Statement by an IMF Staff Mission on PakistanPress Release No. 09/160
May 11, 2009
An International Monetary Fund (IMF) staff mission, led by Mr. Adnan Mazarei, visited Dubai over the past week to initiate discussions on the second review under Pakistan’s SDR 5.169 billion SBA (about US$7.6 billion) Stand-By Arrangement (SBA), approved by the Executive Board of the IMF on November 24, 2008. A first disbursement of SDR 2.067 billion (about $3.1 billion) was made on November 26, 2008, and a second one of SDR 568.5 million (about $847 million) on April 1, 2009, after completion of the first program review (see Press Release 08/303)
At the conclusion of its work, the mission issued the following statement today:
“The IMF mission held extensive discussions with government and central bank officials on Pakistan’s recent economic performance, the outlook for FY 2009/10,1 and the policies needed to boost growth while consolidating macroeconomic stability to cope with the global crisis. The authorities’ expressed strong resolve to sustain prudent macroeconomic policies, strengthen and broaden the social safety net, and enhance Pakistan’s medium-term growth prospects.
“The authorities’ program remains on track. All the program’s quantitative performance criteria for end-March 2009 were observed and structural reforms are progressing broadly as envisaged in many areas. The exchange rate has been broadly stable in recent months, and the international reserves position has strengthened significantly. The State Bank of Pakistan’s (SBP) gross foreign exchange reserves amounted to $7.8 billion on May 7 (excluding reserves of commercial banks).
“While the external current account deficit has started to narrow and inflation has declined, the drop in the demand for exports and uncertainty regarding the prospects for workers’ remittances pose risks to the external outlook. The additional donor support pledged to Pakistan for 2009/10 and 2011/12 at the Donors’ Conference held last April in Tokyo is welcome and provides scope for counter-cyclical policy. The mobilization of this support is crucial to support growth and higher social, development, and security expenditure.
“Discussions focused on the fiscal program and Pakistan’s financing needs. The slowing economy, additional donor support, and the need to protect priority expenditures call for a relaxation of the fiscal deficit target for 2009/10. This relaxation would provide fiscal space to absorb additional donor support, boost growth, and increase social, development, and security spending, including for internally displaced persons. The authorities and the mission reached preliminary understandings to increase the 2009/10 deficit target up to 4.6 percent of GDP, compared to the original target of 3.4 percent of GDP, to provide for additional spending associated with donor support (of up to 1.2 percent of GDP).
“The authorities and the IMF team agreed that the Tokyo package should be regarded as a bridge toward the stronger medium-term revenue effort. In this regard, it is crucial to reinforce efforts to increase the tax revenue-to-GDP ratio through tax policy and administration reforms. Moreover, the need to manage carefully expenditure was agreed, in particular to contain and eliminate poorly targeted subsidies, including those for electricity, while maintaining the life-line tariff to protect vulnerable groups.
“Social protection is a key element of the authorities’ program. In collaboration with the World Bank, the government has developed a plan to strengthen the social safety net and improve targeting to the poor. The roll-out of the reformed Benazir Income Support Program (BISP) has started, but will take longer than expected.
“Regarding monetary policy, markets have responded positively to the 100-basis point reduction in the central bank discount rate. The authorities and the IMF team agreed that the current monetary policy stance was consistent with promoting domestic and external stability. Looking ahead, given the persistence of inflation, the decision on any further cut in the SBP’s discount rate will await a significant decline in core inflation. Exchange rate policy will be managed flexibly to achieve the required adjustment of the current account and strengthen competitiveness. SBP interventions in the foreign exchange market will be largely aimed at achieving the program’s net foreign assets targets.
“Structural reforms have progressed broadly as envisaged in many areas. Electricity tariffs will be adjusted to eliminate tariff differential subsidies, legislative amendments to harmonize the income tax and general sales tax laws; a new draft SBP law has been prepared to increase the SBP’s operational autonomy; and the authorities are preparing amendments of the banking law to improve the effectiveness of SBP enforcement powers. In addition, a plan to deal with the circular debt (inter-corporate debt in the energy sector) is expected to be finalized soon.
“The targets for the quarter ended March 31 have been met. The authorities and the IMF staff will continue their discussions on the 2009/10 budget and Pakistan’s financing needs over the next few weeks to complete the discussions of the second review under Pakistan’s SBA.”
1 Pakistan’s financial year runs from July 1 to June 30.