## cr1878

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### EXECUTIVE SUMMARY — Recent developments and growth
- Economic growth strengthened, underpinned by improved energy supply, investment related to the China-Pakistan Economic Corridor, strong credit growth, and continued investor and consumer confidence.
- Growth could reach 5.6 percent this fiscal year within a favorable inflation environment.
- FY 2016/17: real GDP growth accelerated to 5.3 percent, driven by recovery in agriculture, continued expansion of construction, services, and large-scale manufacturing.
- Large-scale manufacturing expanded 7.2 percent y-o-y in July-November 2017; local cement dispatches rose 17.4 percent y-o-y in July-December 2017.
- Headline inflation was 4.6 percent (y-o-y) in December 2017; core inflation remained flat at 5.5 percent.
- Continued expansions and investment linked in part to CPEC (noted as potentially $55 billion over the next decade in overview material).

### EXECUTIVE SUMMARY — External imbalances and reserves
- Current account deficit widened by more than 2 percent of GDP (to 4 percent of GDP) in FY 2016/17 and further widened in the first half of FY 2017/18.
- Import growth: 19 percent y-o-y (remained strong, began to moderate in H1 FY 2017/18).
- Gross reserves of the State Bank of Pakistan declined from $18.5 billion at the end of the EFF to $12.8 billion in mid-February 2018—equivalent to 2.3 months of prospective imports, or 50 percent the IMF’s reserve adequacy (ARA-EM) metric.
- Net international reserves (NIR) declined from $7.5 billion at the end of the EFF to an estimated negative $0.7 billion in mid-February 2018.
- External borrowing included several syndicated bank loans and an international sukuk and Eurobond issuance of $2.5 billion.
- SBP's net short derivative position doubled to $5.4 billion.
- Stock market corrected by nearly 20 percent following strong growth until May 2017.
- Reserve losses continued after a 5 percent depreciation of the rupee/dollar exchange rate in December 2017 and increases in regulatory duties.

### EXECUTIVE SUMMARY — Fiscal developments and public sector enterprises (PSEs)
- Overall fiscal deficit (excluding grants) widened to 5.8 percent of GDP in FY 2016/17—about 2 percent of GDP more than initially budgeted and 1.3 percent of GDP higher than projected at the time of the Article IV consultation.
- Slippage components in FY 2016/17:
  - Overshooting of provincial development expenditure: 0.7 percent of GDP
  - Federal development expenditure: 0.4 percent of GDP
  - Federal non-interest current expenditure: 0.3 percent of GDP
  - Tax revenue shortfall: 0.3 percent of GDP
  - Higher non-tax revenue offset: 0.4 percent of GDP
- Staff estimates underlying deficit about 0.5 percent of GDP higher (6.3 percent of GDP) after accounting for one-off asset sales.
- Fiscal deficit reached 1.2 percent of GDP in Q1 FY 2017/18 (compared to 1.3 percent of GDP in Q1 FY 2016/17), helped by FBR revenue growth of over 20 percent y-o-y.
- PSE-related accumulated figures by end-December 2017:
  - New payment arrears of power distribution companies since July 2016: PRs 193 billion (0.5 percent of GDP)
  - Accumulated stock of such arrears: PRs 514 billion (1.5 percent of GDP)
  - Combined accumulated losses by PSEs now exceed PRs 1.2 trillion (4 percent of GDP)
- Inter-agency arrears in the gas sector have been rising; tariff updating delays limit cross-subsidization arrangements.

### EXECUTIVE SUMMARY — Monetary policy, banking, and financial indicators
- Monetary policy accommodative; real policy rate below historical average.
- Private credit growth: 15.1 percent y-o-y in January 2018.
- Broad money growth: 11.8 percent y-o-y in January 2018.
- Reserve money growth slowed to 14.7 percent (from 26.5 percent in FY 2015/16).
- Strong domestic government borrowing from the SBP increased by about PRs 1.2 trillion.
- January 2018: SBP tightened the policy rate by 25 bps to 6 percent.
- Banking indicators:
  - System-wide capital adequacy: 15.4 percent in September 2017 (regulatory minimum 10.65 percent)
  - NPL ratio: 9.2 percent by September 2017 (from 11.3 percent a year ago)
  - Profitability moderating but adequate
  - Two small banks remain undercapitalized
  - NYDFS fine originally $630 million (reduced to $225 million in settlement) highlighted AML/CFT enforcement weaknesses
  - A Supreme Court decision (on appeal) regarding another large bank’s pension liabilities could affect capitalization

### EXECUTIVE SUMMARY — Macroeconomic outlook and projections
- Near-term growth likely accelerating to 5.6 percent in FY 2017/18 if macro stability risks contained.
- Staff baseline: growth moderates to about 5 percent in the medium term due to declining energy sector investments, moderating confidence, and structural reform challenges; significant downside risks if imbalances are not addressed.
- Headline inflation expected to remain in mid-single digits in 2017/18 and in the medium term absent major exchange rate changes.
- External sector projections:
  - Current account deficit expected to widen to US$15.7 billion (4.8 percent of GDP) this year.
  - Medium-term current account deficit expected to remain about 3.8 percent of GDP.
  - Gross international reserves expected to weaken to US$12.1 billion (2.2 months of imports) this year, with risks skewed to the downside.
- Fiscal projections:
  - Budget deficit (excluding grants) projected to reach 5.5 percent of GDP this year (5.9 percent of GDP underlying deficit excluding one-off operations).
  - Tax revenue projected at 12.9 percent of GDP (up from 12.5 percent last year).
  - Medium term: fiscal deficit likely to remain around 5.8 percent of GDP due to quasi-fiscal losses and PSE arrears, partially offset by revenue improvements.

### EXECUTIVE SUMMARY — Policy recommendations and priorities
- Short-term focus: arrest widening imbalances, preserve macro stability, support private-sector-led inclusive growth.
- Welcomed recent authorities’ moves:
  - Tightening monetary policy
  - Allowing some exchange rate adjustment
- Further recommended actions:
  - Continue exchange rate flexibility to safeguard external buffers.
  - Further monetary tightening as needed to contain domestic demand.
  - Stronger fiscal discipline and resumption of medium-term fiscal consolidation.
  - Decisive efforts to contain losses in public enterprises.
  - Careful phasing in of new external liabilities.
  - Accelerate growth-supporting structural reforms to reinforce stability and promote higher, more inclusive growth.

### EXECUTIVE SUMMARY — Authorities’ views and upside scenario
- Authorities expect higher growth and lower imbalances based on recent policy measures to contain development spending, adjust the exchange rate, curtail imports, and promote exports.
- Upside scenario (authorities’ projections):
  - General government budget deficit (excluding grants) contained to 5 percent of GDP in FY 2017/18.
  - Current account deficit contained to 4.4 percent of GDP in FY 2017/18.
  - Gross reserves could stabilize at about US$13.9 billion this year and recover to 2½–3 months of imports in the medium term.
  - Real GDP growth could rise to 6 percent this year and 6.5 percent in FY 2018/19.

### EXECUTIVE SUMMARY — Capacity to repay the Fund
- Staff assessment: risks to Pakistan’s medium-term capacity to repay the Fund have increased significantly since completion of the EFF, due to mounting external and fiscal financing needs and declining reserves.
- Elevated current account deficit and increased external obligations expected to double external financing needs in the medium term, further pressuring foreign exchange reserves.
- Risks largely on the downside given a difficult political setting and possible further widening of external and fiscal deficits.

