IMF Executive Board Concludes First Post-Program Monitoring Discussions and the Ex-Post Evaluation of Exceptional Access under the 2008 Stand-By Arrangement with Pakistan

Public Information Notice (PIN) No. 12/135
November 29, 2012

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report for the First Post-Program Monitoring Discussion with Pakistan is also available.

On November 21, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the First Post-Program Monitoring Discussions and the Ex-Post Evaluation of Exceptional Access under the 2008 Stand-By Arrangement with Pakistan.1


Pakistan’s economy faces many challenges. Deep seated structural problems and weak macroeconomic policies have continued to sap the economy’s vigor. Real GDP growth over the past four years has averaged only about 3 percent annually, and is projected to be about 3¼ percent in 2012/13,2 insufficient to achieve significant improvement in living standards and to absorb the rising labor force. A key structural impediment to growth is the problems in the energy sector, which have resulted in widespread and unpredictable power outages. Headline inflation has decelerated recently, but is likely to return to low double digits by the end of 2012/13. The external position has weakened substantially, as export growth turned negative in 2011/12 while imports grew. The financial account has also deteriorated, reflecting weak financial inflows and debt repayments. This has led to a decline in the State Bank of Pakistan’s (SBP) foreign exchange reserves to under US$10 billion in October 2012, below adequate levels.

The fiscal deficit (excluding grants) reached 8½ percent of GDP in 2011/12, well above the original budget target of 4 percent, reflecting both revenue and expenditure slippages, including higher subsidies mainly to clear arrears in the power sector. The 2012/13 budget targets a deficit of 4.7 percent of GDP, but on current policies the deficit would likely be closer to 6½ percent of GDP.

Monetary policy has accommodated large fiscal deficits. The SBP’s direct lending to the government and provision of liquidity to facilitate bank purchases of government securities have accommodated higher deficits at the cost of higher inflation and currency depreciation. Citing declining inflation and weak investment, the SBP has also lowered its policy rate by a cumulative 200 basis points since July 2012.

The financial sector appears healthy based on standard indicators, but financial stability risks exist. Banks’ nonperforming loans remain high at 15.9 percent at end-June 2012, and capital and liquidity indicators are being boosted by large holdings of government securities. At the same time, private sector credit growth remains subdued, with adverse consequences for growth. The government’s large financing needs, considerable commodity operations, together with risk aversion by banks, has contributed to a diversion of credit from the private sector.

Executive Board Assessment

Directors noted that while some progress has been made, Pakistan continues to face difficult macroeconomic challenges as growth remains insufficient, underlying inflation is high, and the external position is weakening. The situation is compounded by an uncertain global environment and a difficult domestic situation, as well as adverse effects of natural disasters. Directors emphasized that strong policy measures and deeper reforms are critical to addressing vulnerabilities, boosting sustainable growth, and reducing poverty.

Directors underscored that reducing the large fiscal deficit is essential for restoring macroeconomic and external stability. To achieve the government’s 2012/13 deficit target, they called for short-term revenue and expenditure efforts, including broadening key taxes and reducing subsidies, while protecting the most vulnerable. To strengthen the fiscal position in the long run and create space for capital and poverty-related spending, Directors called for comprehensive revenue and expenditure reforms. Fiscal consolidation should focus on changes in tax policy and improvements in compliance. Some Directors urged reconsideration of the tax amnesty schedule currently being contemplated. Recognizing the political difficulties in implementing a full VAT, Directors advised the authorities to consider credible alternative revenue measures including a modified GST and strengthening the income tax.

Directors considered that monetary and exchange rate policy needs to better contain inflation and external risks. They noted that the achievement of durably lower inflation would require more prudent monetary policy, accompanied by substantial fiscal adjustment to ease the government’s funding requirement, which has been driving inflation. Greater central bank independence will be important in this regard. Directors recommended more exchange rate flexibility to facilitate external adjustment and safeguard foreign reserves.

Directors noted that the banking system appeared healthy. However, they urged vigilance about risks arising from high NPLs and banks’ large and rising exposure to the sovereign. Directors encouraged the authorities to swiftly complete the recapitalization of public and specialized lenders and to pass pending deposit insurance legislation. Efforts should also focus on restarting private sector credit and further developing capital markets.

