The economic outlook remains clouded by regional and domestic security concerns. Real GDP growth and inflation were broadly in line with program projections in 2001–02. The balance of payments position unproved faster than expected. The budget deficit target for 2001–02 (as set during the first review) was met, despite a shortfall in the Central Board of Revenue (CBR). Broad money increased strongly in 2001–02, despite efforts to sterilize foreign exchange inflows. Reforms in the financial sector made significant progress.
1. This statement summarizes the information that has become available since the staff report (EBS/02/182) was circulated to the Executive Board on October 21, 2002. It does not change the thrust of the staff appraisal.
2. The information provided by the authorities indicates that all the prior actions listed in the October 16, 2002 Memorandum of Economic and Financial Policies have been taken.
3. A multi-year electricity tariff framework for KESC was implemented effective September 13, 2002 to reduce regulatory uncertainty. It provides for automatic adjustment of tariffs to inflation and fuel cost changes, and includes an immediate structural increase of 6.5 percent.
4. A financial improvement plan (FIP) with quarterly performance targets for FY 2002/03 for KESC, based on the approved multi-year tariff framework, was finalized on September 30, 2002. So far, only one large foreign company continues to indicate interest in KESC, and is expected to initiate due diligence once a new government is formed and its economic strategy becomes visible.
5. On October 31, 2002, the authorities notified an increase in petroleum levies by a weighted average of 12.1 percent to become effective November 1, 2002, following an increase of 15.3 percent on October 15, 2002. As a result, as of November 1, 2002 the average petroleum levy will stand at PRs 4.28 per liter, compared with PRs 3.97 per liter on July 1, 2002. This action restores the basis for the overall revenue targets under the program, and more specifically offsets the revenue losses from the exemption of medicines from GST in August 2002 and the lowering of petroleum taxation in September and early October 2002 (to a low of PRs 3.31 per liter).
Progress towards the October 31, 2002 structural performance criterion and benchmarks
6. The authorities have informed staff that the following step toward structural performance criteria and benchmarks for end-October were taken:
7. On October 30, 2002 the budget call for the 2003/04 federal budget was issued on the basis of the New Accounting Model (NAM), and on October 31, 2002, according to information yet to be confirmed, the North Western Frontier province issued its budget call, using NAM in parallel with the conventional format.
8. The model tax unit for small and medium taxpayers in Lahore has started operations in late October 2002. Similarly to the large taxpayer unit opened in Karachi in July 2002, it involves steps towards administering all domestic taxes in a functionally integrated manner.
9. Amendments to the SBP Act, aimed at strengthening central bank autonomy, in particular in the area of reserve management in line with the Safeguard Assessment recommendations, were approved by cabinet on September 25, 2002 and promulgated on October 31, 2002.
10. General elections on October 10, 2002 ushered in the return to civilian government. No political party emerged from the elections with a majority of seats in the (federal) National Assembly. Talks between the main parties to form a coalition government are underway. Large military forces are still deployed along the border with India, but both India and Pakistan recently announced a partial withdrawal of troops.
11. Little additional information on macroeconomic developments has become available since the staff report was issued. The rate of inflation as measured by the CPI remained unchanged in September, with a 12-month increase of 3.7 percent. September data confirmed the pickup in trade flows observed since last spring. In July–September 2002, exports and imports in dollar terms were higher than in July–September 2001 by, respectively, 14.0 percent and 11.1 percent. Remittances remained strong during the summer, reaching about US$ 1.1 billion in July–September 2002, about three times as high as a year ago. This, as well as large disbursements from bilateral and multilateral donors, have allowed the SBP to build official reserves much faster than expected to US$6.3 billion as of end–October 2002, equivalent to about five months of next year’s imports of goods and nonfactor services. The Pakistani rupee slightly appreciated against the U.S. dollar. The main stock market index further rose in the past weeks (by about 15 percent between end-August and end-October).
12. Broad money growth remained strong, with a 12-month increase of about 15 percent in August, similar to June and July. While net foreign assets of the banking system continued to grow at a rapid pace, net domestic assets decreased on account of a seasonal contraction of credit to the economy. Interest rates remained stable in recent months, with the yield on six-month treasury bills at about 6.5 percent.
13. The CBR met its revenue target for end-September 2002, reflecting a relatively buoyant economy, strong imports, and high oil prices. Other available data on federal revenue and expenditure for the first quarter of 2002/03 indicate that the authorities were on track to meet the end-September fiscal objectives.
14. In September 2002, the authorities—in consultation with the World Bank and the U.K. Department For International Development—identified intermediate indicators for health and education designed to monitor progress towards the I-PRSP targets. The indicators rely largely on data produced in-house by the respective ministries. In addition, the World Bank’s Core Welfare Indicators Questionnaire would be adapted to Pakistan; the Pakistan Integrated Household Survey would be consulted for some background information. In the education sector, the indicators focus on school facilities as well as availability and quality of teachers. In the health sector, the indicators focus on availability of basic health services and immunization.
15. The subscription for the second offering of 5 percent government shares in National Bank of Pakistan (NBP) to the general public was opened from October 7, 2002 to October 9, 2002. It was oversubscribed by four times.
16. As of late October 2002, bilateral agreements implementing the December 2001 Agreed Minute with Paris Club creditors had been signed with Austria, Canada (Export Development Corporation and Canadian Wheat Board), Finland, Spain, and the United States.