*International Monetary Fund — Executive Summary (cr1878)*

### External financing needs and reserves (section 14)
- External financing needs expected to rise from US$21.5 billion (7.1 percent of GDP) in FY 2016/17 to around US$45 billion by FY 2022/23 (9.9 percent of GDP).
- Gross foreign exchange reserves (millions of U.S. dollars): 13,534; 18,143; 16,141; 12,099; 10,432; 9,539; 8,360; 6,989; 7,075 (2015–2023).
- Gross reserves amount to about twice Pakistan’s outstanding Fund repurchases (SDR 4.4 billion).
- Repayments to the Fund scheduled to start at SDR 243 million in 2018 and peak at SDR 820 million in 2021, with a gradually declining schedule until 2026.
- While these obligations do not exceed 6 percent of total external debt service in any year, their share in gross reserves is expected to rise significantly, reaching close to 15 percent in 2022.
- Public and publicly-guaranteed debt expected to remain elevated, marginally declining from 70 percent of GDP in FY 2016/17 to 68 percent of GDP by FY 2022/23.
- Gross fiscal financing needs likely to exceed 30 percent of GDP from 2018/19 onward.
- Total External Debt (millions of U.S. dollars): 65,082; 73,063; 82,981; 93,277; 103,385; 114,124; 123,720; 133,070; 144,952 (2015–2023).
- Total External Debt Service (millions of U.S. dollars): 6,205; 6,096; 8,292; 7,739; 12,737; 18,583; 19,163; 20,354; 19,728 (2015–2023).
- Authorities contracted over $10 billion in external borrowing in FY 2016/17 and more than $6 billion so far in FY 2017/18.

### Indicators of Fund credit and debt service (projections)
- Total (millions of SDR): 3,600.0; 4,393.0; 4,393.0; 4,243.0; 3,823.0; 3,163.0; 2,400.8; 1,698.7; 966.5 (2015–2023).
- In percent of end-period gross official reserves: 37.4; 33.5; 37.7; 48.5; 50.7; 45.9; 39.7; 33.6; 18.9 (2015–2023).
- Total projected debt service to the Fund (millions of SDR): 338.1; 51.1; 75.0; 243.0; 505.1; 730.7; 820.2; 747.1; 764.0 (2015–2023).
- In percent of end-period gross official reserves (debt service): 3.5; 0.4; 0.6; 2.8; 6.7; 10.6; 13.6; 14.8; 14.9 (2015–2023).
- As a share of total external debt service: 7.7; 1.2; 1.3; 4.3; 5.5; 5.4; 5.9; 5.1; 5.4 (2015–2023).

### Risks to reserves and scenario: Lower capital inflows (Box 2)
- Trends of rising external financing needs and elevated current account deficits, partly CPEC-related, could further deplete reserves and weaken capacity to repay the Fund.
- Scenario: Lower capital inflows projections (selected comparisons)
  - Current Account (percent of GDP) — Baseline: -4.1; -4.8; -4.4 (2016/17, 2017/18, 2018/19) — Lower capital flows: -4.1; -4.7; -3.6
  - Financial Account (millions of U.S. dollars) — Baseline: 9,987; 11,604; 13,321 — Lower capital flows: 9,987; 8,396; 7,996
  - International Reserves (millions of U.S. dollars) — Baseline: 16,141; 12,099; 10,432 — Lower capital flows: 16,141; 9,370; 5,077
  - Real GDP Growth (percent) — Baseline: 5.3; 5.6; 4.7 — Lower capital flows: 5.3; 5.0; 3.0

### Risk assessment and mitigation
- Key risks (Medium-to-High likelihood and impacts) include additional policy slippages, deterioration in security conditions, tighter global financial conditions, and a significant slowdown in China (Low/Medium likelihood; Medium impact).
- Mitigating policies recommended: allow exchange rate flexibility; sustain and build fiscal and external buffers; maintain an adequate medium-term debt strategy; improve business climate; ensure strong financial regulation and supervision.

### Policy discussions and recommendations (selected areas)
A. External adjustment
- Phase out currency interventions to facilitate external adjustment and safeguard reserves.
- Tighter fiscal and monetary policies to ease import demand and contain inflationary pressures.
- Remove regulatory duties and cash margin requirements as soon as conditions allow.

B. Monetary policy
- Further tighten monetary policy to slow domestic demand and import growth, strengthen demand for rupee financial assets, and mitigate inflation pass-through.
- Unwind increased government borrowing from the SBP.
- Greater exchange rate flexibility should be accompanied by strengthening of the interest rate-based monetary policy framework.

C. Fiscal policy and public debt sustainability
- Contain this year’s budget deficit to 5 percent of GDP (5.4 percent underlying excluding one-offs) through:
  - Elimination of tax concessions and exemptions (0.3 percent of GDP).
  - Raising petroleum taxes, withholding taxes and excises (0.1 percent of GDP).
  - Containing current expenditure (0.1 percent of GDP).
- Revenue mobilization remains main driver: strengthen tax administration (FBR access to third-party information, enhanced audits, centralized electronic fiscal cadaster, reduce outstanding tax refund claims, strengthen tax compliance).
- Improve spending composition by containing wage bill growth and rationalizing electricity subsidies.

D. Public sector enterprises (PSEs)
- Urgent short-term actions:
  - Notify revised electricity tariffs to contain power sector arrears.
  - Faster implementation of circular debt reduction plan; improve distribution companies’ losses and collections.
  - Consider additional electricity surcharges to facilitate cost recovery until structural issues are tackled.
  - Arrest losses at Pakistan International Airlines (PIA) and Pakistan Steel Mill (PSM); consider restructuring, private participation, and privatization options.

E. Medium-term external liability management
- Carefully phase in new external liabilities and save foreign exchange proceeds from additional external borrowing to improve resilience.

### Authorities’ views (section highlights)
- Authorities offered a more optimistic assessment of capacity to repay, believing recent depreciation restored equilibrium in the foreign exchange market.
- Authorities expect continued positive investor confidence and access to external financing, with gradually improving reserve coverage.
- Authorities agreed with many staff recommendations (exchange rate flexibility, containment of fiscal deficit to 5 percent of GDP, update electricity tariffs, strengthen PSE performance) but viewed some administrative measures as possibly effective temporarily.

*Source: Pakistani authorities and IMF staff calculations (IMF staff projections).*

### Improving fiscal federalism and PSEs (section 30)
- Strengthen fiscal federalism: better alignment of revenue and expenditure responsibilities, improved coordination and resource-sharing mechanisms.
- Eliminating quasi-fiscal losses in PSEs on a permanent basis would create significant fiscal space.
- Staff urged completion of restructuring and/or privatization of loss-making PSEs; continue preparatory work given political constraints.
- Reduce technical and distribution losses in power and gas sectors, enforce "Gas Theft and Recovery Act", revisit cross-subsidization arrangements, notify higher gas tariffs for cost recovery.
- SBP transition to inflation targeting by 2020 welcomed; staff urged enhancing SBP autonomy and phasing out government borrowing from SBP.
- Financial sector recommendations: bring two small noncompliant banks to regulatory compliance (one publicly-owned in privatization; one privately-owned merging with a public bank); operationalize the Deposit Protection Corporation; implement Basel III liquidity standards; strengthen contingency planning and bank resolution framework.
- Social protection: shield BISP budget from fiscal consolidation; continue expansion, indexation of stipends, and graduation schemes; raise social protection outlays to levels at or above South Asian peers.

### Staff appraisal — macroeconomic risks and policy priorities
- Despite solid growth, macro stability gains achieved during the EFF have been eroding amid widening external and fiscal imbalances.
- Foreign exchange reserves have declined despite significant public sector external borrowing.
- Risks to medium-term capacity to repay the Fund have increased; scheduled repayments to the Fund as a share of gross reserves could rise to nearly 15 percent by 2022.
- Policy recommendations to arrest widening imbalances:
  - Address fiscal and external imbalances swiftly.
  - Complement monetary tightening and exchange rate adjustment with phasing out FX interventions.
  - Phase out administrative measures as soon as conditions allow.
  - Further monetary tightening, stronger fiscal discipline, and decisive efforts to contain losses in public enterprises.

### Accelerating growth-supporting structural reforms (section 40)
- Priority reforms to reinforce macro stability and promote higher, more inclusive growth:
  - Careful phasing in of new external liabilities.
  - Resume medium-term fiscal consolidation.
  - Strengthen monetary and financial sector policy frameworks.
  - Improve competitiveness: enhance business climate; eliminate PSE losses; ensure cost-recovery in the energy sector.
  - Strengthen and expand social safety nets.

