Statement by Abbas Mirakhor, Executive Director for Pakistan October 27, 2003

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.


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.


My authorities thank staff for the fruitful dialogue which culminated in a clear and balanced report on Pakistan’s achievements under the program since the last review and the challenges that lie ahead. Further strong progress was made under the PRGF arrangement—despite a weak global economy and regional security problems—due to the authorities’ strong commitment to sound macroeconomic policies and reforms aided by robust private capital inflows and external support. All quantitative performance criteria for March and June and most of structural performance criteria were met. The authorities are seeking waivers for the non-observance of structural performance criteria relating to: a) submitting to Parliament a fiscal responsibility law, b) eliminating the exemption from income tax withholding on National Saving scheme (NSS) instruments, and c) not introducing new tax exemptions. While the fiscal responsibility law has now been submitted to Parliament, the elimination of the exemption from income tax withholding on NSS instruments was met with strong opposition in Parliament. However, the authorities have agreed to steps to align yields on NSS instruments to market rates. More tax exemptions were eliminated in the 2003/04 budget (bringing to 107 the total number of exemption withdrawals in the last three budgets) and those few new exemptions mentioned in the staff report are in fact meant to eliminate distortions and discriminations within the system to create a level playing field.

Recent economic developments

The macro-economy continued to strengthen in 2002/03. A higher-than-targeted—and, significantly, broad-based—growth was achieved, and a rebound in agricultural output, in particular, following three successive years of drought, will be of immense benefit to a large section of the poor. Inflation slowed further through August, thanks to lower food and energy costs and the strong macroeconomic policies. The external situation also continued to strengthen—manifested in a large current account surplus, strong reserve position, and a stable Pakistani rupee—reflecting strong exports, private transfers, and external budgetary assistance. The overall fiscal deficit was lower than targeted, driven by higher revenue performance. While expenditures were also higher than projected, owing to higher outlays on civil administration and pensions, social sector spending (“I-PRSP expenditure”) grew strongly, reaching 3.93 percent of GDP (as against a programmed 3.96 percent) despite implementation capacity limitations at the provincial level. High non-bank domestic financing, largely from the National Savings scheme (NSS) instruments, resulting from favorable interest rates, enabled more bank debt to be retired than programmed, despite lower external program financing. The continued strong NFA accumulation and private sector credit growth was countered by reinforced open market operations to moderate the impact on monetary growth.

The structural reform agenda remained on course, with most of the performance criteria and benchmarks under the program being met. In 2002/03, privatization moved forward, including of the State Enterprises Mutual Fund and divestment of shares in Pakistan Oilfields Limited and Attack Refinery Limited, among others, yielding receipts of 0.2 percent of GDP. Progress was made in fiscal reforms, including the submission of the fiscal responsibility law to Parliament, removal of 20 tax exemptions in the 2003/04 budget, and steps toward introduction of universal self assessment. In the financial sector, a formulaic link was established between rates of return on General Provident Fund (GPF) and Pakistani Investment Bond (PIB) yields to enhance transparency. In the energy sector, the fortnightly automatic adjustment of petroleum product prices was consistently applied, while tariff increases determined by the National Electric Power Regulatory Authority (NEPRA) for the Water and Power Development Authority (WAPDA) and Karachi Electricity Supply Corporation (KESC) were notified, although slightly behind schedule. The financial performance of WAPDA and KESC, among other large public enterprises, was broadly in line with targets under the Financial Improvement Plans (FIPs). Technical distribution losses in both enterprises were, however, higher than targeted and will continue to receive high attention. Further progress was made on the PRSP preparation following the completion of the widespread consultation process that has strengthened consensus building and ownership. The final PRSP—due soon—will incorporate the results of the pilot Core Welfare Indicators Questionnaire (CWIQ) survey and will pay strong attention to rural development, gender issues, employment, and the environment.

The program for FY 2003/04

The authorities intend to maintain the current mix of macroeconomic policies that has proved successful in achieving strong growth in a low inflation environment. The 2003/04 program is geared to further raising growth, consolidating macroeconomic stabilization, and reducing debt vulnerability. A strong fiscal effort will be the key driver of the program, and the 2003/04 budget is consistent with the program targets. The increase in wages and pensions, necessary to mitigate their erosion in real terms, is to be offset by upward revision of non-tax revenue and reduction in the wheat export subsidy, among other measures. As staff rightly note, the tight budget allocation for the civil government in the 2003/04 budget calls for strict expenditure control to avoid overruns and redoubled efforts to achieve the CBR revenue target. Accordingly, expenditure management is being strengthened, including through the development of a medium-term budget framework with DFID support, and by improving public procurement and budget accounting. Moreover, the authorities are committed to execute fully the budgetary allocation for I-PRSP expenditure and have agreed with staff to consider raising social spending further in 2003/04 and beyond if additional resources became available and the capacity to spend effectively at the local level was enhanced. They would also closely monitor its impact on poverty.

