My Pakistan authorities are grateful to staff for an excellent report and background papers, their hard work, and a fruitful round of discussions, which, together with the Article IV consultation, provided an opportunity to reflect on, and draw lessons from, the adjustment experience of the past few years. I am pleased to report that the remaining prior action regarding revenue measures was taken on October 29, 2002, and became effective on October 31, 2002. I thank Executive Directors for their understanding in allowing the Board discussions to proceed as scheduled.

Economic developments in Pakistan, since the last review in July 2002, have been marked by continued macroeconomic discipline and steady progress in structural reform despite the challenges posed by the prolongation of the drought, the difficult regional security situation, the weak global economy, and high oil prices. Indeed, there are recent welcome indications that the economy is beginning to make the transition onto a higher growth path. At the same time, inflation remains well under control and the external account has remained strong, supported by a surge in workers’ remittances and private capital flows, which has helped build reserves to unprecedented levels. This broadly positive macroeconomic picture is being underpinned by tangible progress on the structural front, most notably in the areas of tax administration, energy pricing, privatization, and fiscal accountability, and a sharp increase in social sector spending. Overall, the authorities are pleased with what has been accomplished in the past two years under difficult circumstances. Nevertheless, they realize that significant challenges remain, namely, continued low levels of growth, private investment and employment creation, inadequate provision of basic social services, and little evidence of a decline in poverty.

The authorities recognize that the policies and reforms implemented in recent years will only have a lasting impact in terms of improving the lives of the people if continued over the medium term. In this context, staff note that the “main danger” to the program lies in the possibility that the reform effort would not be sustained over a sufficiently long period. Specifically, there are questions whether the new democratically elected government, which is to take office shortly, will challenge the economic strategy and reform agenda. At a delicate time of political transition, these are legitimate questions. However, despite misgivings in some quarters and an understandable impatience to see early results in terms of benefits reaching the people, the authorities are assured that there is sufficient support across a broad spectrum of the political landscape for the government’s policies. This is reinforced by a growing and widespread realization that staying the course offers the best hope of rekindling durable growth and alleviating poverty. If anything, the newly elected government offers “an opportunity to anchor reforms in a broader political consensus” and thereby strengthen ownership.

The thrust of the 2002/03 program is directed towards continuation of stability-oriented macroeconomic policies, enhancing the effectiveness of poverty-related expenditures, and forcefully addressing the ambitious public enterprise reform, governance, and privatization agenda. Economic growth is projected to accelerate to 4.5 percent led by exports; inflation is expected to remain subdued; and the external position should remain robust with gross reserves rising to about five months of imports. Monetary policy will continue to be vigilant, given the uncertainties about money demand, and will guard against a possible re-emergence of inflationary pressures. The recent appreciation of the rupee notwithstanding, there is no evidence that the exchange rate is misaligned; competitiveness remains adequate and should help foster the on-going diversification of the export base.

The path of fiscal consolidation is fully in line with the original financial program. CBR revenues—which have consistently fallen short of expectation in the past—are now showing signs of buoyancy in the context of the pickup in real sector activity, and preliminary data suggest that the end-September performance criterion was met. CBR reforms are also on track and a new strategy to reform customs administration has been sent to Fund staff for comments. On the expenditure side, there have been significant changes in the composition of expenditures to meet the urgent requirements associated with the restructuring of key public enterprises. The authorities expect that these new expenditures will help public enterprises strengthen their financial position, reduce their claims on the budget, and will pave the way for future privatization. Building on the acceleration of I-PRSP expenditure towards the end of last year, as the newly elected local governments became operational, the budget envisages a further substantial increase in these expenditures aimed at making inroads into reducing Pakistan’s “social gap.” Concurrently, with assistance from the World Bank and the U.K. Department for International Development, the authorities hope to have new mechanisms to monitor intermediate poverty indicators in place by the end of the year, which will be closely tracked by the recently established I-PRSP Secretariat.

The program entails a strong commitment to move forward with reforming the major public enterprises, while improving monitoring and accountability. Public reporting of, and accountability for, implementation of the financial improvement plans should create constructive pressure on all major enterprises to perform as promised. Given that the privatization prospects for KESC remain uncertain due to factors beyond the authorities’ control, a financial improvement plan has been prepared, along the lines of that for WAPDA, and the authorities will give consideration to a private management contract in case privatization proves impossible. While there are delays in the privatization of the flagship telecom sector and utilities, due to the recent turbulence in world equity markets, privatization in the oil and gas sector is expected to proceed as planned.

Recent reforms in the financial sector have also been notable. The privatization of the United Bank Limited (UBL) attracted widespread domestic and foreign interest and was successfully concluded. Amendments of the central bank act have strengthened its independence in line with the Fund’s Safeguards Assessment recommendations, a new Anti-money Laundering Law is expected to be promulgated shortly, and the Asian Development Bank is assisting with reforms of the Agricultural Development Bank which will include, inter alia, a cut of 50 per cent in its workforce. The authorities remain committed to implementing further reforms of the various financial instruments which, despite recent measures, still entail a considerable burden on the budget. They are looking forward to receiving soon the long-delayed FSAP mission.

In conclusion, performance under the PRGF continues to be encouraging and, in some areas, notably the external accounts, has significantly exceeded expectations. Nevertheless, the authorities recognize that much remains to be done before the benefits of the reform effort are felt by the people in terms of rising living standards and diminishing poverty. This remains the true test of the success of economic adjustment and reform. The new government, which is to assume office shortly, will inherit an economy poised for a growth upswing. The authorities are confident that the new government will build on recent successes and seize the opportunity to press ahead and deal resolutely with the remaining challenges.