News Brief: IMF Completes First Review of Pakistan's PRGF Supported Program, Approves US$107 Million Disbursement
March 27, 2002
The Executive Board of the International Monetary Fund (IMF) has completed the first review of Pakistan's performance under a three-year Poverty Reduction and Growth Facility (PRGF) arrangement (see Press Release No. 01/51). Completion of this review enables the release of a further SDR 86.1 million (about US$107 million), which will bring total disbursements under the IMF-supported program to SDR 172.3 million (about US$215 million).
To complete the review, the Executive Board approved two waivers for the non-observance of performance criteria on tax revenue and credit to public enterprises, and modification of the tax revenue performance criterion for end-March 2002 and of one structural performance criterion on tax issues.
The PRGF is the IMF's concessional facility for low-income countries. It is intended that PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty.
PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years with a 5 ½-year grace period on principal payments.
"The Fund commends the authorities for the broadly satisfactory progress towards the program's macroeconomic objectives in a difficult context. However, growth prospects had to be scaled down, reflecting drought and repercussions from September 11 on export orders, and tax revenue was lower than targeted. Inflation was lower than expected, and strong private capital inflows and low imports contributed to a large accumulation of official reserves and a nominal appreciation of the rupee. Progress on the structural front was broadly in line with program expectations. Most performance criteria and benchmarks through end-2001 were observed. In view of the economic performance so far, the authorities' strong commitment to reform, and their recent implementation of corrective measures, waivers were granted for the non-observance of two end-2001 performance criteria.
"Looking ahead, the uncertainties surrounding the economic outlook on account of September 11 and related events have decreased and with the recent buildup of international reserves the economy is now better equipped to deal with adverse shocks. The planned cautious monetary policy, under a flexible exchange rate regime, will help consolidate the gains made in reducing inflation and building reserves.
"On the fiscal side, a significant improvement in tax revenue remains a key challenge. The recent tax measures taken by the authorities are welcome, but looking ahead, a significant improvement in the fiscal position will be needed to ensure debt sustainability, while raising allocations for basic social services. This will require the further reduction of tax exemptions, subsidies, and unproductive expenditure, and improved tax administration, in particular through a vigorous reform of the Central Board of Revenue.
"Building on the progress in stabilization, the authorities will need to shift emphasis towards the reforms that will be critical for achieving higher growth, poverty reduction, and improved governance. A sustained increase in spending on human development, especially basic health and education, should be feasible now that the newly elected local governments are in place and can contribute to a better monitoring of expenditure and outcomes. The vigorous pursuit of reforms such as the ongoing overhaul of the tax administration and the planned privatization program will be critical in improving governance and the investment climate. Another important challenge will be to further enhance accountability and transparency in the public enterprise sector, and to address the financial imbalances of the two public utilities. Such a reform strategy should help to stimulate the private sector-driven growth and investment process that is critical if sustained progress is to be made in the fight against poverty," Ms. Krueger said.