A. Return to Fiscal Sustainability

19. The fiscal stance is not sustainable and requires significant consolidation to ensure sustainability. Over the past few years, declining tax revenues and increasing energy subsidies have worsened an already large fiscal deficit. Domestic financing of the fiscal deficit has produced severe crowding-out of private sector credit, and a reliance on negative real interest and direct financing from the SBP. Public debt has climbed above 60 percent of GDP with very short average maturity of domestic public debt, and increased vulnerability of external debt service to currency depreciation.

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Medium-term Fiscal Sustainability

Citation: IMF Staff Country Reports 2013, 287; 10.5089/9781484379615.002.A001

Sources: Pakistani authorities; and IMF staff calculations.Note: The debt stabilizing primary balance is calculated assuming growth at 3 percent.

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20. The 2013/14 federal budget represents an important initial step towards the needed fiscal consolidation. The budget targets a deficit of 6.5 percent of GDP. The tax package included in the budget is expected to raise revenues by about ¾ percent of GDP. However, in staff’s view it makes only limited progress towards a more efficient and equitable tax system, and further efforts will be needed to reach the medium term targets envisaged by the government. Tax revenue will likely fall short of the budget target, but the authorities are willing to take action to compensate (¶50). Likewise, the reduction in subsidies envisaged in the budget will not fully materialize despite the authorities’ strong plan to reduce the subsidies.

^{Box 5.}

Unemployment in Pakistan

The labor force is growing and providing employment opportunities remains challenging. Pakistan’s population growth rate of 2.2 percent (annual average) over the last decade is among the highest in developing economies¹ with about 40 percent of the population below the age of 15. With participation rates also rising, the labor force is expected to grow by 3.5 percent in the coming years. High unemployment among the youth is particularly widespread,² and only 25 percent of employment is in the formal sector. Although, the official unemployment rate is about 6.7 percent in 2012/13, the rural unemployment rate (9.1 percent as of 2012Q3) is twice the urban rate (4.8 percent as of 2012Q3).

Without significant reform, unemployment will rise in the coming years. Weak macroeconomic policies and structural problems, particularly in the energy sector, would lead to low growth and high unemployment in the coming years. Under the baseline scenario, the projected GDP growth hovers around 3 percent over the medium term. According to staff calculations the unemployment rate will rise from 6.7 percent in 2012/13 to about 9.0 percent by 2017/18.³

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Pakistan: Unemployment Rate Forecasts

(In percent of labor force)

Citation: IMF Staff Country Reports 2013, 287; 10.5089/9781484379615.002.A001

Sources: Pakistan Bureau of Statistics; IMF Labor Market Template, and IMF staff estimates.

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Under a Fund supported program, GDP growth will pick up and unemployment would decline gradually. The program envisages a mix of macroeconomic policy changes and structural reforms aiming to boost GDP growth over the course of the program. Although, GDP growth will initially decline due to fiscal contraction, it will steadily increase to about 5 percent. The unemployment rate will increase slightly in the first two years of the program, but it will decline to about 5.8 percent by 2017/18.

¹ Almost twice the average rate of emerging and developing economies. ² Youth unemployment rate was estimated to be above 10 percent in 2011, about almost twice as high as unemployment rate among adults aged over 25 years. ³ Based on the template developed in the Middle East and Central Asia Department. The template uses estimates of employment-growth elasticities that have been produced using a variety of econometric methods including individual country time-series regressions and panel data estimation methods. For further details, see: “A Template for Analyzing and Projecting Labor Market Indicators,” Technical Note Manual, IMF, 2012.

21. Policy actions should permanently strengthen the fiscal stance. Staff advocated a reduction of the deficit to around 3–3½ percent of GDP in the medium-term to ease crowding out and set the public debt on a firmly declining path—back below 60 percent of GDP by 2016/17. As shown in the Debt Sustainability Analysis (Table 11 and Figure 4), moderate shocks to the interest rate, growth, or the primary balance will result to debt levels above 65 percent—albeit stable, which highlights the need for reducing the debt ratio to well below the 60 percent of GDP envisaged in the Fiscal Responsibility Law. In staff’s view, the 60 percent of GDP threshold remains too high for a country like Pakistan with a low tax-to-GDP ratio and exposure to significant external and internal shocks. The consolidation should begin aggressively with measures focusing on the revenue side and on energy subsidies, and continue until the medium-term targeted deficit is reached. In order to protect the neediest from the effects of the envisaged fiscal consolidation, targeted cash transfer programs need to be expanded (see ¶50). Among critical fiscal reforms are the following:

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Pakistan: Public Debt Sustainability: Bound Tests ^{1/ 2/}

(Public debt in percent of GDP)

Citation: IMF Staff Country Reports 2013, 287; 10.5089/9781484379615.002.A001

Sources: Pakistani authorities; and IMF staff estimates.^1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.^2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.4/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2014, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

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• Tax policy. Pakistan’s tax to GDP ratio for 2012/13 was 9.7 percent of GDP—significantly less than the 11.4 percent of GDP in 2002/3—so fiscal consolidation will have to rely heavily on tax policy changes to broadening the tax base.¹⁵ The implementation of a full Value Added Tax (VAT) remains the first-best option to raise tax revenue, but if this remains politically unfeasible, other permanent tax policy measures could be considered to come closer to it by wholesale reductions in exemptions and concessions, and by fully incorporating services into the tax net. The administrative authority to grant tax exemptions via Statutory Regulatory Orders (SROs) should be eliminated to prevent further degradation of the tax net. Income tax should integrate income from all sources, concessions and exceptions should be eliminated, withholding should be adjustable, with the minimum tax on turnover remaining as a control for deductions.

• Tax administration. In a country of nearly 180 million people, only 1.2 million individuals and firms file income tax returns, (of which half are corporate income tax filers). Some 118,000 entities are enrolled in the sales tax system but only 15,000 actually pay any tax, with 82 percent of total sales and federal excise revenue coming from only 100 companies. These low numbers reflect the long-standing failure of the Federal Board of Revenue (FBR) to efficiently administer the system and the inability of previous reform efforts to deliver sustained results. The authorities need to develop and implement a strategy to strengthen tax administration, with the technical assistance of the Fund and the World Bank. While key elements of the strategy will need to be defined, it should include significantly stepping-up the FBR’s enforcement activities and improving its legal authority (such as to facilitate asset seizures for tax evaders and to presumptively bill taxpayers). The anti-money laundering framework will need to be fully applied in this effort.

• Expenditure reforms. The composition of public spending should shift to more growth friendly outlays, including infrastructure, health, and education, with the phasing out of untargeted energy and commodity subsidies, currently around 1.9 percent of GDP (Box 6). Targeted income support programs should be strengthened. Civil service reform should also be considered, to improve the quality of the public service, reduce corruption, and contain the public wage bill.

^{Box 6.}

Reducing Energy Subsidies

The authorities have launched their plan to gradually eliminate most of the energy subsidies.¹ The four phase plan is expected to reduce the subsidies from about 1.8 percent of GDP to 0.3–0.4 percent of GDP in three years.

