IMF Executive Board Approves US$7.6 Billion Stand-By Arrangement for Pakistan

Press Release No. 08/303
November 24, 2008

The Executive Board of the International Monetary Fund (IMF) today approved a 23-month Stand-By Arrangement for Pakistan in an amount equivalent to SDR 5.169 billion (about US$7.6 billion) to support the country's economic stabilization program.

Upon the Board's approval, an amount equivalent to SDR 2.067 billion (about US$3.1 billion) becomes immediately available to Pakistan, and the remaining amount will be phased in, subject to quarterly reviews. The total amount of the IMF resources made available under the arrangement equals 500 percent of the country's quota. The arrangement was approved by the Board under the Fund's fast-track Emergency Financing Mechanism procedures.

The IMF-supported program has two key objectives: to restore macroeconomic stability and confidence through a tightening of macroeconomic policies; and to ensure social stability and adequate support for the poor and vulnerable in Pakistan. Policies laid out in the program seek to achieve these two interrelated objectives.

Following the Executive Board discussion on Pakistan, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chairman, stated:

"The Pakistani economy was buffeted by large shocks during FY2007/08, including adverse security developments, higher oil and food import prices, and the global financial turmoil. The external current account deficit widened as a consequence, net capital inflows declined significantly, and the currency depreciated substantially. A delay in the pass-through of higher international prices to domestic consumers led to a large increase in the fiscal deficit, and its monetization by the State Bank of Pakistan contributed to rising inflation and a sharp decline in international reserves.

"The authorities' program, supported by a 23-month Stand-By Arrangement with the IMF under its exceptional access policy, aims to (i) restore macroeconomic stability and investor confidence through a tightening of macroeconomic policies, and (ii) ensure social stability and adequate support for the poor.

"The program targets a significant reduction in the fiscal deficit, aimed at eliminating State Bank of Pakistan financing of the government and reducing the external current account deficit, while allowing for increased social and development spending. The reduction will be achieved primarily by phasing out energy subsidies, better prioritizing development spending, and implementing tax policy and tax administration reforms. As a complementary measure, the authorities plan to put in place a comprehensive and effectively-targeted social safety net in close cooperation with the World Bank. In the interim, existing social programs will be strengthened and scaled up.

"The recent increase in interest rates, and the State Bank of Pakistan's commitment to further tighten monetary policy as needed, will help to bring down inflation, support the rupee, and boost international reserves. These results will enhance confidence in the Pakistani economy, facilitating a resumption of foreign capital inflows. The program also envisages reforms aimed at improving monetary management and at strengthening the bank resolution framework to address potential pressures in the banking system.

"The authorities' program requires forceful and sustained implementation to succeed. By providing large financial support to Pakistan, the IMF is sending a strong signal to the donor community about the country's improved macroeconomic prospects. The mobilization of additional donor financial support will help consolidate the country's international reserve position and finance the expanded social safety net. The program allows for additional development spending in case external assistance turns out to be higher than projected," Mr. Kato said.


Recent Economic Developments

The macroeconomic situation in Pakistan has deteriorated significantly since mid-2007. Adverse security developments, large exogenous price shocks, notably related to increases in oil and food import prices, and global financial turmoil buffeted the economy. These shocks, combined with policy inaction during the political transition to the new government and large central bank financing of the growing fiscal deficit, led to slower growth, higher inflation and a sharp deterioration of the external position.

Against this background, the Pakistani authorities have embarked on a program to restore macroeconomic stability while protecting the poor and vulnerable during the process of adjustment. To support this program, they have requested IMF financial assistance.

Program Summary

The authorities' program seeks to restore international and domestic investor confidence by addressing current macroeconomic imbalances while protecting the poor and vulnerable.

The program includes the following goals:

• To help reduce the external current account deficit and move toward a more sustainable fiscal position, the program envisages a significant tightening of fiscal policy. Specifically, the fiscal deficit will be reduced from 7.4 percent of GDP in 2007/2008 (July-June) to 4.2 percent in 2008/2009 and 3.3 percent in 2009/2010. This fiscal adjustment will be achieved primarily by phasing out energy subsidies, better prioritizing development spending, and implementing strong tax policy and administration measures.

• The program also envisages a tightening of monetary policy to bring down inflation and strengthen the country's international reserves position. The State Bank of Pakistan (SBP) recently increased its discount rate by 200 basis points to 15 percent, and stands ready to further tighten monetary conditions, as needed. Central bank financing of the government will be eliminated. Structural actions include the design of contingency plans to address problem banks, and measures to improve monetary management and strengthen the SBP's bank resolution capacity. The central bank will pursue a flexible exchange rate policy, with intervention in the foreign exchange market geared toward achieving the program's reserve targets and smoothing excessive exchange rate volatility.

• A strengthening and better targeting of social assistance to provide support for the poor and vulnerable is an essential element of the program. To this end, spending on the social safety net will be increased by 0.6 percentage point of GDP, to 0.9 percent of GDP in 2008/2009.

Pakistan, which joined the Fund on July 11, 1950, has a quota of SDR 1,033.7 million (about US$1,526.6 million).

Pakistan: Main Economic Indicators, 2004/05-2009/10 1/

  2004/05 2005/06 2006/07 2007/08 2008/09 2009/10

Real economy (change in percent)


Real GDP

9.0 5.8 6.8 5.8 3.4 5.0

CPI (average)

9.3 7.9 7.8 12.0 23.0 13.0

CPI (end year)

8.7 7.6 7.0 21.5 20.0 6.0

Gross national saving (percent of GDP)

17.7 17.8 18.2 12.9 13.5 15.7

Gross capital formation (percent of GDP)

19.1 21.7 23.0 21.3 20.0 21.3

General government (percent of GDP)


Overall balance (excluding grants)

-3.3 -4.3 -4.3 -7.4 -4.2 -3.3

Primary balance

0.2 -0.6 0.2 -2.5 0.6 1.6


61.2 55.8 54.1 57.9 54.6 52.4

Money and credit (end-of-period, percent change)



19.3 14.9 19.3 15.3 10.8 15.9

Credit to non-government

33.2 23.2 17.2 16.4 25.2 19.5

Interest rates (percent)


Six-month treasury bill rate (average, in percent)

4.7 8.2 8.8 11.0 ... ...

Balance of payments


Current account (in percent of GDP)

-1.4 -3.9 -4.8 -8.4 -6.5 -5.7

External debt (in percent of GDP)

31.3 28.0 26.9 26.5 31.4 33.2

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

9,805 10,765 14,302 8,591 8,591 11,291

Exchange rate


Exchange regime

Managed float

Present rate (November 21, 2008)

PRs 79.3 = US$ 1

Real effective rate, CPI basis (annual average, 2000=100)

0.2 5.3 0.5 -0.8 ... ...

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 of commercial banks held with the State Bank of Pakistan.


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