Front Matter

Front Matter Page

© 2005 International Monetary Fund

November 2005

IMF Country Report No. 05/409

Pakistan: 2005 Article IV Consultation and Ex Post Assessment of Longer-Term Program Engagement —Staff Reports; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Pakistan

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2005 Article IV consultation with Pakistan, the following documents have been released and are included in this package:

  • the staff report for the 2005 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on August 26, 2005, with the officials of Pakistan on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on October 11, 2005. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

  • a staff supplement of November 1, 2005 updating information on recent developments.

  • a staff report on ex post assessment of longer-term program engagement, which was completed on October 7, 2005.

  • a Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its November 2, 2005 discussion of the staff report that concluded the Article IV consultation.

  • a statement by the Executive Director for Pakistan.

The document listed below has been or will be separately released.

  • Selected Issues and Statistical Appendix

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to

Copies of this report are available to the public from

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Price: $15.00 a copy

International Monetary Fund

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Front Matter Page



Staff Report for the 2005 Article IV Consultation

Prepared by the Staff Representatives for the 2005 Consultation with Pakistan

(In consultation with other departments)

Approved by Amor Tahari and Michael T. Hadjimichael

October 11, 2005

  • Discussions for the 2005 Article IV consultations were held in Islamabad and Karachi during August 15–26, 2005. The staff team consisted of Messrs. Zavadjil (head), van Rooden, Schimmelpfennig (all MCD), Baig (FAD), Bhatia (MFD), and Leite (PDR). Messrs. Mirakhor (Executive Director), Khan (MCD), and Zaidi (Senior Advisor to the Executive Director) attended parts of the discussion. The mission was assisted by Mr. Lorie (Senior Resident Representative).

  • The mission met with State Bank of Pakistan Governor Husain, Finance Advisor Shah, Finance Secretary Ahsan, and other government officials. The mission also met with representatives of banks, the private sector, and nongovernmental organizations.

  • This report was finalized before Pakistan was struck by an earthquake on October 8, 2005. The impact of this tragic event and possible implications for economic policy will be discussed in an update to be issued before the Board meeting.

  • Pakistan completed its PRGF arrangement in December 2004. As of August 31, 2005, total Fund credit and loans outstanding to Pakistan amounted to SDR 1.1 billion (105 percent of quota). The Executive Board completed the 2004 Article IV consultation and the ninth and final review under the PRGF on December 1, 2004 (IMF Country Report No. 04/411).

  • Pakistan has accepted the obligations of Article VIII. It maintains a restriction subject to Fund approval in the form of a 50 percent limit on advance payments for some imports.

  • The exchange rate is described as floating, but has recently followed the U.S. dollar very closely.

  • The principal authors of this report are Milan Zavadjil, Ron van Rooden, and Axel Schimmelpfennig, with contributions from Taimur Baig, Ashok Bhatia, Carlos Leite, and Abhisek Banerjee.


