Abstract
Monetary developments in the first half of 2003 were largely in line with expectations, except for credit to the private sector, which has accelerated significantly in recent months. The overall deficit of the consolidated government was 4.5 percent of GDP in 2002–03, lower than the program ceiling, and the Central Board of Revenue (CBR) collection exceeded the target by a small margin. Pakistan's macroeconomic performance has strengthened substantially over the past few years, with the 2002–03 outcome largely exceeding the Poverty Reduction and Growth Facility (PRGF) targets.
1. This statement summarizes the information that has become available since the staff report was circulated to the Board on October 14, 2003. It does not change the thrust of the staff appraisal.
2. Inflation remained subdued in September, at 2.2 percent year-on-year (or an average of 1.8 percent in July-September 2003 over the same period a year ago). Core inflation increased slightly to 2.9 percent year-on-year.
3. According to preliminary customs data, exports and imports continued to grow strongly in the first quarter of 2003/04, with rises of 15 percent and 12 percent, respectively, in U.S. dollar terms over the corresponding quarter of 2002/03. Inflows of remittances were 14 percent lower than in the same period of the preceding year. Nevertheless, gross official international reserves continued to increase, exceeding $10.0 billion at mid-October. The State Bank of Pakistan reduced further its intervention on the interbank foreign exchange market, and the Pakistani rupee appreciated by about 1 percent in early October to PRs/$57.4 on October 14.
4. Broad money growth decelerated slightly to 18 percent, while reserve money growth fell to 14 percent (reserve money fell in absolute terms during July-August). Increased sales of treasury bills by the State Bank of Pakistan, as well as a slower rate of increase in its net foreign assets, resulted in a sharp reduction in excess bank reserves in July-August. Private sector credit growth remained strong, increasing by 24 percent in the year through August.
5. The Central Board of Revenue exceeded its end-September collection target by about 2 percent. Preliminary data for the federal government through August indicates that achieving the overall deficit target for end-September is well within reach.
6. On October 20, Moody’s Investor Service raised its rating on Pakistan’s foreign and domestic currency debt and bank deposits from B3 to B2.
7. The Pakistani authorities have announced that they intend to make about $1.1 billion in early repayments of external debts in 2003/04 of which about $0.5 billion to the World Bank (current interest rates 4.6-6.6 percent) and about $0.6 billion to the Asian Development Bank (current interest rates 6-11 percent). There will be no early repayments to the Fund, as interest rates on Fund loans are substantially lower than those on the above World Bank and AsDB loans. Specific loans for early repayments have been identified.