### Growth, prices, and monetary indicators (selected exact figures)
- Real GDP at factor cost (annual changes): 2014/15: 4.1; 2015/16: 4.5; 2016/17: 5.3; 2017/18 Est.: 5.6.
- Real per capita GDP (percentage change): 2.0 (2014/15); 2.5 (2015/16); 3.3 (2016/17); 3.6 (2017/18).
- Consumer prices (period average): 4.5 (2014/15); 2.9 (2015/16); 4.1 (2016/17); 5.0 (2017/18 Est.).
- Consumer prices (end of period): 3.2 (2014/15); 3.2 (2015/16); 3.9 (2016/17); 5.4 (2017/18 Est.).
- Broad money (percent change): 13.2 (2014/15); 13.7 (2015/16); 13.7 (2016/17); 14.2 (2017/18).
- Reserve money (percent change): 9.9 (2014/15); 26.5 (2015/16); 22.5 (2016/17); 18.6 (2017/18).
- Private credit (percent change): 5.9 (2014/15); 11.1 (2015/16); 16.6 (2016/17); 16.5 (2017/18).

### Fiscal stance and external sector (selected exact figures)
- General government budget (percent of GDP):
  - Revenue and grants: 14.5 (2014/15); 15.5 (2015/16); 15.7 (2016/17); 15.8 (2017/18 Proj.).
  - Expenditure: 19.8 (2014/15); 19.9 (2015/16); 21.3 (2016/17); 21.2 (2017/18 Proj.).
  - Overall balance (including grants): -5.3 (2014/15); -4.4 (2015/16); -5.7 (2016/17); -5.3 (2017/18 Proj.).
  - General government debt incl. IMF obligations: 63.3 (2014/15); 67.6 (2015/16); 67.2 (2016/17); 67.2 (2017/18).
- Current account balance (percent of GDP): -1.0 (2014/15); -1.7 (2015/16); -4.1 (2016/17); -4.8 (2017/18 Est.).
- Gross official reserves (end-period, millions of U.S. dollars): 13,534 (2014/15); 18,143 (2015/16); 16,141 (2016/17); 12,099 (2017/18 Proj.).
- Balance of payments (2017/18 projections, millions of U.S. dollars): Current account: -12,439; Exports, f.o.b.: 21,931; Imports, f.o.b.: 48,573; Net current transfers (credit): 23,459.
- Net FDI inflows (percent of GDP): 0.9 (2016/17); 1.0 (2017/18).

### Medium-term outlook (selected projections, 2018/19–2022/23)
- Real GDP at factor cost: 4.7 (2018/19); 4.9 (2019/20); 5.0 (2020/21); 5.0 (2021/22); 5.0 (2022/23).
- Consumer prices (period average): 5.0 (2018/19); 5.2 (2019/20); 5.0 (2020/21); 5.0 (2021/22); 5.0 (2022/23).
- Current account balance (percent of GDP): -4.4 (2018/19); -4.2 (2019/20); -4.1 (2020/21); -4.0 (2021/22); -3.8 (2022/23).
- Gross official reserves (millions of U.S. dollars): 10,432 (2018/19); 9,539 (2019/20); 8,260 (2020/21); 6,989 (2021/22); 7,075 (2022/23).
- General government and government guaranteed debt (incl. IMF) as percent of GDP: 69.7 (2018/19); 69.7 (2019/20); 69.8 (2020/21); 69.4 (2021/22); 68.6 (2022/23).

### Annex I — Public and External Debt Sustainability (selected highlights)
- Public and publicly guaranteed debt: close to 70 percent of GDP in 2016/17; projected to remain close to 70 percent by 2023.
- Public debt excluding guarantees: about 67 percent of GDP (FY 2016/17).
- Net public debt: around 62 percent of GDP.
- Share of total public debt foreign currency-denominated: 30 percent.
- Key DSA baseline figures (selected exact entries):
  - Nominal gross public debt (percent of GDP): 2016: 61.7; 2017: 70.0; 2018: 69.7; 2019: 69.6; 2020: 69.9; 2021: 69.8; 2022: 69.4; 2023: 68.6.
  - Public gross financing needs (percent of GDP): 2016: 26; 2017: 28.5; 2018: 29.3; 2019: 30.0; 2020: 31.3; 2021: 33.1; 2022: 32.1; 2023: 32.5; 31.6.
  - Real GDP growth (percent): 2016: 3.6; 2017: 4.5; 2018: 5.3; 2019: 5.6; 2020: 4.7; 2021: 4.9; 2022: 5.0; 2023: 5.0.
  - Effective interest rate (percent): 2016: 8.6; 2017: 7.3; 2018: 6.9; 2019: 7.0; 2020: 7.2; 2021: 7.2; 2022: 7.2; 2023: 7.4.
  - Primary deficit (percent of GDP): 2016: 1.8; 2017: 0.1; 2018: 1.4; 2019: 1.3; 2020: 1.4; 2021: 1.4; 2022: 1.3; 2023: 1.1.
- Gross external financing needs (percent of GDP): FY 2016/17: 7.1; projected to about 9.9 percent of GDP in 2023.
- Gross external financing needs (in billions of US dollars): 2013: 4; 2014: 9.1; 2015: 10.8; 2016: 9.1; 2017: 11.4; 2018: 21.5; 2019: 24.5; 2020: 27.0; 2021: 33.8; 2022: 36.0; 2023: 41.2; 45.0.
- External debt-to-exports ratio (percent): 2013: 193.2; 2014: 215.2; 2015: 217.4; 2016: 266.6; 2017: 302.5; 2018: 316.0; 2019: 310.6; 2020: 308.4; 2021: 299.5; 2022: 290.5; 2023: 286.9.
- Stress tests: adverse shocks (real depreciation of 30 percent in 2018, combined shocks) materially raise debt and external vulnerabilities; external debt-to-GDP would exceed 45 percent only under the one-time real depreciation shock.

### Vulnerabilities, risks and priority actions (summary)
- Vulnerabilities: weak trade competitiveness, reserve erosion from exchange rate defense and derivative obligations (almost $6 billion net), stock market correction, rising gross external financing requirements.
- Priority actions: phase in external liabilities carefully; resume medium-term fiscal consolidation; strengthen monetary and financial policy frameworks; improve competitiveness (business climate, PSE losses elimination, energy cost-recovery); expand social safety nets.

*IMF staff. Annex I. Public and External Debt Sustainability (cr1878).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Recent developments and growth
- Economic growth has continued to strengthen, underpinned by improved energy supply, investment related to the China-Pakistan Economic Corridor, strong credit growth, and continued investor and consumer confidence.
- Growth could reach 5.6 percent this fiscal year within a favorable inflation environment.
- In FY 2016/17, real GDP growth accelerated to 5.3 percent, driven by recovery in agriculture, continued expansion of construction, services, and large-scale manufacturing.
- Large-scale manufacturing expanded 7.2 percent y-o-y in July-November 2017; local cement dispatches rose 17.4 percent y-o-y in July-December 2017.
- Headline inflation was 4.6 percent (y-o-y) in December 2017; core inflation remained flat at 5.5 percent.
- Continued expansions and investment linked in part to CPEC (noted as potentially $55 billion over the next decade in overview material).

### External imbalances and reserves
- The current account deficit widened by more than 2 percent of GDP (to 4 percent of GDP) in FY 2016/17 and further widened in the first half of FY 2017/18.
- Import growth remained strong at 19 percent y-o-y, though it began to moderate in the first half of FY 2017/18.
- Gross reserves of the State Bank of Pakistan declined from $18.5 billion at the end of the EFF to $12.8 billion in mid-February 2018—equivalent to 2.3 months of prospective imports, or 50 percent the IMF’s reserve adequacy (ARA-EM) metric.
- Net international reserves (NIR) declined from $7.5 billion at the end of the EFF to an estimated negative $0.7 billion in mid-February 2018.
- External borrowing included several syndicated bank loans and an international sukuk and Eurobond issuance of $2.5 billion.
- The SBP's net short derivative position doubled to $5.4 billion.
- Stock market corrected by nearly 20 percent following strong growth until May 2017.
- Despite policy measures, reserve losses continued after a 5 percent depreciation of the rupee/dollar exchange rate in December 2017 and increases in regulatory duties.