  • Executive Summary

  • I. Introduction

  • II. Recent Economic Developments

  • III. Report on the Discussions

    • A. Sustaining Strong Economic Growth

    • B. The Macroeconomic Policy Mix for 2005/06

    • C. Vulnerabilities Have Been Reduced

    • D. Revenue Mobilization

    • E. Poverty Situation

    • F. Statistical Issues

  • IV. Staff Appraisal

  • Text Boxes

  • 1. Ex Post Assessment of Pakistan’s Longer Term Program Engagement

  • 2. Stock Market Developments

  • 3. The Impact of Global Oil Price Increases

  • 4. Assessment of External Competitiveness

  • 5. Banking System Update

  • Text Figures

  • 1. Contributions to Growth, 2000/01–2005/06

  • 2. Inflation, 2000–05

  • 3. Karachi Stock Exchange Index, 2004–05

  • 4. External Developments, 2000/01–2005/06

  • 5. Export Performance, 2000–05

  • 6. Import Performance, 2000–05

  • 7. Fiscal Developments, 2000/01–2005/06

  • 8. Interest Rates and Inflation, 2000–05

  • 9. Contributions to Reserve Money Growth, 2000/01–2004/05

  • 10. Monetary Growth, 2000–05

  • 11. Petroleum Levies and Subsidies, 2003–05

  • 12 Monetary Growth Leads Inflation by 12 Months, 2000–05

  • 13. Policy Transmission to Interest Rates, 2000–05

  • 14. De Facto Exchange Rate Arrangement, 1999–2005

  • 15. Exchange Rates, 2000–05

  • 16. Bilateral Exchange Rates, 1984–2005

  • 17a. International Reserves in Comparison with Emerging Markets, 1995–2004

  • 17b. International Reserves in Regional Comparison, 1995–2004

  • 18. Private Sector Credit Growth, 2002–05

  • 19. EMBI + Bond Spreads, 2004–05

  • Text Tables

  • 1. Authorities’ Response to Fund Policy Advice

  • 2. Key Economic Indicators, 2000/01–2005/06

  • 3. Capacity Utilization, 2003/04–2004/05

  • 4. Investment Indicators, 2000/01–2004/05

  • 5. Benchmarks for Reserve Adequacy, 2003–04

  • 6. Selected Banking System FSIs, 1997–2005

  • 7. Stress Test Results for the 12 Largest Commercial Banks, 2003–04

  • Figures

  • 1. External Debt Sustainability: Bound Tests, 1999/2000–2009/10

  • 2. Public Debt Sustainability: Bound Tests, 1999/2000–2009/10

  • Tables

  • 1. Selected Economic Indicators, 2000/01–2005/06

  • 2. Medium-Term Balance of Payments, 2000/01–2009/10

  • 3a. Consolidated Government Budget (In billions of Pakistani rupees), 2000/01–2005/06

  • 3b. Consolidated Government Budget (In percent of GDP), 2000/01–2005/06

  • 4. Financial and Operational Targets for WAPDA and Successor Companies, 2001/02–2004/05

  • 5. Financial and Operational Targets for KESC, 2001/02–2004/05

  • 6. Monetary Survey, 2000/01–2005/06

  • 7. Accounts of the State Bank of Pakistan, 2000/01–2005/06

  • 8. Medium-Term Fiscal Framework, 2002/03–2009/10

  • 9. External Debt Sustainability Framework, 1999/2000–2009/10

  • 10. Public Sector Debt Sustainability Framework, 1999/2000–2009/10

  • 11. Low-Growth Medium-Term Fiscal Scenario, 2002/03–2009/10

  • 12. Low-Growth Medium-Term External Scenario, 2000/01–2009/10

  • 13. Financial Soundness Indicators for the Banking Sector, 1999–2004

  • 14. Social Indicators, 2000/01–2004/05

  • 15. Millennium Development Goals, 1990–2003

  • 16. Selected Social Indicators in International Comparison, 2003

  • 17. Social- and Poverty-Related Expenditures, 2001/02–2005/06

  • Appendices

  • I. Relations with Fund

  • II. Relations with the World Bank Group

  • III. Statistical Issues

Executive Summary

Macroeconomic performance continues to be strong, but inflationary and external pressures are evident. Economic growth reached 8.4 percent in 2004/05 (July–June) and is expected to remain high. Inflation has accelerated and is likely to stay above the authorities’ target over the coming year. Import growth has also been rapid, moving the current account into deficit during 2004/05, despite higher worker’s remittances.

Indicators point to progress toward poverty reduction. High growth, including in agriculture, is estimated to have raised disposable incomes. A recent survey shows improvements in various health and education outcomes. Further increases in health and education spending are nonetheless needed to achieve the Millennium Development Goals.

Pakistan’s medium-term outlook is favorable. The authorities’ ambitious growth objectives require substantial increases in investment, including from the private sector. Public investment has been increased to ease bottlenecks in transportation, irrigation, and energy. Likewise, reforms to improve the investment climate are being undertaken, though weak governance in some public sector institutions remains a problem.

In the short-run, macroeconomic policies need to be tightened somewhat to counter inflationary and external pressures. The State Bank of Pakistan (SBP) has raised its policy rates substantially, but key interest rates remain slightly negative in real terms. Further increases in interest rates seem warranted as monetary growth is still high. A modest tightening of fiscal policies relative to the budget would alleviate demands on monetary policy. The government has already taken steps to offset pressures on the budget from rising oil prices, but for 2005/06, a small increase in the deficit is still projected. Some additional revenue effort and tight expenditure control could contain the deficit at last year’s level.

