Abstract
This paper examines Pakistan’s Fourth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Performance Criterion. Progress on the structural front through November 2002 was broadly in line with the program, except for the power sector, but weakened in the subsequent months. All quantitative performance criteria for end-September 2002 were met. The authorities have requested a waiver for the nonobservance of the continuous structural performance criterion regarding tax exemptions.
1. This statement summarizes the information that has become available since the staff report was circulated to the Executive Board on February 14, 2003. It does not change the thrust of the staff appraisal.
Prior actions
2. The information provided by the authorities indicates that all the prior actions listed in the February 8, 2003 Memorandum of Economic and Financial Policies have been taken.
3. Returns on National Savings Schemes instruments were lowered, as per the existing formula, effective January 1, 2003 to reflect lower yields on Pakistan Investment Bonds in July–December 2002. Returns on the various instruments were reduced between 1.4 to 2.0 percentage points.
4. In the face of the significant increase in international oil prices in the past weeks, the authorities have preserved the market-based fortnightly petroleum pricing mechanism and maintained the Petroleum Development Levy rates at their levels of December 16, 2002, resulting in sharp increases in consumer prices.
5. In the context of the Water and Power Development Authority’s (WAPDA) unbundling and corporatization, the National Transmission and Dispatch Company (spun off WAPDA) was licensed by the power sector’s regulator in late December 2002.
6. The authorities approved on February 24,2003 a program for developing annual core welfare indicator surveys, and initiated work on its design. These surveys, representative at the district level, will complement the three-yearly household survey to enhance the monitoring of intermediate social outcome indicators.
Recent developments
7. Little additional information on macroeconomic developments has become available since the staff report was issued. Inflation remains subdued (3.4 percent in the year through January 2003). Exports and imports for the period July 2002–January 2003 in U.S. dollar terms grew by about 20 percent over the corresponding period of 2001/02, while remittances doubled to $2.5 billion. The State Bank of Pakistan slightly reduced its purchases of foreign exchange on the interbank market, building foreign exchange reserves to $8.4 billion as of February 26, 2003. The Pakistani rupee remained broadly stable against the U.S. dollar.
8. Available data indicate that the authorities likely met the end-December 2002 fiscal deficit target. The Central Board of Revenue (CBR) met its revenue target, reflecting a relatively buoyant economy, strong imports, and high oil prices, and probably some first effects of administrative reform. CBR revenue collection was also on target in January 2003.
9. According to preliminary data, social sector spending (“I-PRSP expenditure”) rose by 45 percent to PRs 66.5 billion during July–December 2002 over the preceding year, but fell short of the target level by about 6 percent.
10. Available data indicate that the monetary targets for end-2002 were likely met too. Net foreign assets of the banking system continued to grow at a rapid pace in September–December 2002. Broad money growth eased somewhat to 17 percent in the year through December, and reserve money to 10 percent. The yield on 6-month treasury bills fell to 3.2 percent in recent auctions. The main Karachi Stock Exchange Index on February 27, 2002, was down 13 percent from end-2002 (and down 20 percent from its 2003 peak).
11. The World Bank concluded on February 26 that progress on the development of the full PRSP (Poverty Reduction Strategy Paper), as evidenced by the PRSP Preparation Status Report, is satisfactory and provides a sound basis for continued access to World Bank concessional financial assistance.