The Executive Board of the International Monetary Fund (IMF) today completed the second review of Pakistan’s economic performance under a program supported by a Stand-By Arrangement (SBA).
To help the country address increased balance of payment needs, the Board also approved an augmentation of access by an amount equivalent to SDR 2,067.4 million (about US$3,236.3 million), bringing the total financial support to an amount equivalent to SDR 7,235.9 million (about US$11,327.0 million), equivalent to 700 percent of Pakistan’s quota or 6.3 percent of its GDP.
The Board also approved the extension to end 2010 of the arrangement, originally approved on November 24, 2008 (see Press Release No. 08/303).
The completion of the review enables the immediate disbursement of an amount equivalent to SDR 766.7 million (about US$1,200.2 million), bringing total disbursements under the program to an amount equivalent to SDR 3,402.6 million (about US$5,326.5 million). The Board agreed that a portion of the augmented access could be used to finance priority spending until the disbursements of donor support pledged for 2009/10 are received.
Pakistan will also benefit from the proposed allocation of Special Drawing Rights (SDRs), which, once approved, will supplement its reserves.
The Executive Board also approved Pakistan’s request for a waiver for the non-observance of two end-June 2009 structural performance criteria on submission to parliament of legislative amendments to (i) enhance the effectiveness of the State Bank of Pakistan in banking supervision; and to (ii) harmonize the income tax and sales tax laws and reduce exemptions for both taxes. The Executive Board also approved Pakistan’s request for a waiver for non-observance for the end-June quantitative performance criterion on the fiscal deficit, which according to preliminary information was missed by an amount equivalent to 0.9 percent of GDP.
Following the Executive Board’s discussion on Pakistan, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, stated:
“Pakistan’s economy has continued to stabilize. Reforms in the financial sector and the foreign exchange market have been progressing, and steps have been taken to strengthen the social safety net. These achievements are appreciable, considering the security developments that resulted among others in the large number of internally displaced persons (IDPs), the global economic recession, and the difficult domestic political environment.
“The end-2008/09 fiscal deficit target was missed, due partly to unforeseen security- and IDP- related expenditures but also to excessive spending by provinces and revenue shortfalls, owing partly to delayed implementation of tax reforms. The unresolved energy sector problems have continued to undermine Pakistan’s growth potential and burden public finances.
“A durable solution to the problem of low tax revenue should start with the early implementation of VAT and the ongoing tax administration reform. These reforms will make the economy less vulnerable, provide the steady flow of resources needed to reduce poverty and develop basic infrastructure, and strengthen the government’s ability to deal with the pressing needs of the population, which are now compounded by the large number of IDPs.
“The recent agreement with World Bank and Asian Development Bank staffs on the electricity sector reform signals a desire to address the deep-seated problems in that sector, including the resolution of the intercorporate circular debt, which burdens the energy sector enterprises, and the elimination of tariff differential subsidies within a year from now, making additional fiscal resources available for priority spending.
“The macroeconomic outlook for 2009/10 remains difficult, and the external position is subject to considerable downside risks. The donor support pledged in Tokyo and the augmentation of access under the IMF-supported Stand-By Arrangement by about $3.1 billion will help mitigate these risks and enable the implementation of the government’s fiscal program; however, this financing is temporary and should be used as a bridge until the revenue reforms bear fruit.
“The 2009/10 budget aims to provide adequate space for priority spending. This includes spending on IDPs, support for poor households, and other well-targeted social spending.
“Monetary policy should remain vigilant about preventing a resurgence of inflation. The relaxation of the fiscal policy stance, electricity tariff increases, and the rebound in oil prices will add to inflationary pressures that monetary policy needs to combat.
“The increased flexibility of the exchange rate and the timely elimination of the State Bank of Pakistan’s provision of foreign exchange for imports of diesel and other refined products will improve the functioning of the foreign exchange market, make Pakistan’s economy more resilient to external shocks, and will contribute to further strengthening of its international reserves position.
“The accelerated reforms to strengthen central bank independence and the legislative amendments to increase its supervisory powers will enhance the monetary policy framework and help strengthen the banking system,” Mr. Portugal said.