Directors emphasized the importance of deeper structural reforms to foster growth. They particularly stressed the need for energy sector reforms, including removal of price distortions and subsidies, while protecting the most vulnerable, and further improvements in the governance and management of this sector. Other reforms, especially restructuring and privatizing loss making public sector enterprises, improving the investment climate, and further trade liberalization will also be necessary to put Pakistan on a higher growth path.

Directors agreed with the conclusions of the ex post evaluation. They noted that Pakistan’s program implementation was initially good but remained incomplete thereafter in the face of adverse external and domestic shocks. Progress on structural reforms was mixed and goals for sustainable fiscal consolidation could not be met. Directors recognized that going forward, better analyzing the risks to the program, including those related to donor financing, strong ownership, and securing broad political support for tax and other reforms are critical. They highlighted that continued engagement with the Fund remains beneficial and policy advice could usefully focus on ensuring fiscal discipline and boosting revenues, overcoming monetary accommodation, strengthening structural reform implementation, and managing fiscal decentralization.

Pakistan: Selected Economic Indicators, 2008/09–2012/13
        Estimate Projection
  2008/09 2009/10 2010/11 2011/12 2012/13
  (Annual percentage change, unless specified otherwise)

Real Economy 1/


Real GDP

1.7 3.1 3.0 3.7 3.2

Total domestic demand

20.3 14.5 20.9 17.8 12.7

Private consumption

31.9 17.9 24.4 18.9 13.4

Gross capital formation

0.9 -2.2 0.1 9.0 -0.5

Foreign balance


Merchandise exports, U.S. dollars

-6.4 2.9 28.9 -2.8 2.2

Merchandise imports, U.S. dollars

-10.3 -1.7 14.9 11.9 4.6

Consumer prices (period average)

17.6 10.1 13.7 11.0 10.0

Consumer prices (end of period)

9.6 11.8 13.3 11.3 11.3

Unemployment rate (average, in percent)

5.5 5.6 6.0 7.7 8.4

Gross domestic investment (percent of GDP)

18.2 15.6 13.1 12.5 12.6

Gross domestic saving (percent of GDP)

12.6 13.3 13.2 10.5 11.6

General government (percent of GDP)


Overall balance (excluding grants)

-5.3 -6.3 -7.2 -8.5 -6.4

Primary balance (excluding grants)

-0.6 -1.9 -3.4 -4.2 -2.5


61.3 61.7 60.3 62.1 61.8

Money and credit (end period, percent change)


Broad money

8.4 12.5 15.9 14.1 14.6

Lending to private sector

8.3 3.9 4.0 7.5 7.5

Interest rates (percent)


Policy rate

14.0 12.5 14.0 12.0

T-bill yield (6-month, average)

12.9 12.3 13.3 12.3

Balance of payments


Goods and services, and income balance (percent of GDP)

-12.5 -9.3 -7.3 -9.5 -8.8

Current account (percent of GDP)

-5.7 -2.2 0.1 -2.0 -1.0

Reserves (in billions of U.S. dollars) 2/

9,110 12,958 14,784 10,799 7,381

Exchange rate


Rupees per U.S. dollar (period average, percent change )

25.1 7.6 2.2 4.1

Real effective exchange rate (annual average, percent change) 3/

-3.2 -0.1 4.2 3.8

Quota at the Fund

SDR 1,033.7 million

Sources: Pakistani authorities; and IMF staff estimates and projections.

1/ Fiscal year ends June 30.

2/ Excluding gold and foreign deposits held with the State Bank of Pakistan.

3/ An increase is a real appreciation.

1 Post-Program Monitoring provides for more frequent consultations between the Fund and members whose arrangement has expired but that continue to have Fund credit outstanding, with a particular focus on policies that have a bearing on external viability. There is a presumption that members whose credit outstanding exceeds 200 percent of quota would engage in Post-Program Monitoring.

2 The fiscal year runs from July 1 to June 30.


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