The Executive Board of the International Monetary Fund (IMF) today completed the fourth 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$1.13 billion), bringing total disbursements under the arrangement to an amount equivalent to SDR 4.94 billion (about US$ 7.27 billion). The Board also approved rephasing three remaining disbursements into two, while keeping the total access under the arrangement unchanged.
The Executive Board also approved Pakistan’s request for waivers for the non observance of two end-March 2010 quantitative performance criteria. These waivers were granted for overruns on the overall budget deficit and net government borrowing limits from the State Bank of Pakistan (SBP) on the grounds that their non observance was in part due to a temporary factor-the delay in the disbursements of foreign financing–and that adequate remedial actions have been agreed upon to address the remaining slippage.
Additionally, the Executive Board agreed to a request for modification of the end-June 2010 performance criteria for the budget deficit to increase the cumulative end-quarter ceilings by 0.15 percent of gross domestic product (GDP) to allow space for urgent security outlays and avoid undue cuts in other priority spending, and to raise the floor for the net foreign assets of the SBP by US$300 million given a strengthened external position.
The 23-month SBA in an amount equivalent to SDR 5.1685 billion (about US$7.61 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 7.2359 billion (about US$10.66 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:
“Against a background of adverse security developments and a rapidly changing political environment, economic conditions have improved. Real GDP growth has begun to pick up and the external position has strengthened. Preparations for important and politically difficult tax reforms have moved forward, and there has been steady progress in financial sector reform.
“Nevertheless, Pakistan’s vulnerabilities remain high, due to persistent inflation, security-related spending pressures, energy-sector problems, and shortfalls in revenue collection and external financing. These challenges highlight the importance of pursuing a credible fiscal consolidation, maintaining a flexible exchange rate and a cautious stance to monetary policy, and improving governance. The authorities’ resolve to press ahead with the structural reform agenda will also be key.
“The authorities reaffirmed their commitment to proceed with legal and administrative steps to ensure that the VAT is introduced on July 1 as scheduled, providing the needed tax revenue for investments in human resources, infrastructure, and poverty reduction. Its success depends crucially on prompt passage of consistent VAT laws by parliament and provincial assemblies, harmonization of other tax laws, and an effective refund system.
“Achieving the 2009/10 fiscal target will require strong efforts, including from the political leadership. Resolute continuation of tax collection efforts, tax administration reform, and expenditure restraint, together with timely disbursement of the pledged foreign financing will be critical to facilitate fiscal management.
“The risks posed by quasi-fiscal operations need to be addressed through reforming the electricity sector, cutting back losses at public enterprises, and managing losses from wheat procurement in a transparent manner. Steps are being taken to ensure that commodity operations do not crowd out credit to the private sector.
“The authorities are determined to accelerate the nationwide rollout of the new targeting system for the social safety net, with a view to easing hardship in a period of high inflation and sluggish growth,” Mr. Murilo said.