### Fiscal developments and public sector enterprises (PSEs)
- The overall fiscal deficit (excluding grants) widened to 5.8 percent of GDP in FY 2016/17—about 2 percent of GDP more than initially budgeted and 1.3 percent of GDP higher than projected at the time of the Article IV consultation.
- Slippage components in FY 2016/17:
  - Overshooting of provincial development expenditure: 0.7 percent of GDP
  - Federal development expenditure: 0.4 percent of GDP
  - Federal non-interest current expenditure: 0.3 percent of GDP
  - Tax revenue shortfall: 0.3 percent of GDP
  - Higher non-tax revenue offset: 0.4 percent of GDP
- Staff estimates underlying deficit to have been about 0.5 percent of GDP higher (6.3 percent of GDP) after accounting for one-off asset sales.
- Fiscal deficit reached 1.2 percent of GDP in Q1 FY 2017/18 (compared to 1.3 percent of GDP in Q1 FY 2016/17), helped by FBR revenue growth of over 20 percent y-o-y.
- Accumulated PSE-related figures by end-December 2017:
  - New payment arrears of power distribution companies since July 2016: PRs 193 billion (0.5 percent of GDP)
  - Accumulated stock of such arrears: PRs 514 billion (1.5 percent of GDP)
  - Combined accumulated losses by PSEs now exceed PRs 1.2 trillion (4 percent of GDP)
- Inter-agency arrears in the gas sector have been rising; tariff updating delays limit cross-subsidization arrangements.

### Monetary policy, banking, and financial indicators
- Monetary policy has been accommodative, with the real policy rate below its historical average.
- Private credit growth: 15.1 percent y-o-y in January 2018.
- Broad money growth: 11.8 percent y-o-y in January 2018.
- Reserve money growth slowed to 14.7 percent (from 26.5 percent in FY 2015/16).
- Strong domestic government borrowing from the SBP increased by about PRs 1.2 trillion.
- In January 2018, the SBP tightened the policy rate by 25 bps to 6 percent.
- Banking system indicators:
  - System-wide capital adequacy: 15.4 percent in September 2017 (regulatory minimum 10.65 percent)
  - NPL ratio declined to 9.2 percent by September 2017 (from 11.3 percent a year ago)
  - Profitability moderating but remains adequate
  - Two small banks remain undercapitalized
  - Sanctioning of the largest bank by U.S. regulator highlighted AML/CFT enforcement weaknesses; earlier NYDFS fine originally $630 million (reduced to $225 million in settlement)
  - A Supreme Court decision (on appeal) regarding another large bank’s pension liabilities could affect capitalization

### Macroeconomic outlook and projections
- Near-term growth expected to remain strong if macroeconomic stability risks are contained; real GDP growth likely accelerating to 5.6 percent in FY 2017/18.
- Staff baseline projection: growth moderates to about 5 percent in the medium term due to declining energy sector investments, moderating confidence, and structural reform challenges; significant downside risks if imbalances are not addressed.
- Headline inflation expected to remain in mid-single digits in 2017/18 and in the medium term absent major exchange rate changes.
- External sector projections:
  - Current account deficit expected to widen to US$15.7 billion (4.8 percent of GDP) this year.
  - Medium-term current account deficit expected to remain about 3.8 percent of GDP.
  - Gross international reserves expected to weaken to US$12.1 billion (2.2 months of imports) this year, with risks skewed to the downside.
- Fiscal projections:
  - Budget deficit (excluding grants) projected to reach 5.5 percent of GDP this year (5.9 percent of GDP underlying deficit excluding one-off operations).
  - Tax revenue projected at 12.9 percent of GDP (up from 12.5 percent last year).
  - Over the medium term, fiscal deficit likely to remain around 5.8 percent of GDP due to quasi-fiscal losses and PSE arrears, partially offset by revenue improvements.

### Policy recommendations and priorities
- Focus short-term policies on arresting widening imbalances, preserving macroeconomic stability, and supporting private-sector-led inclusive growth.
- Recent authorities’ moves that are welcomed:
  - Tightening monetary policy
  - Allowing some exchange rate adjustment
- Further recommended actions:
  - Continue exchange rate flexibility to safeguard external buffers.
  - Further monetary tightening as needed to contain domestic demand.
  - Stronger fiscal discipline and resumption of medium-term fiscal consolidation.
  - Decisive efforts to contain losses in public enterprises.
  - Careful phasing in of new external liabilities.
  - Accelerate growth-supporting structural reforms to reinforce stability and promote higher, more inclusive growth.

### Authorities’ views and upside scenario
- Authorities expect higher growth and lower imbalances based on recent policy measures to contain development spending, adjust the exchange rate, curtail imports, and promote exports.
- Under an upside scenario based on authorities’ projections:
  - General government budget deficit (excluding grants) contained to 5 percent of GDP in FY 2017/18.
  - Current account deficit contained to 4.4 percent of GDP in FY 2017/18.
  - Gross reserves could stabilize at about US$13.9 billion this year and recover to 2½–3 months of imports in the medium term.
  - Real GDP growth could rise to 6 percent this year and 6.5 percent in FY 2018/19.

### Capacity to repay the Fund
- Staff assessment: risks to Pakistan’s medium-term capacity to repay the Fund have increased significantly since completion of the EFF, due to mounting external and fiscal financing needs and declining reserves.
- An elevated current account deficit and increased external obligations are expected to double external financing needs in the medium term, further pressuring foreign exchange reserves.
- Risks are largely on the downside given a difficult political setting and possible further widening of external and fiscal deficits.

*International Monetary Fund — Executive Summary (cr1878)*

### 14.      External financing needs are

### 14.      External financing needs are

### External financing needs and reserves
- External financing needs are expected to rise from US$21.5 billion (7.1 percent of GDP) in FY 2016/17 to around US$45 billion by FY 2022/23 (9.9 percent of GDP).
- Gross foreign exchange reserves (millions of U.S. dollars): 13,534; 18,143; 16,141; 12,099; 10,432; 9,539; 8,360; 6,989; 7,075 (2015–2023).
- Gross external financing needs (In percent of GDP) are projected to increase through 2023 (chart-based projection referenced in source).
- At present, gross reserves amount to about twice Pakistan’s outstanding Fund repurchases (SDR 4.4 billion).
- Repayments to the Fund are scheduled to start at SDR 243 million (including GRA charges and surcharges) in 2018 and peak at SDR 820 million in 2021, with a gradually declining schedule until 2026.
- While these obligations do not exceed 6 percent of total external debt service in any year, their share in gross reserves is expected to rise significantly in the medium term, reaching close to 15 percent in 2022.

### Public debt, fiscal financing needs, and external debt
- Public and publicly-guaranteed debt is expected to remain elevated, marginally declining from 70 percent of GDP in FY 2016/17 to 68 percent of GDP by FY 2022/23.
- Gross fiscal financing needs will likely exceed 30 percent of GDP from 2018/19 onward, in part reflecting increased debt service obligations.
- Level of external debt: 27.4 percent of GDP in FY 2016/17.
- Total External Debt (millions of U.S. dollars): 65,082; 73,063; 82,981; 93,277; 103,385; 114,124; 123,720; 133,070; 144,952 (2015–2023).
- Total External Debt Service (millions of U.S. dollars): 6,205; 6,096; 8,292; 7,739; 12,737; 18,583; 19,163; 20,354; 19,728 (2015–2023).

### Mobilization of external financing and market conditions
- The authorities contracted over $10 billion in external borrowing in FY 2016/17 and more than $6 billion so far in FY 2017/18.
- Continued mobilization of external financing at favorable rates could become more challenging given rising international interest rates and increasing financing needs.

### Indicators of Fund credit (projections)
- Total (millions of SDR): 3,600.0; 4,393.0; 4,393.0; 4,243.0; 3,823.0; 3,163.0; 2,400.8; 1,698.7; 966.5 (2015–2023).
- In percent of end-period gross official reserves: 37.4; 33.5; 37.7; 48.5; 50.7; 45.9; 39.7; 33.6; 18.9 (2015–2023).
- Total projected debt service to the Fund (millions of SDR): 338.1; 51.1; 75.0; 243.0; 505.1; 730.7; 820.2; 747.1; 764.0 (2015–2023).
- In percent of end-period gross official reserves (debt service): 3.5; 0.4; 0.6; 2.8; 6.7; 10.6; 13.6; 14.8; 14.9 (2015–2023).
- As a share of total external debt service: 7.7; 1.2; 1.3; 4.3; 5.5; 5.4; 5.9; 5.1; 5.4 (2015–2023).

