopted for the period November 2001-June 2002. A substantial number of auditors have recently been added to the CBR staff, which should allow the CBR to more than double the number of sales tax audits in 2001/02 compared to last year.

• A first progress report on social and poverty-related federal and provincial expenditures over the period 1995/96-2000/01 (the so-called I-PRSP expenditures) has been provided, including a detailed data breakdown (see EBD/107/01, Annex V). In line with provisions in the MEFP, given the large amounts of budget grants already disbursed, the Cabinet has decided to allocate an additional PRs 13 billion (0.3 percent of GDP) to specific social and other programs for the present fiscal year. The Khushal program will benefit from an additional allocation of PRs 8 billion, while PRs 2 billion will added to health and PRs 3 billions to primary education programs.

• Official reserves stood at US$2.05 billion on November 15, 2001, exceeding the US$1.85 billion target by a large margin. As of December 3, official reserves reached US$2.8 billion, the equivalent of 11 weeks of imports of goods and services, with the increase reflecting the disbursement of US$600 million grant assistance from the United States, as well as substantive SBP purchases of foreign exchange, mostly on the interbank market.

• CBR revenue for July 2001-October 2001 reached PRs 110.7 billion, exceeding slightly the target of PRs 109 billion.

• The SBP issued two circulars to ensure compliance with Article VIII obligations and deepen the interbank market. Circular No. 20, dated November 21, 2001, eliminates the restriction that bank transactions on the foreign exchange market should be backed by commercial transactions; Circular No. 21, dated November 22, 2001, ensures that the release of foreign exchange for travel, education, and medical treatment abroad, is granted beyond bona fide limits on the basis of appropriate documentation.

In addition, the office of the Accountant General Pakistan Revenue has posted on its website consolidated fiscal accounts for the first quarter of 2001/02, in line with the standard practice agreed upon under the previous Stand-By Arrangement. In November, the Federal Bureau of Statistics completed, as scheduled, four additional studies on specific sectors as preparatory steps for the revision of the national accounts. The final version of the Interim Poverty Reduction Strategy Paper was posted on the website of the Ministry of Finance on December 3, and endorsed by the Board of the World Bank on December 4.

5. Paris Club creditors provided assurances that they would consider Pakistan’s request for debt rescheduling of the debt service payments falling due during the program period, but the terms remain to be decided. A Paris Club meeting on Pakistan’s request is scheduled for December 11–12.

6. On making a Joint Staff Assessment of the I-PRSP (EBD/01/106), the staffs of the Bank and the Fund do not intend to make any judgment on the legal or other status of any disputed territories or to prejudice the final determination of the parties’ claims.