This paper discusses key findings of the Third Review Under the Stand-By Arrangement for Pakistan. Program implementation has been uneven but key reforms are moving forward. All end-September 2009 quantitative performance criteria were met, with the exception of the ceiling on the overall budget deficit. The tax revenue foregone in September was largely recovered in October, and the wage bill overrun was self-correcting. On these grounds, the authorities request a waiver of nonobservance for the related end-September 2009 performance criterion. IMF staff recommends the completion of the program review.
The Executive Board of the International Monetary Fund (IMF) today completed the third review of Pakistan’s economic performance under a program supported by a Stand-By Arrangement (SBA). The completion of the review enables the immediate disbursement of an amount equivalent to SDR 766.7 million (about US$1.2 billion), bringing total disbursements under the program to an amount equivalent to SDR 4.17 billion (about US$6.54 billion).
The Executive Board also approved Pakistan’s request for a waiver for the non-observance of the end-September performance criterion on the ceiling of the overall budget deficit, which was missed by a margin of 0.3 percent of GDP.
The 23-month SBA in an amount equivalent to SDR 5.17 billion (about US$8.11 billion) was approved on November 24, 2008 (see Press Release No. 08/303). On August 7, 2009, the SBA was augmented to an amount equivalent to SDR 7.24 billion (about US$11.35 billion) and extended to end 2010 (see Press Release No. 09/281).
Following the Executive Board’s discussion on Pakistan, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, stated:
“The Pakistani authorities have made significant efforts to stay the course on stabilization and structural reform against the backdrop of weak external demand and a difficult security and political environment. Inflation has declined, the external position strengthened, and tangible progress has been made in tax, electricity, and financial sector reforms. Nevertheless, Pakistan’s vulnerabilities remain high, due notably to low revenue collection, large energy subsidies, and weak private sector credit. A credible fiscal consolidation, supported by flexible interest rate and exchange rate policies, further structural reforms, and improved governance will be essential to reduce these vulnerabilities.
“The fiscal slippage in the first quarter of 2009/10 was due partly to factors beyond the authorities’ control. The authorities are committed to strengthened fiscal discipline, including the use of contingencies. Adhering to the 2009/10 fiscal target—while challenging given security-related spending pressures—will help build confidence, preserve macroeconomic stability, and limit the potential for crowding out the private sector. Resolute implementation of tax administration reforms and timely disbursement of the pledged foreign financing will help facilitate fiscal management and prevent excessive recourse to domestic borrowing and undue compression of social and development spending.
“The introduction of the VAT and associated administrative reforms, scheduled for July 1, 2010, is key to strengthening revenue, crucial for reducing poverty and financing needed investment in human and physical capital. Prompt submission of the VAT law to parliament and its passage will therefore be important.
“The nationwide rollout of the strengthened targeting system for the social safety net is key to easing the hardship related to macroeconomic adjustment. The authorities remain committed to strengthening administrative capacity to ensure timely implementation of the new system.
“A cautious monetary policy stance will be essential for counteracting inflationary pressures. Maintaining a flexible exchange rate policy will help facilitate a further buildup of foreign reserves. The early experience with the interest rate corridor is encouraging, but care should be taken to harmonize better the corridor-based liquidity management framework with the monetary policy objectives.
“The authorities remain committed to ensuring financial stability and fostering bank soundness. Continued vigilance will be needed to ensure that bank lending decisions are economically sound, and to avoid moral hazard risks related to regulatory forbearance. ”