• Phase I. The first phase entailed the almost full elimination of the subsidy for industrial, commercial, bulk, and AJ&K² users, accomplished through an increase in tariff of about 50 percent at end--July. The majority of domestic consumers are excluded from increases at this stage.

• Phase II. The second phase entails the elimination of the subsidy for consumption over 200Kwh, SCARP³, and others (public lighting, housing schemes, railways, HVTL⁴), and reducing the subsidy in agriculture by about 13 percent. The corresponding price increases have already been approved and notified—effective October 1st.

• Phases III and IV. In FY 2014/15 and FY 2015/16 the authorities will reduce the remaining subsidies (on agriculture and consumption below 200Kwh) in order to reduce the fiscal burden to 0.3-0.4 percent of GDP. By the end of Phase IV the subsidy for consumption above 200Kwh will be eliminated, and it will be reduced for those below 200Kwh. While most households will see price increases, subsidies will remain for the lowest level consumers and increases in targeted transfer programs will also protect the poorest.

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Energy subsidies

(In percent of GDP)

Citation: IMF Staff Country Reports 2013, 287; 10.5089/9781484379615.002.A001

Sources: Pakistani authorities; and IMF staff calculations.

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Pakistan strategy is broadly consistent with the lessons learned from previous energy reforms. Their strategy addresses the six key elements usually linked with successful reforms: (i) they developed a comprehensive energy sector reform plan with long-term objectives, (ii) they have launched a communication strategy, (iii) the price increases are phased and sequence differently across energy products, (iv) they are strengthening their cash transfer program to protect the poor, (v) they are working towards improving the efficiency in state-own enterprises, and (vi) they are working towards improving the timeliness of the pricing mechanisms.

¹ Fuel price changes are passed through to electricity prices on a monthly basis. ² Azad Jammu and Kashmire. ³ Salinity Control and Reclamation Program. ⁴ High Volatge.

• Fiscal federalism reforms. The revenue sharing system needs to be reformed to increase provinces’ incentives to rely less on federal transfers and more on their own revenue-raising efforts (Box 2). A mechanism needs to be put in place to set and implement statutory limits on provincial fiscal balances, supported by strengthened limits on provincial borrowing. In the short-run, a binding agreement should be negotiated between the provinces and the federal government, perhaps at the Council of Common Interest (CCI) to ensure that additional revenues raised under a fiscal consolidation plan are used for deficit reduction rather than to facilitate additional provincial spending. To the extent possible, this agreement should be supported by sanctions and by technical modifications of the revenue transfer system (i.e., a legislated “lock-box”).

• Public financial management reforms. Commitment control systems for the general government need to be implemented for better public financial management. The authorities also need to strengthen their fiscal debt office to improve deficit financing through lengthening the maturity of domestic debt, building a longer yield curve, and eventually returning to external private markets for some fiscal financing (see also ¶33).

B. Realigning Monetary Policy for Macroeconomic Stability

23. The SBP has pursued an accommodative monetary policy to lift weak private investment and growth, in light of falling headline inflation. The policy rate has been cut repeatedly over the past two years by a cumulative 500 basis points to 9 percent. In addition, in FY2012/13, the SBP continued direct financing of the large fiscal deficit (accounting for almost all of the increase in reserve money). Open market operations and foreign currency swaps have also pumped additional liquidity into the market. As a result, despite falling net foreign assets, monetary aggregates expanded relatively quickly. However, this accommodative policy did not bear fruit in terms of private sector stimulus—private credit shrank in real terms.

24. Pakistan has arrived at a critical balance of payments situation through a combination of: (i) past current account deficits occasionally coupled with weak financial accounts; (ii) reliance on external official financing to deal with financing gaps while maintaining an emphasis on relative exchange rate stability; and (iii) the disappearance of even modest private financial inflows following the global financial crisis of 2008. The first step in decreasing the risk of a crisis is for the central bank to accumulate reserves through net purchases in the foreign exchange market. In the mediumterm, a fiscal consolidation plan would help boost national saving, catalyze international support, and lead to an improvement of the financial account.

25. Prudent monetary and exchange rate policies are needed to address declining reserves and contain projected rebound in inflation.¹⁶ Staff advised that monetary and exchange rate policies should focus on rebuilding foreign exchange reserves and maintaining price stability. The SBP should signal a clear policy shift to market participants through purchasing foreign exchange in the interbank market to bolster reserves. Staff reiterated that the SBP should refrain from further direct lending to the government and limit open market liquidity injections to the economy. Inflation reduction should be a top priority of the SBP, as inflationary pressures will likely materialize in the coming 12–18 months. The SBP’s policy rate should be set prudently to contain expected inflationary pressures, to maintain positive real interest rates to attract deposits; and to help rebuild reserves.

26. The SBP continued to intervene in the foreign exchange market. The SBP’s net sale of foreign exchange in the spot market totaled US$3.35 billion in 2012/13, almost 70 percent of total loss in reserves. Staff argued that the chief short-run challenge facing the SBP is to rebuild criticallylow reserves, so a reversal of the exchange intervention policy was urgently needed. External competitiveness factors also suggest that a moderate weakening of the rupee would be appropriate (¶6, Box 1). Staff expressed concern about the SBP’s heavy reliance on short-term currency swap/forward contracts to boost gross reserves, and recommended that they be gradually scaled back to limit risk.

27. Independence of the SBP remains inadequate. Staff urged the authorities to amend the SBP Act in order to establish an independent, decision-making monetary policy committee, which is a pre-requisite for an optimal design and implementation of monetary policy. Staff stressed that full Independence would help pave the way for improved price stability, as SBP’s primary objective, and the elimination of future direct financing of fiscal deficits.

C. Safeguarding Financial Sector Stability

29. Growth in banks’ lending to private sector continues to be weak, while banks’ holdings of government securities continue to expand. Financial intermediation to the private sector has declined significantly over the last few years. Despite strong domestic deposit growth, high capitalization and liquidity levels, and reductions of the policy interest rate and NPLs, lending to the private sector has been diminishing as a share of total lending from around 75 percent in 2005 to around 45 percent in 2012, as the fiscal deficit increased from less than 3 percent to around 8 percent. Staff emphasized the need to tackle this severe crowding-out of the private sector in a credible way in order to stabilize the economy and create the conditions for future growth. The envisaged reduction of the government’s borrowing requirement and addressing NPLs should help stimulate private sector credit from the supply side, while greater macro stability and broader structural reforms should boost demand for private credit. These in turn would support the recovery of private sector investment, and thus employment and growth.

30. Staff urged the SBP to address the undercapitalization of a few banks. The SBP has already identified the capital shortfall for each bank that falls below CAR, where there are four noncompliant banks (excluding one state-owned bank that is under liquidation)—representing around 7 percent of the banking sector assets (with a total shortfall of less than 0.1 of GDP). Moreover, there are nine banks (six private and three state owned) that fall below the minimum capital requirement (MCR) but meet the CAR, representing 7.8 percent of the banking system assets. The SBP has provided extension to some banks for meeting MCR, subject to maintaining healthy CAR and presenting a timeline to meet the shortfall. Staff advised the authorities to develop a welldefined time bound Action Plan to deal with banks that are either below CAR or MCR, and restructure or merge few state-owned banks. Continued forbearance may pose a financial threat to financial system and have fiscal implications (e.g., in case of a need to recapitalize a state-owned bank).

