Front Matter

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© 2006 International Monetary Fund

December 2006

Corrected: January 2007

IMF Country Report No. 06/426

Pakistan: 2006 Article IV Consultation—Staff Report; 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 2006 Article IV consultation with Pakistan, the following documents have been released and are included in this package:

  • the staff report for the 2006 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on September 2, 2006, 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 November 1, 2006. 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 Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its November 22, 2006 discussion of the staff report that concluded the Article IV consultation; and

  • a statement by the Executive Director for Pakistan.

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: $18.00 a copy

International Monetary Fund

Washington, D.C.

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Staff Report for the 2006 Article IV Consultation

Prepared by the Staff Representatives for the 2006 Consultation with Pakistan

(In consultation with other departments)

Approved by Juan Carlos Di Tata and Scott Brown

November 1, 2006

  • Discussions for the 2006 Article IV consultation were held in Islamabad and Karachi during August 21–September 2. The team comprised Mr. Savastano (head), Mr. Bartsch, Ms. Hakura and Mr. Moriyama (all MCD), Mr. Cossé (PDR), and Mr. Fletcher (FAD). The mission was assisted by Mr. Lorie (Senior Resident Representative). Mr. Khan (MCD) and Mr. Zaidi (OED) participated in some of the policy discussions.

  • The mission met with Prime Minister Aziz, State Bank of Pakistan (SBP) Governor Akhtar, Finance Advisor Shah, Finance Secretary General Ahsan, Finance Secretary Agha, other senior officials, and private sector representatives. A press statement was released at the conclusion of the mission (http: // /sec/pr/2006 /pr06191.htm).

  • The last Article IV consultation was concluded on November 2, 2005. Directors’ comments may be found at external/np/ sec/pn/2005/pn05157.htm.

  • 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 regime has been classified de facto as a conventional peg since 2005. Pakistan has participated in the GDDS since 2003. At end-September 2006, total Fund credit and loans outstanding to Pakistan amounted to SDR 1,001 million (96.8 percent of quota).


  • Executive Summary

  • I. Introduction

  • II. Recent Economic Developments

  • III. Report on the Discussions

    • A. Economic Outlook and Key Challenges

    • B. Risks to the Outlook and Policy Responses

    • C. Key Structural Reforms

    • D. Other Issues

  • IV. Staff Appraisal

  • Text Boxes

  • 1. Poverty in Pakistan—New Estimates

  • 2. Banking System Update

  • 3. Pakistan’s Real Exchange Rate

  • 4. Textile and Clothing Exports Following the Expiration of the Multi-Fiber Agreement (MFA)

  • Tables

  • 1. Selected Economic Indicators, 2001/02–2006/07

  • 2. Medium-Term Macroeconomic Framework, 2003/04–2010/11

  • 3. Balance of Payments, 2001/02–2010/11

  • 4. Monetary Survey and Analytical Balance Sheet of the State Bank of Pakistan, 2001/02–2006/07

  • 5a. Consolidated Government Budget, 2001/02–2006/07 (In billions of Pakistani rupees)

  • 5b. Consolidated Government Budget, 2001/02–2006/07 (In percent of GDP)

  • 6. Medium-Term Fiscal Framework, 2001/02–2010/11

  • 7. Public Sector Debt Sustainability Framework, 2001/02–2010/11

  • 8. External Debt Sustainability Framework, 2001/02–2010/11

  • 9. Selected Vulnerability Indicators, 2001/02–2005/06

  • 10. Financial Soundness Indicators for the Banking Sector, 2001–2006

  • 11. Millennium Development Goals, 1990–2004

  • Figures

  • 1. Public Debt Sustainability: Bound Tests

  • 2. External Debt Sustainability: Bound Tests

  • Appendixes

  • I. Relations with the Fund

  • II. Relations with the World Bank Group

  • III. Statistical Issues

Executive Summary

Economic performance during 2005/06 was strong. Real GDP growth remained buoyant and inflation declined slightly. Domestic demand and non-oil import growth, however, remained high and the current account deficit increased to nearly 4 percent of GDP. Record-high inflows of foreign direct investment (FDI), including from privatization, and government borrowing from international markets at favorable terms more than covered the larger deficit, resulting in a balance of payments surplus of over US$1 billion.

Pakistan’s main near-term challenge is to strengthen the balance of payments, in particular the external current account. Given the favorable prospects for non-debt-creating capital flows, meeting the above challenge requires placing the external current account deficit relative to GDP on a declining path, and increasing international reserves. A further tightening of monetary policy in 2006/07 that quickly aligns domestic demand growth with output growth is necessary to attain this outcome. To be effective, the monetary tightening should be supported by greater exchange rate flexibility and some fiscal restraint. The authorities are of the view, however, that the external current account deficit can be stabilized without major changes in the current stance of macroeconomic policies; they believe that the unwinding of transitory, nonrecurrent factors that influenced last year’s level of imports (e.g., oil price spike, foodstuff shortages) would lead to a significant deceleration in import growth in the coming months.

Beyond 2006/07, the favorable prospects for sizable FDI flows bode well for future gains in productivity and investment, but also present challenges for macroeconomic policy. Continued reliance on FDI flows of uncertain size and timing to finance relatively large deficits in the external current account would require a high degree of flexibility in economic policymaking. An improved capacity to generate timely policy responses to shortfalls of external financing arising from negative balance of payments shocks would help safeguard macroeconomic stability during that period. Given the goal of strengthening the official international reserves position, the option of resorting to the use of international reserves to cover shortfalls of external financing should be used sparingly.

Sustaining high growth and poverty reduction through higher rates of saving and investment remains Pakistan’s main medium-term challenge. Structural reforms conducive to these goals (including ongoing efforts to improve the investment climate, financial market reform, tax reform, improvements in public service delivery, and trade liberalization) should be prioritized.

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Public Information Notice (PIN) No. 06/139


December 7, 2006

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

On November 22, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Pakistan.1

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November 22, 2006