This paper focuses on Pakistan’s 2004 Article IV Consultation, Ninth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF), and Request for Waiver of Performance Criteria (PCs). Implementation of the PRGF program in Pakistan remains broadly on track. All quantitative PCs and indicative targets for end-June 2004 were met. Structural reforms continue to be advancing, although four structural PCs were breached. A temporary intensification of an existing and the imposition of a new exchange restriction, however, were quickly reversed, and new tax exemptions have been offset by other tax measures.

Abstract

This paper focuses on Pakistan’s 2004 Article IV Consultation, Ninth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF), and Request for Waiver of Performance Criteria (PCs). Implementation of the PRGF program in Pakistan remains broadly on track. All quantitative PCs and indicative targets for end-June 2004 were met. Structural reforms continue to be advancing, although four structural PCs were breached. A temporary intensification of an existing and the imposition of a new exchange restriction, however, were quickly reversed, and new tax exemptions have been offset by other tax measures.

December 1, 2004

1. This statement summarizes information that has become available since the staff report for the 2004 Article IV consultation and the ninth review under Pakistan’s arrangement under the Poverty Reduction and Growth Facility was circulated to the Board on November 17, 2004. It does not change the thrust of the staff appraisal.

2. Following the January 2004 summit of the South Asian Association for Regional Cooperation, a series of bilateral talks were held between Pakistani and Indian officials, covering a range of issues, including advancing economic cooperation and fostering regional trade. These talks are expected to continue in the period ahead.

3. Available data indicate that economic activity continues to show strong growth. Provisional data for the large-scale manufacturing industry show an increase in production by 14 percent in the first quarter of 2004/05, compared to the same period in the previous year. In the agricultural sector, the cotton and rice harvests were considerably higher than in the preceding year.

4. Inflation slowed somewhat, with consumer prices increasing by 8.7 percent in the 12 months through October, compared to a peak of 9.3 percent in July. Nonfood, nonenergy (core) inflation, however, continued to increase, to 7.2 percent year-on-year in October. Wholesale price inflation, meanwhile, fell sharply from its peak of 12.8 percent year-on-year in June, to 6.6 percent in October.

5. The budget continues to overperform. Preliminary fiscal data for the consolidated government through September suggest an overall budget deficit (excluding grants) in the first quarter of PRs 25 billion, which would be considerably less than the projected deficit of PRs 89 billion. This reflects a stronger-than-anticipated revenue performance, as well as some underspending. Notably, both revenue collection by the Central Board of Revenue and the receipt of nontax revenues were considerably higher than envisaged. Social- and poverty-related spending in the first quarter of 2004/05 fell somewhat short of projections, though these data are often revised upwards. The improved revenue position—if maintained—mitigates the risk to the budget posed by the higher oil prices and the authorities’ decision as yet not to pass these higher prices on to consumers. The staff, however, maintains its recommendation to pass the higher oil prices on to consumers, not only to ensure an efficient resource allocation, but also because higher-than-anticipated revenues could be better used to fund additional social spending or debt reduction.

6. The current account recorded a small surplus in the first quarter of 2004/05 (0.1 percent of GDP). Notably private transfers were higher than projected and exports performed somewhat better as well. Gross official international reserves (including the sinking fund), however, fell from $10.6 billion at end-June to $10.3 billion by end-September, and further to $9.3 billion in late-November, partly reflecting efforts by the State Bank of Pakistan (SBP) to alleviate recent pressures on the exchange rate, with the Pakistani rupee depreciating by 5.5 percent vis-à-vis the U.S. dollar from end-June through end-October. However, the Pakistani rupee reversed over half of its losses in November.

7. Standard & Poor’s raised Pakistan’s sovereign credit ratings to B+ for foreign currency instruments and BB for local currency instruments, on account of declining debt indicators and sustained economic progress. The authorities plan to issue an Islamic bond (Sukuk) in the international markets by the end of this year or early in 2005, to be followed by Islamic bonds for the domestic market.1

8. Monetary expansion remained strong so far in 2004/05, with preliminary data showing broad money growing by 19.5 percent in the 12 months through October. Credit to the private sector accelerated further, increasing by 34 percent in the 12 months through October. The SBP raised the six-month treasury bill cut-off rates by another 19 and 50 basis points in October and November, respectively. Although it may be too early for the increases in interest rates in the last few months to have an impact on monetary aggregates, in the staff’s view the continued rapid private sector credit expansion, the further increase in core inflation, combined with the recent pressures on the exchange rate and associated loss in international reserves, underscore the need for the SBP to tighten its monetary policy more forcefully.

9. The Report on the Observance of Standards and Codes—Data Module, together with the authorities’ response and the Detailed Assessments Using the Data Quality Assessment Framework, have been finalized and will be published on the Fund’s website shortly.

1

A sukuk is an asset-backed security that is in compliance with Islamic Sharia laws. Sukuk holders receive regular payments from the underlying assets.

Pakistan: Staff Report for the 2004 Article IV Consultation, Ninth Review Under the Three—Year Arrangement Under the Poverty Reduction and Growth Facility, and Request for Waiver of Performance Criteria
Author: International Monetary Fund