31. Staff supported financial sector reforms to enhance the resilience of the financial system. In particular:

• Introducing a bankruptcy law: due to nonexistence of a bankruptcy law in Pakistan and the large volume of NPLs, staff underscored the need to complete the consultation with key stakeholders in order to finalize the draft Corporate Rehabilitation Act (CRA). At the moment, banking courts are understaffed, with years of long litigation and resolution process, as well as weak enforcement capacity of courts’ decisions. This is not a conducive environment for banks to extend credit to the eligible borrowers. Therefore, there is a need to revamp the recovery mechanisms by speeding up judicial process and filling up vacancies in banking courts with the necessary skills to handle outstanding cases.

• Setting up a deposit insurance scheme: the SBP is preparing to introduce an explicit Deposit Protection Fund (DPF). Deposit protection is currently ambiguous in Pakistan, as under the Banks (Nationalization) Act of 1974, the government of Pakistan implicitly guaranteed the safety of all deposits, despite the fact that the Banks Act applies only to nationalized banks. Therefore, depositors widely anticipate that the government or the SBP will compensate their deposits in case of a bank failure. Banks also support the introduction of the DPF. As the draft DPF Act is being finalized, staff stressed the need to ensure that the necessary preconditions are in place before launching the DPF, such as achieving compliance of all banks with minimum capital requirements, appropriate regulation and effective supervision for a sound banking system, and a special resolution regime.

• Enhancing consolidated supervision: the SBP and the Securities and Exchange Commission of Pakistan (SECP) recognize that consolidated supervision of financial conglomerates is critical for financial stability. The regulatory framework is similar to a “twin peak” model, where the SBP is entrusted with regulating the banking system and the SECP with regulating nonbank financial sector. Given ownership inter-linkages in the financial sector, however, there is a challenge to regulate these financial conglomerates. The SBP and SECP signed a Memorandum of Understanding (MoU) to share information and monitor the financial risks on consolidated basis. A joint task force on financial conglomerates was also established in 2010 and it meets periodically to discuss regulatory concerns pertaining to consolidated supervision.

• Strengthening the regulatory and supervisory framework: the SBP has developed and introduced several prudential regulations (e.g., loan to value, loans to deposits, and exposure limits on individual borrowers and borrowing groups), aiming to address macro-prudential risk. It has also improved its macro stress testing framework substantially over the years; however, there remains no macroeconomic model that the SBP could use for generating baseline and adverse scenarios for the stress testing. The SBP has requested technical assistance from the IMF’s Monetary and Capital Markets to assess its overall framework for contingency planning and crisis management. In addition, the SECP has revisited its legal framework—by drafting legislation that is under consideration by the government—to enhance its supervisory and enforcement powers, and to regulate futures markets. Staff also recommended that the government restore the SECP’s budgetary autonomy.

32. After the collapse in 2008, there has been renewed buoyancy in the stock market. The Karachi Stock Exchange (KSE-100) set new records over the last 12 months to June 2013, outperforming many other emerging markets (Figure 3). Staff recommended that the authorities closely monitor any speculation and market manipulation to maintain confidence in the stock market. Looking ahead, the SECP will continue with its reforms to develop stock exchanges through attracting strategic foreign investors, introducing Shariah-compliant investment products, and establishing a central counter party to provide protection to investors by reducing credit risk.

33. Steps should be taken to develop debt markets. The corporate debt market is underdeveloped and small. For the government debt market, measures have been taken to develop an efficient and liquid market, by consolidating benchmark securities, automating the auction process, and pre-announcing the auction calendar for the next quarter. To further deepen the government debt market, the authorities need to: (i) continue aligning rates of returns on the National Saving Schemes (NSS) to equivalent government securities;¹⁷ (ii) improve price discovery during the auction process by utilizing cut-off rates much less frequently and allowing market forces to determine the yield on government securities; (iii) build a more complete yield curve by extending maturities of government securities;¹⁸ (iv) issue Sukuk instruments beyond 3-year maturity; (v) continue to broaden the investor base to include institutional investors, and (vi) list government debt instruments in the stock exchanges to increase secondary market liquidity.

34. Over the medium-run, the authorities should seek to further deepen the financial markets and develop capital markets.¹⁹ The financial system of Pakistan remains shallow in terms of its inclusiveness, depth, efficiency, and stability. Though the system has grown over the last decade and is diversified, it remains small and largely bank-based. There is scope for further financial deepening by: (i) continuing to increase access to financial services through the Financial Inclusion Program and microfinance; (ii) stimulating credit to the private sector; (iii) addressing undercapitalization of a few banks; and (iv) developing capital markets to provide alternative means of financing investments and investment opportunities for investors. Financial deepening should, over the long term, sustain economic growth and increase the effectiveness of macroeconomic policies.

D. Structural Reforms for Fiscal Consolidation and Economic Growth

37. Structural reforms, especially in the energy sector, are crucial for fiscal consolidation and economic growth. The energy sector is saddled with considerable problems that have led to unreliable electricity supply and large fiscal costs, including price distortions, insufficient collections, costly and poorly targeted subsidies, inadequate governance and low efficiency in energy supply and distribution, regulatory inadequacies, and insufficient investment in new energy production (Box 7). As a result the output level is estimated to be depressed by some 2 percent.²⁰ Outside the energy sector, growth prospects are limited by the presence of loss-making public sector enterprises (PSE) in key economic activities, a poor business climate, and a distorted trade regime—all areas where Pakistan falls short of its peer countries.²¹

38. Initial actions on energy sector reform should concentrate on “quick wins” that contribute to fiscal adjustment and resolve energy sector bottlenecks to boost economic growth. Staff argued that the key to reform is making the energy system financially viable, including via clearance of circular debt, tariff adjustments, and a change to cheaper fuels. The mission welcomed the Prime Minister’s announcement of a new Energy Policy to relieve short-term bottle necks and encourage long-term increases in electricity supply. In this respect, out of the Rs. 503 billion of payment arrears identified as of end-May 2013, Rs. 342 billion were cleared at end-June 2013, with the residual slated for resolution by end-August 2013. The arrears reduction will allow cash-constrained power producers to bring additional electricity supply to the system in the short-run and reduce load shedding by around three hours per day. Tariff adjustments will improve resource allocation and efficiency, and will encourage conservation. Staff stressed that phasing out subsidies is also an important component of fiscal adjustment; however, targeted income support programs should be used to protect the most vulnerable members of the society. Cost-cutting, improved collection from nonpayers, and efficiency measures are needed to reach full cost recovery in the electricity sector.

39. A key shortcoming of the current electricity sector has been the limited ability to collect for energy supplied, due in part to a lack of specific real-time data on energy flows, and which also results in inadequate compliance with usage restrictions. To address this, strengthened performance contracts needs to be signed with all power sector companies to tackle losses, raise payment compliance, and improve energy efficiency and service delivery. Staff stressed that pending amendments to the Penal Code 1860 and the Code of Criminal Procedures 1898 need to be accelerated to strengthen the legal framework in cases of electricity theft by enhancing investigation, prosecution, and penalties. However, a new electricity act is still needed to modernize governance of the sector.

