Abstract
This paper examines Pakistan’s Fifth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF) and Request for Waiver and Modification of Performance Criteria. Although most reforms were broadly on track, there were setbacks in energy sector reforms, and to a lesser extent in privatization. Progress was made in preparing the full Poverty Reduction Strategy Paper and monitoring intermediate social outcomes. All quantitative performance criteria for end-December 2002 were met. The budget for fiscal year 2003/04 will aim at a further reduction of the fiscal deficit while raising social and poverty-related expenditures.
June 16, 2003
1. This statement summarizes the information that has become available since the staff report was circulated to the Board on June 2, 2003. It does not change the thrust of the staff appraisal. The delay in government approval (and submission to parliament) of the fiscal responsibility law (see below) illustrates, however, the risks noted in the staff appraisal.
2. The additional information on macroeconomic and financial developments includes partial data for end-March 2003 which indicate that all end-March quantitative performance criteria are likely to have been observed.
3. Official GDP growth estimates for the fiscal year ending June 2003 have been revised upward to 5.1 percent (compared to 4.5 percent) due to higher-than-expected growth in agriculture, manufacturing, and commerce. Inflation remains subdued at 2.6 percent year-on-year in May (or an average of 3.2 percent in June 2002-May 2003 over the same period a year ago). Exports and imports for July 2002-April 2003 grew both by about 20 percent in U.S. dollar terms over the corresponding period of 2001/02, and the level of remittances remains high. Gross official international reserves continued to increase, reaching US$9.3 billion by end-May, while the Pakistani rupee slightly appreciated against the U.S. dollar (4.1 percent year-on-year). As of June 12, 2003, the main stock market index (KSE) was up 20 percent over end-2002.
4. End-April monetary data are broadly in line with staff projections. Net foreign assets of the banking system continued to grow at a rapid pace. Broad money growth eased somewhat to 18 percent in the year through April while reserve money growth was 16 percent. Credit to the private sector picked up, increasing by about 13 percent in the year through April.
5. Preliminary unreconciled fiscal data for the federal government through April suggest that meeting the end-year fiscal targets remains within reach. The Central Board of Revenue slightly exceeded its implicit cumulative revenue target for April. The performance of other revenue items was mixed with petroleum surcharges, in particular, slightly below target. On the expenditure side, there appears to be a possibility of underspending on the Public Sector Development Program at the end of the fiscal year. The growth of cumulative social and poverty-related expenditures has slowed to 23 percent for the period July 2002–March 2003 over the corresponding period of the previous fiscal year, falling short of the indicative target by 14 percent, but still above the growth of 21 percent targeted for the year as a whole.
6. The 2003/04 federal budget that was submitted to parliament on June 7 appears consistent with a consolidated deficit (excluding grants) of 4.0 percent of GDP, and includes the various tax measures planned under the program. Both revenues and expenditures in the proposed budget are somewhat higher than in the staff report, and their composition has been modified. Staff is seeking clarification and assessment of the financial impact of a recent cabinet decision to raise federal public sector base salaries and pensions by 15 percent, as well as of a number of proposals made in the Finance Minister’s budget speech, including extension of the special National Saving Schemes pensioner scheme to widows. Staff would urge the authorities to pursue pension and pay reform in the context of an overall comprehensive strategy of right-sizing the civil service and enhancing the sustainability of the public pension system.
7. In the area of structural reform, beyond the status of compliance with structural conditionality indicated in the MEFP (Table 2(a)), the authorities met a structural performance criterion by publishing on May 31 the third quarter progress report on implementation of financial improvement plan (FIP) of large public enterprises, including the Water and Power Development Authority (WAPDA) and the Karachi Electric Supply Corporation (KESC). The reports confirm the expected deterioration of the operational and financial situation of the two power utilities. Line losses increased while revenue declined, notably due to lower tariffs. According to preliminary estimates, the accrual deficits of WAPDA and KESC amounted to PRs 19.6 billion and PRs 9.9 billion respectively during July 2002-March 2003, broadly in line with the projections under the revised FIPs.
8. In breach of a structural performance criterion for the seventh disbursement, the fiscal responsibility law was not submitted to parliament by June 1. The delay seems related to the dispute, noted in the staff report, between the government and the opposition parties on the legality of constitutional amendments passed under the previous government. However, cabinet approval of the draft law is expected in the coming days and submission to parliament in late June.
9. In line with program commitments, the Oil Companies’ Advisory Committee increased on May 31 the price of major petroleum products in line with changes in import costs while leaving the surcharges on all petroleum products unchanged.
10. Finally, in the staff report, the staff of the Fund does 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.