### Risks to reserves and capacity to repay
- Trends of rising external financing needs and elevated current account deficits, partly CPEC-related (loan repayments and profit repatriation), could further deplete reserves and weaken Pakistan’s capacity to repay the Fund.
- Staff’s downside scenario (partial materialization of identified risks) projects faster depletion of foreign exchange reserves and significant implications for economic growth.

### Scenario: Lower capital inflows (Box 2 projections)
- Current Account (percent of GDP)
  - Baseline (2016/17, 2017/18, 2018/19): -4.1; -4.8; -4.4
  - Lower capital flows (2016/17, 2017/18, 2018/19): -4.1; -4.7; -3.6
- Financial Account (millions of U.S. dollars)
  - Baseline (2016/17, 2017/18, 2018/19): 9,987; 11,604; 13,321
  - Lower capital flows (2016/17, 2017/18, 2018/19): 9,987; 8,396; 7,996
- International Reserves (millions of U.S. dollars)
  - Baseline (2016/17, 2017/18, 2018/19): 16,141; 12,099; 10,432
  - Lower capital flows (2016/17, 2017/18, 2018/19): 16,141; 9,370; 5,077
- Real GDP Growth (percent)
  - Baseline (2016/17, 2017/18, 2018/19): 5.3; 5.6; 4.7
  - Lower capital flows (2016/17, 2017/18, 2018/19): 5.3; 5.0; 3.0

### Risk assessment (summarized)
- Key risks with Medium-to-High likelihood and impacts include:
  - Additional slippages in policy implementation (Medium likelihood; High expected impact).
  - Security conditions deterioration (Medium likelihood; Medium to High impact).
  - Retreat from cross-border integration (Medium likelihood; Low to Medium impact).
  - Structurally weak growth in key advanced economies (High likelihood; Medium impact).
  - Significant slowdown in China (Low/Medium likelihood; Medium impact).
  - Tighter global financial conditions (High likelihood; Medium impact).
- Recommended mitigating policies repeatedly include: allow exchange rate flexibility; sustain and build fiscal and external buffers; maintain adequate medium-term debt strategy; improve business climate; ensure strong financial regulation and supervision.

### Policy discussions and recommendations
A. Focusing short-term policies on external adjustment
- Phase out currency interventions to facilitate external adjustment, safeguard reserves, and buttress competitiveness.
- Tighter fiscal and monetary policies to ease import demand and contain inflationary pressures, while supporting public debt sustainability.
- Remove regulatory duties and cash margin requirements as soon as conditions allow; staff cautioned these administrative measures are unlikely to facilitate sufficient external adjustment and may harm competitiveness.

B. Monetary policy
- Staff recommended further tightening of the monetary policy stance to slow domestic demand and import growth, strengthen demand for rupee financial assets, and mitigate pass-through from the exchange rate adjustment to inflation.
- Staff advised unwinding the increased government borrowing from the SBP to support monetary tightening.
- Greater exchange rate flexibility should be accompanied by strengthening of the interest rate-based monetary policy framework with appropriate intermediate and operational targets, and a clear limit to FX interventions.
- Real SBP Target (Policy) Rate chart referenced (historical averages noted).

C. Fiscal policy and public debt sustainability
- Staff recommended containing this year’s budget deficit to 5 percent of GDP (5.4 percent underlying deficit excluding one-off operations) through:
  - Elimination of tax concessions and exemptions (0.3 percent of GDP).
  - Raising petroleum taxes, withholding taxes and excises (0.1 percent of GDP).
  - Containing current expenditure (0.1 percent of GDP).
- Medium-term fiscal consolidation needed; both the fiscal deficit and net public debt are expected to exceed limits set in the Fiscal Responsibility and Debt Limitation Act (FRDLA) throughout the medium term without lasting consolidation.
- Revenue mobilization remains the main driver of fiscal consolidation; strengthen tax administration (FBR access to third-party information, enhanced audits, centralized electronic fiscal cadaster, reduce outstanding tax refund claims, strengthen tax compliance).
- Improve composition of spending by containing wage bill growth and further rationalizing and better targeting electricity subsidies.

D. Public sector enterprises (PSEs)
- Urgent short-term actions to contain quasi-fiscal losses in PSEs:
  - Notify revised electricity tariffs to contain power sector arrears.
  - Faster implementation of circular debt reduction plan, improve distribution companies’ losses and collections.
  - Consider additional electricity surcharges to facilitate cost recovery until structural issues are tackled.
  - Urgency to arrest losses at Pakistan International Airlines (PIA) and Pakistan Steel Mill (PSM); authorities considering restructuring, private participation, and privatization options.

E. Medium-term external liability management
- Careful phasing in of new external liabilities and saving foreign exchange proceeds from additional external borrowing to improve resilience and ensure medium-term sustainability.

### Authorities’ views
- Authorities offered a more optimistic assessment of capacity to repay, believing recent depreciation restored equilibrium in the foreign exchange market.
- Authorities expected continued positive investor confidence and access to external financing, with gradually improving reserve coverage over the medium term.
- Authorities agreed with many staff recommendations (exchange rate flexibility, containment of fiscal deficit to 5 percent of GDP, update electricity tariffs, strengthen PSE performance) but viewed some administrative measures as possibly effective on a temporary basis.

*Source: Pakistani authorities and IMF staff calculations (IMF staff projections).*

### 30.      Improving efficiency, flexibility, and responsiveness of the national fiscal federalism

### 30.      Improving efficiency, flexibility, and responsiveness of the national fiscal federalism

### Fiscal federalism and medium-term fiscal risks
- Improving efficiency, flexibility, and responsiveness of the national fiscal federalism framework will be critical to contain medium-term fiscal risks.
- Staff reiterated the need for strengthening the current framework with better alignment of revenue and expenditure responsibilities, as well as improved coordination and resource-sharing mechanisms.

### Public Sector Enterprises (PSEs) and quasi-fiscal losses
- Eliminating quasi-fiscal losses in PSEs on a permanent basis would create significant fiscal space in the medium term.
- Staff urged the authorities to complete the unfinished agenda of restructuring and/or privatizing the loss-making PSEs.
- Recognizing the difficulties of making substantive progress during the remaining term of the current government, staff recommended continuing preparatory work to enable swift progress once substantive reforms become feasible.
- Efforts to reduce technical and distribution losses in the power and gas sectors, including by stricter enforcement of the "Gas Theft and Recovery Act," are needed to contain arrears.
- Staff welcomed the authorities' plans to revisit the current cross-subsidization arrangements and notify higher tariffs in the gas sector to ensure adequate cost recovery.

### Monetary policy framework
- Continued strengthening of the monetary policy framework will help enhance macroeconomic stability.
- Staff welcomed the SBP’s plans to transition to an inflation targeting framework by 2020.
- Staff urged further enhancing autonomy of the SBP and phasing out government borrowing from the SBP to avoid fiscal dominance and support an effective interest rate-based monetary policy framework.
- A draft legislative action plan to strengthen SBP independence has been prepared and staff urged the authorities to swiftly implement it.
- Staff recommended addressing the remaining recommendations of the 2013 Safeguards Assessment in areas of SBP’s institutional autonomy, governance, limiting credit to government, and personal autonomy of board members.

### Competitiveness and business environment
- Lasting improvements in competitiveness will require a significant enhancement of the business environment.
- Priority areas include:
  - improving the provision of administrative services at various levels of government;
  - easing procedures for starting a business, obtaining construction permits, registering property, and paying taxes;
  - strengthening the legal framework and capacity of the judiciary in contract enforcement and corporate restructuring/bankruptcy;
  - effective anti-corruption enforcement.
- Staff welcomed the recent passage of the Corporate Rehabilitation Act, which will facilitate faster resolution of non-performing loans in the banking sector with a strengthened bankruptcy framework.
- Stepped-up efforts are needed to promote diversification of the export sector and private sector job creation to absorb the growing youth population.