^{Box 7.}

Overview of Pakistan’s Power Sector

Technical and financial problems in the energy sector have led to large-scale power outages which have depressed output. In the 2000–10 period, Pakistan increased energy supply by 11 percent in per capita GWh, lagging behind her peers¹ by almost one fourth. Energy supply has also lagged behind growing demand at notified prices which fell behind the cost recovery levels. The total installed capacity as of end FY12/13 reached around 23.5² GW, however net electrical output has been declining in the last three years due to drags created by the growing payment arrears, derated power plants, and insufficient supply of gas. The current generation falls short of estimated demand by 4–5 GW leading to 8–10 hours of load shedding in the system. Delays in tariff determination and low collection rates contributed to increasing arrears in the sector, which further depressed supply.³ Transmission and distribution (T&D) losses hover around 22 percent of total supply triple high income economies and more than double the world average.⁴ Load shedding in this period led to declining capacity utilization which is estimated to cost around 10 percent of GDP.⁴, ⁵

Energy supply relies on costly fuel mix. Despite power sector’s heavy reliance on gas as a generating fuel, the insufficient supply of gas led to the substitution to costly imported fuel. Growing allocation of gas to domestic users further elevated the shortage in the power sector. Fuel imports reach 36 percent of the total energy mix,⁶ however it constitutes 70 percent of the total energy generation cost.

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Energy Supply by source

Citation: IMF Staff Country Reports 2013, 287; 10.5089/9781484379615.002.A001

Sources: Pakistani authorities; and IMF staff calculations.

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Energy Supply by Cost

Citation: IMF Staff Country Reports 2013, 287; 10.5089/9781484379615.002.A001

Sources: Pakistani authorities; and IMF staff calculations.

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Pakistan consumes all of its domestic gas production, however due to lack of investment production is dropping. The current level of gas supply is just over one half of unconstrained demand due to low prices and insufficient investment.⁷ The lack of infrastructure also makes it difficult to import gas. At current regulated domestic gas prices, quantity based allocations divert gas from the power sector to households, transport, fertilizer production and industry. Nevertheless, low user prices discourage new investment, promote inefficiency in gas use, and have the potential to generate fiscal cost from the gas sector. The current level of un-accounted for gas losses reached 11 percent—way above international benchmarks.

Fiscal subsidies reached almost 2 percent of GDP per year. The sector generates direct and indirect fiscal costs through untargeted direct subsidies to energy users and repeated bailouts of the recurrent costs in the sector. Pakistan’s direct subsidies are more than double relative to median emerging market economy.⁸ The delays in determination and notification of prices also increase uncertainty on predicting the cost of subsidies on budget.

Until recently, the increasing stock of circular debt posed to limit energy supply. The stock was estimated to reach 4 percent of GDP as of end-FY13. The debt emerges due to the gap between the actual cost of production and the revenues, and delayed payments by distribution companies to the Central Power Purchasing Agency (CPPA). T&D losses, delays in price determination and notification, delays in pass through of fuel price changes, poor revenue collections, courts interference to power sector governance, delays in subsidy payments by the government to distribution companies all contributed to the growing circular debt. In June 2013, the government cleared large portion of the circular debt, about 1.4 percent of GDP, which should help elevate electricity supply. However, until the underline issues are addressed in a systemic way the problem will emerge in the future.

¹ Median Emerging Market economy improved energy supply by 36 percent in the same period. ² NEPRA (2012) State of the Industry Report. ³ DISCO losses reached 18.46 percent, 32.64 percent of losses at KESC (total 20.8 percent) from units purchased, and 2.8 percent of losses for NTDC from units received. The total losses of the system are around 22.37 percent of supply i.e. (NTDC+KESC+DISCO losses)/ Units received by NTDC +KESC purchased from own plants. ⁴ http://wdi.worldbank.org/table/5.11# ⁵ Sahin, S. and F. Salman, (2013), “Pakistan’s energy issues in computable general equilibrium setting,” unpublished. ⁶ Sources: Pakistani Authorities. ⁷ At current prices, supply of gas is around 60 percent of total demand in the system. ⁸ IMF (2013) “Energy Subsidy Reform: Lessons and Implications” ⁹ Planning Commission of Pakistan and USAID (2013) “The Causes and Impacts of Power Sector Circular Debt in Pakistan,” March.

40. Conservation and energy efficiency are the cheapest and the fastest ways to alleviate the electricity shortage. Staff pointed out that pricing and other market based instruments to encourage energy conservation will significantly improve resource allocation and energy efficiency. Staff also urged authorities to promulgate the Pakistan Energy Efficiency and Conservation Act.

41. Current energy generation is tilted towards the use of costly fuel oil. Changes in the energy mix are required to decrease the production costs. The use of gas and coal rather than fuel oil needs to be prioritized. Moreover, the development of hydropower projects needs to continue for long-term sustainable supply.

42. Gas supply falls short of unconstrained estimated demand by half at current prices and investment is limited. To help tackle the gas shortages in the short-run, import of Liquefied Natural Gas (LNG) should be a priority, along with limiting further expansion of the gas distribution networks for domestic consumption and limiting the use of compressed natural gas to fuel vehicles. In the medium-term new investment in gas production should be a priority, both from existing fields and new exploration. Gradual price rationalization would encourage new production and would allocate gas consumption to the most efficient uses. Improvements in the business climate would also encourage new domestic and foreign investment in the sector.

43. Governance and regulatory improvements should be important components of energy sector reform. Half of current circular debt is caused by inefficiencies in tariff determination and notification. Staff urged authorities to minimize the time to determine and notify tariffs and to consolidate the process under the National Electric Power Regulatory Authority (NEPRA) while strengthening NEPRAs administrative capacity. Similarly fuel price adjustments need to be made on a timely basis. Finally, the institutional capacity of all energy sector PSEs needs to be strengthened to allow them to operate independently from the Government as efficient commercial entities.

44. Business climate reforms should initially tackle the major impediments to entry. Staff pointed out that liberalization of barriers to new business start-ups, simplification of legal and taxation requirements (such as a “one stop shop” for investors), strengthening anti-corruption efforts, and designing frameworks to improve contract enforcement would enhance the business climate and increase investment. Access to credit for small and medium enterprises (SME) remains very limited. In this respect, the State Bank of Pakistan’s Financial Inclusion Program makes an important contribution.

45. Trade policy reforms would stimulate competition, facilitate innovation and encourage foreign investment. A decade ago, Pakistan had a relatively simple and flat import regime, with four tariff rates from 0 to 25 percent and few exceptions. This system has been subjected to numerous modifications which have made it complex and riddled with special conditions. According to a study by the Customs Budget Wing in 2012, 84 percent of traded tariff headings were subject to SROs modifying rates or granting exemptions. In staff’s view, simplifying tariff rates, eliminating exemptions and SROs would deliver a much needed improvement in the competitive environment. Staff also suggested a return to the 2003 framework of 4 tariff “slabs” with 0 to 25 percent rates. Elimination of the negative list on trade with India and extending India most favored nation status, and shifting to “sensitive list” under SAFTA regime would increase regional trade. A strategy to take full advantage of trade preferences available from the EU—where currently autonomous trade preferences in 75 items is present—would also be advantageous.