Better revenue performance is needed to achieve medium-term fiscal objectives. The government is targeting higher social and development spending, while further reducing the debt-to-GDP ratio. Stronger tax efforts will be required to achieve these targets. Enhancing compliance of existing tax payers is a first step to improving collection, but a strategy to extend the tax net into the service and agriculture sectors needs to be developed quickly.

Vulnerabilities have been reduced. Debt dynamics are favorable, and international reserves are adequate. The real effective exchange rate has appreciated slightly in early 2005, but competitiveness is not a concern so far. The financial sector has strengthened further as reflected in financial soundness indicators and resilience in standard stress tests.

Structural reforms are progressing. The sale, together with management control, of 26 percent of the public telecommunication company was the largest transaction so far in Pakistan’s privatization program. The sale of several other important companies is under way. However, energy sector reforms are taking longer than envisaged.

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Staff Report for the 2005 Article IV Consultation Supplementary Information

Prepared by the Staff Representatives for the 2005 Consultation with Pakistan

Approved by Juan Carlos Di Tata and Michael T. Hadjimichael

November 1, 2005

Front Matter Page



Ex Post Assessment of Longer-Term Program Engagement

Prepared by a staff team from the Middle East and Central Asia, Fiscal Affairs, and Policy Development and Review Departments1

Authorized for distribution by the Middle East and Central Asia and Policy Development and Review Departments

October 7, 2005


  • I. Introduction and Overview

  • II. The Facts

    • A. Program Conditionality

    • B. Goals and Achievements

  • III. Main Issues

    • A. Why the Change Between Pre- and Post-Crisis Period?

    • B. Was Structural Conditionality Appropriate?

    • C. Should the Monetary Program Have Been Designed Differently?

    • D. Did Fund-Supported Policies Help to Reduce Poverty?

    • E. Was the Size of the 2001 PRGF Arrangement Appropriate?

    • F. Did Fund-Bank Collaboration Contribute to the Success of the Program?

    • G. How Did the Work of Fund Staff on Pakistan Evolve Following the IEO Report?

  • IV. Lessons for the Fund

  • Tables

  • 1. History of Lending Arrangements, 1958–2004

  • 2. Structural Conditionality, 2000–04 1/

  • 3. Implementation of Conditionality, 2000–04

  • 4. Selected Economic Indicators, 1999/2000–2004/05

  • 5. Key Social Indicators, 2000/01–2004/05

  • 6. Social and Demographic Indicators, 2003

  • 7. External Official Support, 1998/99–2004/05

  • 8. Current Account Performance, 1998/99–2004/05

  • 9. Fiscal Performance, 1998/99–2004/05

  • Figures

  • 1. Real Per Capita GDP Growth and Fund Programs, 1960–2004

  • 2. Fund Financial Support, 1984–2004

  • 3. Outstanding Loans and Credits, 1984–2004

  • 4. Structural Conditions per Year, 2000–04

  • 5. Compositions of Structural Conditions, 2000–04

  • 6. Implementation of Conditionality, 2000–04

  • 7. Economic Growth, 1999/2000–2004/05

  • 8. Balance of Payments and International Reserves, 1999/2000–2004/05

  • 9. General Government Budget, 1999/2000–2004/05

  • 10. Debt Indicators, 1999/2000–2004/05

  • 11. Inflation and Interest Rates, Jul. 1999 Aug. 2005

  • 12. Tax Revenues, 1993/94–2004/05

  • 13. Inflation and Broad Money, 1998–2005

  • 14. Real Effective Exchange Rate vs. Trade Balance, 1995–2004

  • 15. Reserve Money Growth, 2000/01–2004/05

  • 16. Money Demand, 1999/2000–2004/05

  • 17. Were the Main Assumptions/Projections Overoptimistic?

Front Matter Page

November 2, 2005

Front Matter Page

Public Information Notice (PIN) No. 05/157


November 17, 2005

International Monetary Fund

700 19th Street, NW

Washington, D.C. 20431 USA

On November 2, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultations with Pakistan.1