### Financial sector resilience and reforms
- Staff recommended further financial sector reforms and efforts to strengthen the sector's resilience.
- The two small banks, which persistently operate below the minimum capital adequacy requirement, need to be brought to regulatory compliance.
  - One (publicly-owned) noncompliant bank is in the privatization process and the pre-qualification stage of bidders has been completed.
  - The second (privately-owned) bank is in the process of merging with another public bank.
- Following up on Article IV discussions, staff reiterated the need to operationalize the Deposit Protection Corporation and welcomed progress with enhancing the regulatory framework, including the implementation of Basel III liquidity standards.
- Staff recommended further strengthening contingency planning, and exploring options for modernizing the bank resolution framework.
- Assessment of recent shocks:
  - The recent stock market correction and exchange rate depreciation will likely have a very limited impact on banks, given their low exposure to the stock market, low dollarization, and strict open position limits.
  - Deceleration of private credit growth in the wake of policy tightening could raise NPLs, requiring vigilance and effective implementation of the supervisory framework.
- Staff urged continued strengthening of the AML/CFT framework and its consistent implementation, including the effectiveness of measures to mitigate significant risks of terrorist financing.
  - The SBP has increased its inspection cycles in this area, is contemplating focused and more frequent offsite supervisory interactions and monitoring, and has urged banks to rationalize their overseas operations and meticulously comply with the AML/CFT requirements of respective jurisdictions.

### Social protection and the Benazir Income Support Program (BISP)
- Stronger mechanisms for protecting the most vulnerable will be critical to support inclusive growth.
- The BISP, which was expanded significantly during the EFF, has made substantial progress with improving delivery mechanisms and minimizing fraud, including the use of biometric identification technology, and establishing graduation schemes for long-term beneficiaries.
- Staff emphasized the importance of shielding the BISP budget from fiscal consolidation and urged its continued expansion to increase coverage and ensure timely indexation of stipends.
- Staff advised continuing to raise budgetary outlays for social protection over the medium term to levels at or above those of Pakistan’s South Asian peers.
- Authorities noted ongoing work to establish graduation programs for BISP beneficiaries and a donor-funded endowment fund.

### Authorities’ views
- The authorities broadly agreed with these priorities.
- They stressed efforts to increase scrutiny of terms of new foreign-financed projects and their decision to minimize the role of imported fuel in energy sector projects.
- They underscored that achieving higher exports will be important for sustainable growth and external sector resilience.
- They concurred with the need for further fiscal consolidation through the medium term, in part by raising more revenue through broadening of tax bases.
- They agreed on the need for improving the fiscal federalism framework, while noting constitutional constraints and the need for extensive consultations with the provinces, which may limit politically feasible reforms.
- The authorities stressed the importance of further business climate reforms and advancing restructuring and private sector participation in public sector enterprises, including in the energy sector.
- Regarding increases in BISP outlays, the authorities noted ongoing work to establish graduation programs for BISP beneficiaries and a donor-funded endowment fund.

### Staff appraisal — macroeconomic risks and policy priorities
- Despite solid growth, Pakistan’s macroeconomic stability gains achieved during the EFF have been eroding amid widening external and fiscal imbalances.
  - While real GDP growth has continued to accelerate, external and fiscal imbalances have significantly widened in the context of strong domestic demand growth, limited exchange rate flexibility, accommodative monetary policy, fiscal slippages, and limited progress with key structural reforms.
  - As a result, foreign exchange reserves have been declining, despite significant public sector external borrowing in recent months.
- Risks to Pakistan’s medium-term capacity to repay the Fund have increased.
  - An elevated current account deficit and increased external obligations are expected to double the external financing needs in the next three to five years.
  - Scheduled repayments to the Fund as a share of gross reserves could rise to nearly 15 percent by 2022.
  - Risks to this outlook are largely on the downside, given the difficult political setting and a possible further widening of the external and fiscal deficits in the coming months.
- Policy recommendations to arrest widening imbalances:
  - Swiftly address fiscal and external imbalances to mitigate substantial downside risks.
  - Complement recent moves to tighten monetary policy and allow some exchange rate adjustment with further steps to phase out foreign exchange interventions to preserve external buffers and improve competitiveness, while allowing for greater exchange rate flexibility on a more permanent basis.
  - Phase out administrative measures to support the balance of payments as soon as conditions allow.
  - Further monetary tightening, stronger fiscal discipline, and decisive efforts to contain losses in public enterprises would help reverse external imbalances and reduce fiscal risks.

*IMF staff appraisal contained in the source chapter.*

### 40.      Accelerating growth-supporting structural reforms will be critical to reinforce

### 40.      Accelerating growth-supporting structural reforms will be critical to reinforce

### Key findings and context
- Accelerating growth-supporting structural reforms is critical to reinforce macroeconomic stability and promote higher and more inclusive growth.
- Careful phasing in of new external liabilities and resuming medium-term fiscal consolidation will help ensure fiscal and external sector sustainability.
- Other priority areas include:
  - strengthening the monetary and financial sector policy frameworks;
  - achieving lasting improvements in competitiveness by enhancing the business climate, eliminating losses by public enterprises, and ensuring cost-recovery in the energy sector;
  - strengthening and expanding the social safety nets to protect the most vulnerable.

### Growth and output
- Real GDP at factor cost (annual changes, selected years):
  - 2014/15: 4.1
  - 2015/16: 4.5
  - 2016/17: 5.3
  - 2017/18 Est.: 5.6
- Real per capita GDP (percentage change): 2.0 (2014/15); 2.5 (2015/16); 3.3 (2016/17); 3.6 (2017/18).
- Sectoral notes: Growth strengthened, supported by recovery in agriculture and strong services, but has been increasingly import-dependent.

### Prices and monetary conditions
- Consumer prices (period average):
  - 2014/15: 4.5
  - 2015/16: 2.9
  - 2016/17: 4.1
  - 2017/18 Est.: 5.0
- Consumer prices (end of period):
  - 2014/15: 3.2
  - 2015/16: 3.2
  - 2016/17: 3.9
  - 2017/18 Est.: 5.4
- Six-month treasury bill rate (period average, in percent): 8.8 (2014/15); 6.3 (2015/16); 5.9 (2016/17).
- SBP indicators and money:
  - Broad money (percent change): 13.2 (2014/15); 13.7 (2015/16); 13.7 (2016/17); 14.2 (2017/18).
  - Reserve money (percent change): 9.9 (2014/15); 26.5 (2015/16); 22.5 (2016/17); 18.6 (2017/18).
  - Private credit (percent change): 5.9 (2014/15); 11.1 (2015/16); 16.6 (2016/17); 16.5 (2017/18).
- Monetary stance: The SBP's interest rate corridor has been functioning smoothly, and interest rates have been declining, reflecting an accommodative monetary stance and low inflation.

### Banking and financial sector
- Banking soundness (selected indicators, Dec 2013–Sep 2017):
  - Regulatory capital to risk-weighted assets: 14.9 (Dec. 2013); 15.4 (Sep. 2017).
  - Nonperforming loans (NPLs) to gross loans: 13.3 (Dec. 2013); 9.2 (Sep. 2017).
  - Provisions to NPLs: 78.4 (Dec. 2013); 85.3 (Sep. 2017).
  - Return on assets (after tax): 1.1 (Dec. 2013); 0.9 (Sep. 2017).
  - Liquid assets to total assets: 48.6 (Dec. 2013); 54.5 (Sep. 2017).
- Banking system characteristics:
  - As growth picked up, the NPL ratio declined.
  - Despite a pick-up in private credit, bank lending remains dominated by government, leaving Pakistan behind peers in terms of private credit relative to the size of economy.
  - The banking system remains well capitalized and liquid, while profitability has been gradually declining.

### Fiscal stance and budgetary position
- General government budget (selected FY figures, percent of GDP unless noted):
  - Revenue and grants: 14.5 (2014/15); 15.5 (2015/16); 15.7 (2016/17); 15.8 (2017/18 Proj.).
  - Expenditure: 19.8 (2014/15); 19.9 (2015/16); 21.3 (2016/17); 21.2 (2017/18 Proj.).
  - Overall balance (including grants): -5.3 (2014/15); -4.4 (2015/16); -5.7 (2016/17); -5.3 (2017/18 Proj.).
  - Primary balance (including grants): -0.5 (2014/15); -0.1 (2015/16); -1.4 (2016/17); -1.3 (2017/18 Proj.).
  - General government debt incl. IMF obligations: 63.3 (2014/15); 67.6 (2015/16); 67.2 (2016/17); 67.2 (2017/18).
- Fiscal composition (2017/18 Proj. percent of GDP):
  - Tax revenue: 12.5
  - Expenditure—current: 16.2; development and net lending: 4.9
  - Interest: 4.0 (of which domestic interest 3.6; foreign 0.5)
- Public sector development program (2017/18 Proj.): 5.0 percent of GDP.
- Underlying fiscal balance (excl. grants; percent of GDP): -6.3 (2016/17); -5.9 (2017/18).