46. Reforming public sector enterprises will limit poor performance and help lift economic growth by improving resource allocation. The authorities and staff agreed that comprehensive action was needed on some 65 PSEs. Initially, a stock taking of all major loss-making PSEs would be advisable to provide a diagnosis of the main problems. This could be followed by implementation of medium-term action plans to privatize firms, restructure those with prospects of profitability but which the government wishes to retain in the public sector, and close nonviable firms. Staff suggested that for those companies with shares already in private hands, privatization should go ahead with block sales, secondary public offerings for institutional and general public or international listings. On restructuring improved governance and corporatization should be essential components of reform.

Fiscal Policy

The Fund supported program contemplates around 4½ percent of GDP in fiscal consolidation over three years, of which 2 percent of GDP would be taken upfront.

50. Under the authorities’ proposed program, the fiscal deficit would be reduced to around 3½ percent of GDP by FY2016/17 (MEFP ¶7–9). World Bank studies suggest that aggressively broadening the coverage of General Sales Tax (GST) and key taxes (income taxes and import tariffs) could yield up to 4½ percent of GDP over time, and increases in tax rates (such as GST or excises) could be considered, in addition to other potential measures (table below). On the expenditure side, current spending—mostly electricity subsidies—could be reduced by 1½– 2 percent of GDP over the program period. Together, measures of this order of magnitude could deliver the desired deficit reduction while permitting increased spending on growth enhancing investment and social protection. Given the significant devolution of revenues to the provinces, the government will seek explicit agreement with the provinces to deliver the budgeted surpluses through saving additional revenue transfers.

51. The initial fiscal adjustment effort includes permanent deficit reduction measures of 2 percent of GDP, coming mainly from revenue increases and lower energy subsidies (MEFP ¶8). Tax measures included in the 2013/14 budget—including a one point hike in the GST rate—are expected to yield ¾ percent of GDP annually. Reduced energy subsidies will produce another ¾ percent of GDP in savings. The remainder will come from lower current expenditures (0.15 percent of GDP), savings of the PSDP budget, and (in the second half of the fiscal year) a new levy on natural gas expected to yield about 0.4 percent of GDP on an annualized basis. As a contingent strategy, the government will bring forward the measures identified for years two and three of the program.

52. The additional fiscal adjustment in years two and three of the program will be concentrated on efforts to broaden the tax base and to further reduce untargeted subsidies (MEFP ¶9, 10, and 13). On the revenue side, the authorities envisage measures yielding ¾ percent of GDP in each of the subsequent years. The focus will be on eliminating exemptions and concessions embedded in the Statutory Regulatory Orders (SROs) and in the law, as well as on eliminating the power of the executive to grant preferential tax treatment through SROs. These steps will facilitate gradually moving the GST to a full-fledged integrated VAT-style modern indirect tax system with few exemptions and to an integrated income tax by 2016/17. Tax administration reforms will also be critical to this revenue effort. On the income tax side, the authorities will focus on 300,000 potential taxpayers, through the national data warehouse. In addition to the 100,000 notifications for late return filing under section 114 envisaged for FY2013/2014, the authorities will pursue additional 100,000 in each of the following two years. If the tax payers fail to respond satisfactory, these notifications will be followed by a provisional assessment of income under section 122—which will become final if the taxpayer again fails to respond satisfactorily—and measures to collect the tax liability (including attachment of bank accounts). The authorities will also develop plans to strengthen the administration of customs, sales and excise taxes (structural benchmark). On the expenditure side, further subsidy reductions of around 0.4 percent of GDP per year are envisaged under the authorities’ comprehensive energy plan.

Annualized Yield of Key Measures under the Program (In percent of GDP)

Annualized Yield of Key Measures under the Program (In percent of GDP)

	2013/14	2014/15	2015/16
Total	2.08	1.20	1.06
Tax measures included in the budget	0.74	…	…
Tax measures to be identified	…	0.75	0.75
New levy on natual gas	0.40	0.00	0.00
Reduction of energy subsidies	0.79	0.45	0.31
Savings on current non-wage spending	0.15	0.00	0.00
Memorandum
Increase in BISP	0.06	0.11	0.05

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Annualized Yield of Key Measures under the Program (In percent of GDP)

	2013/14	2014/15	2015/16
Total	2.08	1.20	1.06
Tax measures included in the budget	0.74	…	…
Tax measures to be identified	…	0.75	0.75
New levy on natual gas	0.40	0.00	0.00
Reduction of energy subsidies	0.79	0.45	0.31
Savings on current non-wage spending	0.15	0.00	0.00
Memorandum
Increase in BISP	0.06	0.11	0.05

53. The provinces will contribute to the consolidation effort (MEFP ¶14). In 2013/14, the provinces—through the Council of Common Interests—have agreed to deliver the required fiscal surpluses through saving the additional revenue transfers. To encourage compliance, the SBP will begin to pay interest on deposits held by the provinces. However, stronger institutional arrangements will be needed in the future to ensure the sustainability of the envisaged fiscal consolidation. In 2014/15 and beyond, negotiations will take place on a new NFC award which the authorities plan to use to adjust the revenue sharing arrangements to provide a better balance between revenue and spending responsibilities.

Federal and Provincial Fiscal Balances (In percent of GDP)

Federal and Provincial Fiscal Balances (In percent of GDP)

	2012/13	2013/14	2014/15	2015/16
Overall balance	-8.5	-5.5	-4.4	-3.6
Provincial balance	-0.1	0.5	1.0	1.4
Share in federal revenue	5.2	5.7	6.2	6.6
Net other	-5.3	-5.2	-5.2	-5.2
Federal balance	-8.4	-6.0	-5.4	-5.0

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Federal and Provincial Fiscal Balances (In percent of GDP)

	2012/13	2013/14	2014/15	2015/16
Overall balance	-8.5	-5.5	-4.4	-3.6
Provincial balance	-0.1	0.5	1.0	1.4
Share in federal revenue	5.2	5.7	6.2	6.6
Net other	-5.3	-5.2	-5.2	-5.2
Federal balance	-8.4	-6.0	-5.4	-5.0

54. Targeted assistance schemes will be expanded significantly during the program to protect the most vulnerable members of society ²² (MEFP ¶13). The main program, the Benazir Income Support Program (BISP), reaches 4.8 million families in the two poorest quintiles of the population.²³ For FY2013/14, the budget allocated to BISP has risen so as to increase the level of benefits from PRs.1000 to PRs. 1200 per family per month and expand coverage to 5.7 million families. Additional resources will also provide conditional cash transfers (CCTs) to primary education, supporting 560,000 families with a benefit of Rs. 200 per child per month attending school. Coverage of the BISP and CCTs would continue to rise under the program, reaching 6.6 million families by 2015/16 with benefits scaled up to cover inflation.