The authorities recognize the importance of achieving the projected revenue in order to realize the overall fiscal targets. In this connection, Central Board of Revenue (CBR) receipts will be safeguarded by strengthening tax administration, and bringing into the tax net more taxpayers through improved information gathering. Furthermore, the scope of income and sales tax exemption is to be reduced, while other measures will be taken to broaden the tax base. At a minimum, the authorities are committed to protecting the fiscal targets by cutting non-priority spending in case of unforeseen shocks.

While the risk to inflation is considered to be low in light of weak import prices, a strong Pakistani rupee, and positive outlook for agricultural output, the authorities recognize the need to remain vigilant, especially given the recent buildup in bank liquidity and strong private sector credit growth. Accordingly, the SBP will act promptly to mop up excess liquidity, including by introducing new certificates, should the need arise. Positive real interest rates are expected to be restored following rising short-term rates in conjunction with declining inflation. Despite limited SBP intervention in the foreign exchange market, the Pakistani rupee has remained remarkably stable against the US dollar—thanks to the strong macroeconomic and financial policies.

The authorities are fully aware of the importance of maintaining the momentum of structural reforms in order to strengthen the economy’s long-term growth potential and its resilience to shocks, while reducing fiscal risks. The privatization of designated public enterprises is expected to regain momentum with the anticipated renewed investor interest as concerns about regional security and the global economy subside. Reform of the energy sector, in particular, is considered vital to mitigating risks to the fiscal program. In this regard, while full budgetary provision has been made to support WAPDA and KESC, as projected in their FIPs over the medium term, their financial performance is expected to improve due to the reduction of upfront payments to independent power producers (IPPs) and the increasing output from the lower-cost Ghazi Barotha hydropower station. At the same time, plans are being developed to further contain costs and increase efficiency of their operations. The prospects for KESC divestment have improved following expression of interest from several potential investors, while progress continues to be made towards the unbundling of WAPDA. The authorities are committed to regular adjustment of energy prices, including differentiated electricity tariffs by region, in order to safeguard the financial position of WAPDA and KESC. This will be buttressed with the finalization by end-October of the action plan developed with the World Bank assistance to establish a transparent regulatory framework for setting electricity tariffs.

In the financial sector, the authorities will reinforce their reform strategy, and look forward to the FSAP long-delayed mission. Further to efforts to privatize some of the remaining state-owned banks, the legislative framework will continue to be strengthened, including in the areas of anti-money laundering and corporate bankruptcy. Capital market development remains a key plank of the authorities’ strategy to support private sector investment and to reduce interest costs to the budget. The strategy also entails transformation of the NSS into a modern savings institution and development of the non-bank financial sector. The objective of creating a favorable business climate is being buttressed by strengthening governance, particularly regarding financial transparency and accountability, and reducing abuse of official discretionary power and bureaucratic regulations.

As Box 2 of the staff report shows, the paths of public and external debts are not expected to deteriorate significantly under a variety of shocks. Reducing Pakistan’s debt burden over the medium- to long-term so as to maintain macroeconomic stability as well as achieve sustained growth and poverty reduction remains at the top of the authorities’ agenda, and significant headway has been made through fiscal consolidation and the support of the international community. To this end, the authorities intend to repay some expensive debts this fiscal year.

Furthermore, in order to diversify Pakistan’s sources of financing its development program as well as to expand its international investor base, the authorities intend to access international capital markets. They believe that Pakistan can benefit from a eurobond placement as it will provide a strong incentive for maintaining policy discipline when the current program runs its course, Additionally, the placement would provide an important instrument of debt management as well as a benchmark for Pakistan corporates.


Strong implementation of the PRGF-supported program, buttressed by adequate support of the international community, has turned the economy around and positioned Pakistan on a path of sustained growth, with the potential for durable reduction of poverty. The authorities greatly value their continued engagement with the Fund, which is vital to maintaining international support. While they are grateful to the Fund for the financial assistance they have received thus far, they believe that the time has come, and the circumstances are propitious, to exit Fund-supported programs. Accordingly, they have expressed their intention not to enter into a successor arrangement following the completion of the present PRGF. They will, however, maintain close contact with the Fund to seek advice, particularly in the areas of macroeconomic policy, further second-generation reforms, and strengthening of the institutional capacity in the financial, public sector and statistical areas. For now, the authorities look forward to Board support for their request for waiver of non-observance of structural performance criteria and completion of the sixth and seventh reviews under the PRGF arrangement. In view of the strong improvement in Pakistan’s external and fiscal prospects, the authorities also request moving to semi-annual reviews.