### External sector and reserves
- Current account balance (in percent of GDP):
  - 2014/15: -1.0
  - 2015/16: -1.7
  - 2016/17: -4.1
  - 2017/18 Est.: -4.8
- Gross official reserves (end-period, in millions of U.S. dollars):
  - 2014/15: 13,534
  - 2015/16: 18,143
  - 2016/17: 16,141
  - 2017/18 Proj.: 12,099
  - In months of next year's imports of goods and services: 3.2 (2014/15); 3.7 (2015/16); 3.0 (2016/17); 2.2 (2017/18 Proj.).
- Balance of payments (2017/18 projections, in millions of U.S. dollars):
  - Current account: -12,439 (2017/18)
  - Exports, f.o.b.: 21,931 (2017/18)
  - Imports, f.o.b.: 48,573 (2017/18)
  - Net current transfers (credit): 23,459 (2017/18)
  - Net FDI inflows (percent of GDP): 0.9 (2016/17); 1.0 (2017/18)
- External debt and financing:
  - External general government debt (percent of GDP): 18.9 (2014/15); 20.8 (2015/16); 20.6 (2016/17); 22.2 (2017/18).
  - External public and publicly guaranteed debt (2014/15–2017/18): 159.8 (2014/15); 193.3 (2015/16); 210.1 (2016/17); 220.7 (2017/18) [in millions of U.S. dollars].
  - Gross external financing needs (in millions of U.S. dollars): 9,089 (2014/15); 11,424 (2015/16); 21,486 (2016/17); 24,464 (2017/18).
  - End-period gross official reserves (millions of U.S. dollars): 13,534 (2014/15); 18,143 (2015/16); 16,141 (2016/17); 12,099 (2017/18).

### Medium-term outlook (selected projections, 2018/19–2022/23)
- Real GDP at factor cost: 4.7 (2018/19); 4.9 (2019/20); 5.0 (2020/21); 5.0 (2021/22); 5.0 (2022/23).
- Consumer prices (period average): 5.0 (2018/19); 5.2 (2019/20); 5.0 (2020/21); 5.0 (2021/22); 5.0 (2022/23).
- Current account balance (in percent of GDP): -4.4 (2018/19); -4.2 (2019/20); -4.1 (2020/21); -4.0 (2021/22); -3.8 (2022/23).
- Gross official reserves (in millions of U.S. dollars): 10,432 (2018/19); 9,539 (2019/20); 8,260 (2020/21); 6,989 (2021/22); 7,075 (2022/23).
- General government and government guaranteed debt (incl. IMF) as percent of GDP: 69.7 (2018/19); 69.7 (2019/20); 69.8 (2020/21); 69.4 (2021/22); 68.6 (2022/23).

### Vulnerabilities and risks
- Trade competitiveness has remained weak, burdened by real exchange rate appreciation.
- Interventions to defend the exchange rate have eroded gross reserves and pushed SBP's derivative position to almost $6 billion in net obligations.
- The stock market entered a correction phase, partly reflecting political uncertainty and policy slippages.
- Liquidity injections via OMOs increased as the BOP position tightened and foreign liquidity began drying up.
- Gross external financing requirements projected to rise substantially in 2016/17–2017/18.

### Policy recommendations and priorities
- Carefully phase in new external liabilities.
- Resume medium-term fiscal consolidation to ensure fiscal and external sector sustainability.
- Strengthen monetary and financial sector policy frameworks.
- Improve competitiveness through:
  - enhancing the business climate;
  - eliminating losses by public enterprises;
  - ensuring cost-recovery in the energy sector.
- Strengthen and expand social safety nets to protect the most vulnerable.

*Source: IMF staff report content for Pakistan (selected tables and figures).*

### Annex I. Public and External Debt Sustainability

### Annex I. Public and External Debt Sustainability

### Overview
- While improvements in the debt profile have been made in recent years, risks to Pakistan’s debt sustainability have increased since the Article IV Consultation in June 2017.
- Public and publicly guaranteed debt remained at close to 70 percent of GDP in 2016/17 and is expected to slightly decline over the medium term.
- External debt remains sustainable but is subject to risks as external borrowing is projected to increase and international reserves are expected to continue declining on current policies.

### Public debt: status and projections
- Public and publicly guaranteed debt: 69.7 percent of GDP by end of FY 2016/17.
- Public debt excluding guarantees: about 67 percent of GDP (FY 2016/17).
- Net public debt: around 62 percent of GDP.
- Share of total public debt that is foreign currency-denominated: 30 percent.
- Drivers of higher debt relative to Article IV DSA: fiscal deficit higher by 1.3 percent of GDP due to revenue underperformance and a sizable increase in provincial development spending.
- Baseline projection (to 2023):
  - Public and publicly guaranteed debt projected to remain close to 70 percent of GDP by 2023.
  - Public debt excluding guarantees projected to stay around 66–67 percent of GDP.
  - Fiscal deficit excluding grants expected to remain at close to 6 percent of GDP through the medium term absent strong consolidation measures.
- Gross financing needs:
  - FY 2016/17: 29 percent of GDP.
  - Projected to reach above 30 percent of GDP during the projection period.
  - Large share accounted for by domestic loan amortization.
- Debt profile improvements noted: moderate shares of short-term and foreign exchange-denominated debt that sit between the lower and upper early warning thresholds; high gross financing needs may pose potential rollover risk.

### Key DSA baseline figures and assumptions (selected, exact)
- Nominal gross public debt (in percent of GDP): 2016: 61.7; 2017: 70.0; 2018: 69.7; 2019: 69.6; 2020: 69.9; 2021: 69.8; 2022: 69.4; 2023: 68.6; projection end: 68.0.
- Of which: guarantees (in percent of GDP): 2016: 1.9; 2017: 2.5; 2018–2023: 2.5.
- Public gross financing needs (in percent of GDP): 2016: 26; 2017: 28.5; 2018: 29.3; 2019: 30.0; 2020: 31.3; 2021: 33.1; 2022: 32.1; 2023: 32.5; 31.6.
- Real GDP growth (in percent): 2016: 3.6; 2017: 4.5; 2018: 5.3; 2019: 5.6; 2020: 4.7; 2021: 4.9; 2022: 5.0; 2023: 5.0; projection: 5.0.
- Inflation (GDP deflator, in percent): 2016: 10.5; 2017: 1.5; 2018: 4.0; 2019: 5.2; 2020: 5.2; 2021: 5.2; 2022: 5.0; 2023: 5.3; 5.1.
- Nominal GDP growth (in percent): 2016: 14.5; 2017: 6.0; 2018: 9.5; 2019: 11.0; 2020: 10.1; 2021: 10.3; 2022: 10.3; 2023: 10.6; 10.3.
- Effective interest rate (in percent): 2016: 8.6; 2017: 7.3; 2018: 6.9; 2019: 7.0; 2020: 7.2; 2021: 7.2; 2022: 7.2; 2023: 7.4; 7.6.
- Change in gross public sector debt (cumulative, percent of GDP): 2016: 1.3; 2017: 4.4; 2018: -0.4; 2019: -0.3; 2020: 0.2; 2021: -0.1; 2022: -0.4; 2023: -0.8; cumulative through projection: -0.6; -1.9 (table cumulative).
- Identified debt-creating flows (cumulative percent of GDP): 0.8; 2.9; -0.5; -1.4; -0.6; -0.8; -0.7; -1.0; -0.7; -5.2.
- Primary deficit (in percent of GDP): 2016: 1.8; 2017: 0.1; 2018: 1.4; 2019: 1.3; 2020: 1.4; 2021: 1.4; 2022: 1.3; 2023: 1.1; projection cumulative: 1.1; 7.7 (table cumulative).
- Primary (noninterest) revenue and grants (in percent of GDP): 14.0; 15.5; 15.7; 15.8; 15.8; 15.8; 15.8; 16.0; 16.0; 95.2 (table cumulative).
- Primary (noninterest) expenditure (in percent of GDP): 15.8; 15.6; 17.1; 17.1; 17.2; 17.2; 17.2; 17.1; 17.1; 102.8 (table cumulative).
- Automatic debt dynamics contribution (cumulative percent of GDP): -1.5; 1.3; -1.6; -2.5; -1.8; -2.0; -1.9; -2.0; -1.7; -11.9.