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Quintile Share of Aggregate Spending or Transfers

(In precent)

Citation: IMF Staff Country Reports 2013, 287; 10.5089/9781484379615.002.A001

Sources: Pakistani authorities; and IMF staff calculations.

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Monetary Policy

Rebuilding reserves will be the priority short-term policy objective, with maintaining low and stable inflation taking on greater importance later on. Enhanced SBP independence and ending SBP direct financing of the fiscal deficit will be crucial.

55. Staff and the SBP agreed that monetary and exchange rate policies should be adjusted to address declining reserves and a projected rebound in inflation (MEFP ¶17). In the short-term, monetary and exchange rate policies should focus on rebuilding foreign exchange reserves. As a first step, to signal a shift in policy and to begin attracting capital inflows, the SBP has begun net purchases of foreign exchange in the interbank spot market. Reserves accumulation will be guided by a tight NIR target under the program. The SBP will allow greater exchange rate flexibility, limiting intervention in the exchange market to that needed to build reserves, cushion major shocks, and strengthen competitiveness over time. The authorities also agreed to gradually reduce the SBP’s short swap/forward foreign exchange position to a more sustainable level. Inflation will be contained to around 8 percent in 2013/14, aided by the effects of fiscal consolidation in limiting domestic demand growth and easing fiscal pressures on the money supply.

56. Beginning in 2014/15, monetary policy should aim to reduce inflation while continuing to rebuild foreign exchange reserves (MEFP ¶16, and 18). To guide inflation reduction efforts, a target on NDA of the SBP envisages a reduction in money supply growth over time to rates consistent with the inflation objective of 6–7 percent. Monetary accommodation of fiscal deficits will be scaled back considerably, while maintaining a positive real policy interest rate will help anchor inflation expectations. The SBP has also halted further direct lending to the government, reflected by a continuous ceiling on total SBP credit to the government (which will fall over time and will help lowering the reserve money growth).

57. Enhanced central bank independence will improve monetary policymaking (MEFP ¶19). In the near term the authorities agreed to work toward approval of amendments to the SBP law to give greater operational independence in the central bank’s pursuit of price stability as its primary objective. Among other things, the amendments will establish an independent, decision-making monetary policy committee to design and implement monetary policy and will prohibit any form of new direct lending to the government from the SBP.

Financial Policies

58. The SBP will prepare detailed plans to assure that all banks come into compliance with minimum capital adequacy requirements (structural benchmark, MEFP ¶21). The plan will cover both state-owned and private banks and will include contingency measures in case of slippages, indicating clearer alternatives in case banks are unable to raise expected capital.

59. Consultations are already underway with key stakeholders on the new bankruptcy law (Corporate Rehabilitation Act) to revamp the recovery mechanisms (MEFP ¶22). The new law will facilitate the legal framework for rehabilitating viable corporate and financial entities while speeding up the process of liquidation of unviable entities. The authorities also plan to approach key stakeholders to address the concerns regarding creditor and debtor protection.

60. A deposit insurance scheme will be introduced once preconditions are in place (MEFP ¶23). The scheme is expected to boost confidence in the banking system, which will encourage additional growth in deposits. The authorities agreed to pass legislation on deposit insurance scheme and fully implement this legislation over the course of the next three years where necessary preconditions are met such as capital adequacy, effective supervisory and regulatory framework, and a special resolution framework.

61. Revising the regulatory and supervisory frameworks is critical for financial stability (MEFP ¶24). The Securities and Exchange Ordinance, 1969 “SEO 69” lacks a proper structure and suffers from numerous inconsistencies and gaps due to several amendments made over years. The authorities will undertake several initiatives during the program period:

• The draft Securities Bill will enhance the supervisory and enforcement power of the regulator.

• Regulatory power of the Securities and Exchange Commission of Pakistan (SECP) will be enhanced with a new draft bill.

• A comprehensive framework for the futures markets will be prepared.

• Better coordination between SBP and SECP will be implemented to effectively regulate and supervise banking groups.

Structural Policies

Critical structural measures in the energy sector together with targeted transfers to protect the most vulnerable will be a priority under the new Fund-supported program. Other reforms will also be important components of the arrangement, such as trade liberalization, reforms of public sector enterprises (PSEs), and improvements to the business climate, which will kick start growth.

62. The authorities have launched a comprehensive energy policy (MEFP ¶26). The policy to be implemented during the program will cover all elements of the energy supply chain, demand management, and pricing policies for better functioning of the sector:

• Electricity sector (MEFP ¶27, and 32). Tariff rationalization has already begun, and the elimination of payables arrears in the power sector is a positive development. However, more is needed to limit the recurrence of arrears in the future. During the program period Tariff Differential Subsidies (TDS) will be phased out and tariffs will be brought to cost recovery levels. Tariff adjustments will improve resource allocation and efficiency, and will encourage conservation. Cost-cutting and efficiency measures will also be undertaken in both generation and distribution companies. Legal changes will be undertaken to tackle electricity theft by enhancing investigation, prosecution, and penalties. High priority will be given to improve energy sector governance and transparency. Additional electricity production projects will be accelerated.

• Gas sector (MEFP ¶34). The authorities will prepare a gas price rationalization plan to accompany the electricity price rationalization already underway. In the short-run, they will administratively allocate gas to uses with higher economic value (e.g., energy production) while preparing to let price mechanisms take over the allocation function in the future. They will develop facilities to import gas, and will increase incentives for higher domestic production.

63. The authorities agreed to move forward with business climate reforms to help increase foreign and domestic private investment (MEFP ¶36). The Corporate Rehabilitation Act, Alternative Dispute Resolution (ADR) Mechanisms, setting up a one-stop shop (including the human resource and funding needs), and identifying the required changes in the regulations and administration will be required to tackle the impediments to doing business. In this respect, the Board of Investment, in coordination with SECP, Federal Bureau of Revenue, provincial governments, and other concerned agencies, will develop a plan to further simplify procedures and reduce costs for setting-up businesses in Pakistan.

64. Trade policy and PSE reforms will be important components of the program (MEFP ¶37). These reforms will increase consumer welfare, stimulate growth via increased competition, and improve public resource allocation. The authorities will prepare a three-year program to return to a simplified import tariff regime, with 4 tariff rates ranging from 0-25 percent with few exceptions. The elimination of SROs will also remove the source of many distortions to the trade regime. The authorities will embark on a stock-taking of all major loss-making PSEs. This shall be followed by implementation of medium-term action plans to privatize firms, restructure those with prospects of profitability but which the government wishes to retain in the public sector, and close nonviable firms.

65. Enhanced and better-targeted assistance for the poorest households is necessary (MEFP ¶13). The poor and most vulnerable segments of the society will be protected from the direct and indirect impacts of fiscal consolidation and tariff adjustments. The Benazir Income Support Program (BISP) is the largest targeted social assistance mechanism directly reaching 4.8 million families (16 percent of the population) within the two poorest quintiles. As savings from tariff adjustments and fiscal space are realized, the authorities agreed to expand its coverage and increase the benefit amount to protect the real purchasing power of the beneficiaries.

Program Modalities

66. Access, Duration, Phasing: An extended arrangement under the EFF would be appropriate to meet Pakistan’s medium-term financing needs, build reserve buffers from their current level of US$5.4 billion, and put the economy on a sustainable, higher-growth path. Access of 425 percent of quota (SDR 4,393 million, equivalent to US$6.68 billion) is based on Pakistan’s external financing needs (Box 8). The required fiscal adjustment, outstanding credit, and record of using Fund resources are also used to determine access. The proposed arrangement will be within normal access limits for an extended arrangement under the EFF, even after the implementation of the 14^th quota review and possible changes to normal access limits.²⁴ Even phasing over the program would imply net repayments to the Fund in the first four quarters of the program. The first disbursement would be at program approval and the remaining purchases would be contingent on completing quarterly reviews.

67. Support from other donors. Staff has worked in close coordination with the World Bank, the Asian Development Bank, and key bilateral donors in developing policy recommendations (particularly for structural reforms). There are firm commitments from donors to fill the entire financing gap for the first 12 months of the arrangement, and good prospects that there will be adequate multilateral and bilateral financing for the remainder of the program. Financial support from these partners is expected to reach US$6 billion during the program period, with strong technical assistance also provided, particularly in tax administration and the energy sector.

68. Prior actions: The following prior actions were undertaken by the authorities to kick start reforms and signal commitment to the necessary adjustment policies:

• Implementation of a series of fiscal adjustment measures (including those in 2013/14 budget) totaling 2 percent of GDP on an annualized basis.

• Elimination of tariff differential subsidies in industrial, commercial and bulk users and reduction of subsidies to high levels of consumption totaled 0.75 percent of GDP in annualized savings.

• Sustained purchases of foreign exchange by the SBP.

• An agreement at the Council of Common Interest on respecting the 2013/14 fiscal balances for the provinces under the program.

• Issuance of 10,000 collection notices to individuals not registered to pay taxes based where indirect methods suggest large potential income tax liabilities.

69. Quantitative and Continuous Performance Criteria: The program will be monitored with quarterly performance targets on the general government fiscal balance (consolidated federal and provincial), net foreign assets, net domestic assets, SBP lending to the government, the SBP’s forward/swap position, the accumulation of domestic arrears, and the standard continuous performance criterion on the nonaccumulation of external arrears.

70. Structural Benchmarks: Beyond the prior actions in the structural area, benchmarks on structural reforms are also set. Benchmarks in the fiscal sector are designed to secure the fiscal consolidation and distribute the burden to wider groups of tax payers. Monetary policy benchmark is aimed at bringing more independence to the SBP through changing the composition of the Board, extending the tenure of the Governor and eliminating SBP lending to the Government. Financial sector benchmarks focus on initially to mitigate short-term risks posed by undercapitalized banks and ensure that necessary institutions are set up to protect medium-term financial stability. Finally, benchmarks in the structural policies are intended to address the long-standing problems in the energy sector and loss making public sector enterprises which constitute critical constraints on growth and have generated or have the potential to generate large fiscal cost.

71. Risks: Program implementations risks are high given Pakistan’s track record, particularly political constraints and the limited technical capacity to implement reforms simultaneously across a wide range of activities. These risks are mitigated by critical upfront actions as well as the strong electoral mandate and commitment to reform of the new government. Strong technical assistance support from the international community should help ease risks that implementation will lag due to weak technical capacity. The recent record of interventions by the Supreme Court in economic and administrative issues may be another source of uncertainty. The governing party may lack political support in provinces outside of Punjab, complicating provincial-federal financial agreements. Endorsement of the 2013/14 budget parameters and medium-term program objectives from other provinces is expected to mitigate this danger. Delays or shortfalls in financing from public or private sources are another program risk. Public funding risks should be eased by the strong commitments of support from the World Bank, ADB, and key bilateral partners. Private financing risks may be reduced by the authorities’ strong privatization program (flows from which have been very conservatively estimated).

^{Box 8.}

BOP Projections and External Financing Requirement

The BOP position is sustainable with significant adjustment and new financing. While the current account deficit is not particularly large, foreign exchange reserves are under downward pressure from three factors: (i) weak gross financing inflows; (ii) large expected financing outflows (including repayments to the Fund); and (iii) the possible unwinding of the SBP’s short forward position (currently at US$2.2 billion). Fiscal measures of 2 percent of GDP and Fund financing will stop reserve loss and maintain the stability of the external position.

Reserves are projected to reach adequate levels within the program period to handle unforeseen shocks (see Table below). Under the program scenario, reserves are projected to reach to around US$15.5 billion by the fourth quarter of 2015/16 (three months of imports). This projection incorporates the following assumptions: the latest WEO assumptions on commodity prices and external demand; additional inflows from the Coalition Support Fund (US$3 billion), PTCL privatization (US$0.85 billion), and sales of 3G licenses (US$1.2 billion); and Fund financing of US$6.6 billion to close the remaining financing gap. The program is expected to stabilize the economy and catalyze external official (US$6 billion) and private financial inflows. FDI is expected to return gradually to its former levels as a share of GDP, driven by privatization revenues and improved business climate.

Medium-term projections are subject to significant downside risks. First, Pakistan’s BOP is very sensitive to volatile commodity prices. A US$10 per barrel increase in the oil price raises the import bill by about US$600 million. Second, some capital inflows that are expected in 2013/14 may not materialize. Third, the program scenario assumes that Pakistan will regain modest access to international capital markets in 2015/16. Finally, SBP’s short forward foreign exchange positions may unwind faster than envisaged in the program.

Pakistan: Gross Financing Requirements and Sources, 2011/12–2015/16

(In millions of U.S. dollars; unless otherwise specified)

Sources: State Bank of Pakistan, and Fund staff estimates and projections.

^1/Excludes program related budgetary grants

Pakistan: Gross Financing Requirements and Sources, 2011/12–2015/16

(In millions of U.S. dollars; unless otherwise specified)