### Fiscal consolidation needs and legal targets
- Recommendation: sustained fiscal consolidation is needed to improve public debt sustainability and build sufficient fiscal buffers.
- Without timely fiscal tightening, projected public debt trajectory sits higher than the revised FRDL Act limits:
  - FRDL Act net general government debt limit: 60 percent of GDP until FY 2017/18 and a gradual transition toward 50 percent of GDP over a 15-year period.
- Contingent liabilities: restructuring of loss-making PSEs represents additional fiscal risks.

### External debt: status, projections, and risks
- Gross external debt (percent of GDP) trend and peak:
  - Declining trend until 2015; expected to increase and peak at about 32 percent of GDP in 2021.
- Sensitivity and stress-test results:
  - Bound and stress tests suggest external debt-to-GDP ratio would be affected by adverse shocks.
  - External debt ratio would exceed 45 percent only under the real depreciation shock scenario (one-time real depreciation of 30 percent occurs in 2018 in the DSA).
  - Combined shock and interest-rate, current-account shocks raise vulnerabilities (figures show stress scenarios).
- Gross external financing needs (in percent of GDP):
  - FY 2016/17: 7.1 percent of GDP.
  - Projected to increase to about 9.9 percent of GDP in 2023.
- Gross external financing need (in billions of US dollars):
  - 2013: 4; 2014: 9.1; 2015: 10.8; 2016: 9.1; 2017: 11.4; 2018: 21.5; 2019: 24.5; 2020: 27.0; 2021: 33.8; 2022: 36.0; 2023: 41.2; 45.0.
- External debt-to-exports ratio (in percent): 2013: 193.2; 2014: 215.2; 2015: 217.4; 2016: 266.6; 2017: 302.5; 2018: 316.0; 2019: 310.6; 2020: 308.4; 2021: 299.5; 2022: 290.5; 2023: 286.9.

### Stress tests and risk assessment highlights
- Public DSA stress tests presented: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Shock; Contingent Liability Shock.
- Selected stress-test behavior (gross nominal public debt, in percent of GDP):
  - Baseline and stressed paths show debt rising substantially under adverse shocks (charts indicate debt levels reaching into 70s and beyond under severe shocks).
- Risk-assessment benchmarks used in heat map:
  - Benchmarks include gross financing needs benchmark of 15 percent, public debt burden benchmark of 70 percent, and thresholds for EMBIG spreads, external financing requirement, change in share of short-term debt, public debt held by non-residents, and share of foreign-currency denominated debt.
- DSA realism checks:
  - Forecast track record comparisons show Pakistan’s past forecast errors and percentile ranks for real GDP growth, primary balance, and inflation (deflator) relative to other countries for 2007–2015.

### Policy implications and recommendations (from text)
- Strengthen fiscal consolidation to:
  - Improve debt dynamics.
  - Build sufficient fiscal buffers.
  - Gradually achieve legally mandated debt targets under the FRDL Act.
- Address high gross financing needs and rollover risks through timely fiscal tightening and measures to manage contingent liabilities, particularly from loss-making PSEs.
- Monitor external vulnerabilities: rising gross external financing needs and projected decline in foreign exchange reserves warrant careful external financing and reserve management.

*Source: IMF staff. Annex I. Public and External Debt Sustainability (cr1878).*

### 3.9 percent at end 2016/17. The stronger growth momentum has put pressure on the

### cr1878 - 3.9 percent at end 2016/17. The stronger growth momentum has put pressure on the

### External sector and balance of payments
- Stronger growth momentum has put pressure on the external sector.
- High import content of the CPEC investment projects and rising oil prices have had a significant impact on the balance of payments, with concomitant decline in gross international reserves.
- Authorities allowed the rupee/dollar exchange rate to depreciate by 5 percent in December 2017.
- Authorities raised regulatory duties on certain imports on a temporary basis and started tightening of monetary policy.
- The policy mix, together with the ongoing rebound of exports, should help contain the deterioration in the external balance.
- Pakistan successfully tapped international financial markets last December at favorable market conditions to meet its financing needs, and its bond spreads remain close to the average of emerging markets.

### Growth projections and authorities' outlook
- Authorities expect real GDP growth to accelerate to 6 percent in 2017/18 and 6 ½ percent in 2018/19.
- Growth support attributed to a combination of confidence-enhancing reforms and high investment spending under the CPEC.
- Authorities are confident that prudent fiscal and monetary policies and adequate exchange rate flexibility will help strengthen external sustainability.

### Fiscal Policy
- Authorities concur with the need to contain the fiscal deficit to 5 percent of GDP, which they consider achievable under current policies.
- Sustained improvements in tax collection, supported by broadening of the tax base, have strengthened revenue performance.
- Efforts to rationalize development spending and adequate fiscal surplus at the provincial level will help achieve fiscal objectives.
- Fiscal deficit contained to 2.2 percent of GDP in H1FY2018 as compared to 2.5 percent in the same period last year.
- Authorities view that the debt-to-GDP ratio could be brought down over the near-to medium term to the limits set in the Fiscal Responsibility and Debt Limitation Act.
- Authorities concur with staff advice to make further gains in fiscal consolidation through:
  - enhanced revenue mobilization;
  - improvement in the fiscal federal framework;
  - restructuring and/or privatization of loss-making public sector enterprises (PSEs);
  - improved cost recovery in the gas sector.
- Commitment to expanding coverage and benefits under the Benazir Income Support Program (BISP).
- Efforts underway to establish a donor-financed endowment fund and graduation schemes for the program’s long-term beneficiaries.

### Monetary and Exchange Rate Policies
- Monetary policy has been accommodative, but authorities raised the policy rate by 25 bps in January 2018 in response to domestic demand and inflation developments.
- Exchange rate was allowed to depreciate to stem reserve losses.
- Temporarily raised regulatory duties on imported intermediate, consumer, and luxury goods while maintaining cash margin requirements on imports of consumer goods.
- Authorities agree with staff on potentially negative side effects of these measures and intend to phase them out when external pressures subside.
- Authorities will continue efforts to strengthen the autonomy of the SBP, with a draft legislation placed before parliament.
- The recently established independent monetary policy committee is now fully empowered to take policy decisions based on its review of economic developments and fundamentals.

### Financial Sector
- The banking system is sound, with capital adequacy ratios well above the regulatory minimum, except for two small banks which are being considered for privatization or merger with larger banks.
- Banking system has adequate profitability and declining NPLs, remains resilient, and has appropriately supported economic activity.
- Regulatory framework being strengthened toward phased implementation of Basel III norms by 2019.
- Authorities committed to continue strengthening AML/CFT regulations and enforcement in line with international standards, illustrated by recent intensification of inspections and close monitoring of banks’ compliance with AML/CFT requirements, including in overseas operations.

### Structural Reforms
- Structural reforms will emphasize improvement in business climate, restructuring of PSEs and opening them to private sector participation, and consolidation of the energy sector reform.
- Corporate Rehabilitation Act was passed recently to strengthen the bankruptcy framework and facilitate resolution of NPLs in the banking system.

### Capacity to Repay the Fund
- Authorities acknowledge challenges from growing need to mobilize external resources to finance large scale investment projects and support growth.
- Debt-to-GDP ratio projected to decline from close to 70 percent of GDP in 2016/17 to 68 percent in 2022/23, but needs to be brought further down through appropriate fiscal and monetary policies while improving the debt profile.
- Authorities believe risks to Pakistan’s capacity to repay the Fund are low and will likely remain so in the medium-term.
- External DSA points to a sustainable medium-term path with external debt of 27 percent of GDP in 2016/17 projected to rise and peak at 32 percent in 2022/23.
- Share of Fund credit outstanding in external debt is low (7 percent in 2017 and declining thereafter).
- Debt service to the Fund projected to peak at less than 6 percent of the total in 2021, and is not a source of concern.
- Authorities value engagement with the Fund and look forward to continuing close cooperation in support of their medium-term reform strategy.

*IMF staff report content.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1878.pdf_