							2011/12	2012/13	2013/14				2013/14	2014/15	2015/16
							FY	FY	Q1	Q2	Q3	Q4	FY	FY	FY
								Est	Program				Program
Gross external financing requirements							7,834	7,582	2,482	2,821	874	901	7,077	5,948	6,284
Current account deficit (if surplus = -) 1/							4,658	2,299	904	994	-246	-334	1,318	1,719	2,723
				Of which: Interest payments (if net receipts = -)			1,589	1,182	222	321	219	296	1,057	1,128	1,155
				Of which: CSF			0	1,806	300	300	300	300	1,200	1,200	600
Amortization of medium- and long-term debt							3,076	4,892	1,420	1,315	1,120	1,235	5,090	3,729	3,262
	To external private creditors						444	478	117	111	123	116	468	529	1,222
	To external official creditors						2,632	4,414	1,303	1,204	997	1,119	4,623	3,199	2,040
				IMF			1,155	2,162	849	1,014	625	600	3,089	1,272	57
				To other official creditors			1,477	2,252	453	190	372	519	1,534	1,927	1,983
Maturing short-term debt							100	391	157	512	0	0	669	500	300
Available financing							7,834	7,582	1,939	2,239	-203	-177	3,797	1,479	1,633
Net FDI (including privatization receipts)							744	1,229	319	663	365	981	2,327	3,166	3,960
Medium- and long-term borrowing							3,070	1,973	606	589	702	760	2,658	1,296	1,827
			From external private creditors				437	137	161	184	191	215	751	816	1,571
					Borrowing by domestic private sector		437	137	161	184	191	215	751	816	1,071
					Borrowing by domestic public sector		0	0	0	0	0	0	0	0	500
			From external official creditors (non-IMF, currently identified)				2,633	1,836	445	405	511	545	1,906	480	257
Roll-over of short-term debt							0	295	50	150	150	150	500	300	300
Other net capital inflows							-410	-471	395	276	-51	-250	370	580	648
Reserve Assets (decrease = +)							4,430	4,556	569	561	-1,370	-1,819	-2,058	-3,863	-5,103
Remaining financing gap							0	0	543	581	1,077	1,078	3,280	4,469	4,652
Program Financing								0	543	581	1,077	1,078	3,280	4,469	4,652
					Borrowing from IMF (gross)			0	543	544	545	546	2,177	2,191	2,203
					Loans and Grants from other official creditors			0	0	38	533	533	1,103	2,278	2,449
						Of which: WB				0	225	225	450	800	900
						Of which: ADB				0	133	133	267	533	533
						Of which: Bilateral and other				38	174	174	386	945	1,016
Memorandum items
Gross official reserves in US$ billions							10.8	6.0	5.6	5.3	7.2	9.6	9.6	13.4	18.5
		In months of imports					2.7	1.4	1.3	1.2	1.6	2.2	2.2	2.8	3.6
Total gross external debt in percent of GDP							29.1	27.0	26.7	26.4	26.3	26.2	27.0	25.2	23.4

Sources: State Bank of Pakistan, and Fund staff estimates and projections.

^1/Excludes program related budgetary grants

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Pakistan: Gross Financing Requirements and Sources, 2011/12–2015/16

(In millions of U.S. dollars; unless otherwise specified)

							2011/12	2012/13	2013/14				2013/14	2014/15	2015/16
							FY	FY	Q1	Q2	Q3	Q4	FY	FY	FY
								Est	Program				Program
Gross external financing requirements							7,834	7,582	2,482	2,821	874	901	7,077	5,948	6,284
Current account deficit (if surplus = -) 1/							4,658	2,299	904	994	-246	-334	1,318	1,719	2,723
				Of which: Interest payments (if net receipts = -)			1,589	1,182	222	321	219	296	1,057	1,128	1,155
				Of which: CSF			0	1,806	300	300	300	300	1,200	1,200	600
Amortization of medium- and long-term debt							3,076	4,892	1,420	1,315	1,120	1,235	5,090	3,729	3,262
	To external private creditors						444	478	117	111	123	116	468	529	1,222
	To external official creditors						2,632	4,414	1,303	1,204	997	1,119	4,623	3,199	2,040
				IMF			1,155	2,162	849	1,014	625	600	3,089	1,272	57
				To other official creditors			1,477	2,252	453	190	372	519	1,534	1,927	1,983
Maturing short-term debt							100	391	157	512	0	0	669	500	300
Available financing							7,834	7,582	1,939	2,239	-203	-177	3,797	1,479	1,633
Net FDI (including privatization receipts)							744	1,229	319	663	365	981	2,327	3,166	3,960
Medium- and long-term borrowing							3,070	1,973	606	589	702	760	2,658	1,296	1,827
			From external private creditors				437	137	161	184	191	215	751	816	1,571
					Borrowing by domestic private sector		437	137	161	184	191	215	751	816	1,071
					Borrowing by domestic public sector		0	0	0	0	0	0	0	0	500
			From external official creditors (non-IMF, currently identified)				2,633	1,836	445	405	511	545	1,906	480	257
Roll-over of short-term debt							0	295	50	150	150	150	500	300	300
Other net capital inflows							-410	-471	395	276	-51	-250	370	580	648
Reserve Assets (decrease = +)							4,430	4,556	569	561	-1,370	-1,819	-2,058	-3,863	-5,103
Remaining financing gap							0	0	543	581	1,077	1,078	3,280	4,469	4,652
Program Financing								0	543	581	1,077	1,078	3,280	4,469	4,652
					Borrowing from IMF (gross)			0	543	544	545	546	2,177	2,191	2,203
					Loans and Grants from other official creditors			0	0	38	533	533	1,103	2,278	2,449
						Of which: WB				0	225	225	450	800	900
						Of which: ADB				0	133	133	267	533	533
						Of which: Bilateral and other				38	174	174	386	945	1,016
Memorandum items
Gross official reserves in US$ billions							10.8	6.0	5.6	5.3	7.2	9.6	9.6	13.4	18.5
		In months of imports					2.7	1.4	1.3	1.2	1.6	2.2	2.2	2.8	3.6
Total gross external debt in percent of GDP							29.1	27.0	26.7	26.4	26.3	26.2	27.0	25.2	23.4

Sources: State Bank of Pakistan, and Fund staff estimates and projections.

^1/Excludes program related budgetary grants

72. Capacity to Repay the Fund: Pakistan’s capacity to repay the Fund is strengthened by the new program as it will help Pakistan restore its external stability and should catalyze new capital inflows from donors and from the private sector. With an extended arrangement under the EFF, the net repayment profile to the Fund eases significantly, while still lowering the Fund’s exposure to Pakistan during the first two years of the program. The new program will enhance the capacity to repay in two main ways: (i) the balance of payments is expected improve significantly (Box 8) due initially to consolidation and official inflows, but later due to higher private capital inflows; and (ii) reserves will be significantly higher under the program scenario, reducing the Fund’s exposure to only around 1/3 of reserves by the end of program period despite new disbursements.²⁵ In the absence of a new program, the repayment burden would constitute a substantial strain on Pakistan’s balance of payments. While the authorities’ determination to repay is not in doubt, at end-June 2013 the Fund’s exposure to Pakistan stood at roughly US$4.5 billion (74 percent of gross official reserves). Repayments are concentrated in the remainder of 2013 and during 2014 (roughly US$4 billion). In addition, baseline risks to the balance of payments are tilted to the downside, and Pakistan’s ability to regain access to international capital markets is limited without reforms. Materialization of these risks would further erode Pakistan’s capacity to repay the Fund. While sensitive to real depreciation shocks, Pakistan’s total external debt remains broadly sustainable (Table 10).

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Reserves under Baseline and Program Scenarios

(In billions of U.S. dollars)

Citation: IMF Staff Country Reports 2013, 287; 10.5089/9781484379615.002.A001

Sources: Pakistani authorities; and IMF staff calculations.

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Net Purchases from the IMF

(In millions of U.S. dollars)

Citation: IMF Staff Country Reports 2013, 287; 10.5089/9781484379615.002.A001

Sources: Pakistani authorities; and IMF staff estimates.

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73. Safeguards: A safeguards assessment update will be completed no later than the first review under the new extended arrangement under the EFF.