## _cr08364 - 2003. Economic data are broadly adequate for surveillance and program monitoring.

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---

### Executive summary — core findings and program request
- Macroeconomic performance deteriorated significantly during 2007/08 and the first four months of 2008/09 due to adverse security developments, large increases in import prices (oil and food), and the global financial turmoil.
- Fiscal deficit rose to 7.4 percent of GDP in 2007/08, from 4.3 percent in 2006/07, driven by delays in passing through higher energy prices to consumers.
- Inflation reached 25 percent in October 2008; core inflation (excluding energy and food) increased to 18.3 percent in October 2008.
- Real GDP growth slowed to 5.8 percent in 2007/08 (down from 6.8 percent in 2006/07).
- Current account deficit widened to 14 billion or 8.4 percent (8½ percent) of GDP in 2007/08.
- Gross international reserves fell to $3.4 billion (less than one month of imports) at end-October 2008 (declined from $14.3 billion at end-June 2007).
- Authorities requested a 23-month Stand-By Arrangement (SBA) for SDR 5.169 billion ($7.6 billion, 500 percent of quota) to support a macroeconomic stabilization program for 2008/09 and 2009/10.
- Program aims: tighten fiscal and monetary policies to bring down inflation, reduce the external current account deficit, and protect social stability.

### Recent developments — activity, inflation, external and fiscal balances, banking
- Real GDP growth: 5.8 percent in 2007/08.
- Inflation:
  - 12-month headline CPI inflation rose to 25 percent in October 2008.
  - Core inflation rose to 18.3 percent in October 2008.
- External current account: widened to 14 billion or 8½ percent of GDP in 2007/08 (from 4.8 percent in 2006/07).
- Gross international reserves: declined from $14.3 billion at end-June 2007 to $3.4 billion at end-October 2008.
- Fiscal deficit (excluding grants): estimated 7.4 percent of GDP in 2007/08 (from 4.3 percent in 2006/07).
- State Bank of Pakistan (SBP) actions and outcomes:
  - Discount rate increased by 350 basis points starting June 2007, to 13 percent in July 2008; later increased by 200 basis points to 15 percent (program summary and later references).
  - SBP financing of the government reached PRs 950 billion ($12 billion) during July 2007–October 2008.
  - Negative real interest rates slowed rupee deposit growth and increased foreign currency deposits.
  - Credit growth to the private sector accelerated to 20 percent by September 2008.
- Banking system (as of end-June 2008) appeared well capitalized and liquid; liquidity problems emerged for some small and mid-sized banks.
  - Authorities reduced cash reserve requirement by 4 percentage points during October–November and broadened eligible assets for statutory liquidity requirement.
  - SBP facilitated mergers of non-viable banks with sound banks.
- Financial market stress:
  - EMBIG spread for sovereign bonds rose above 2,000 basis points.
  - Karachi KSE-100 stock index fell by 40 percent by late August 2008 from record highs at end-April 2008; price floor imposed August 27, 2008, halting trading.
- Exchange measures adopted in May 2008 (one measure subject to Article VIII, Section 2(a) assessment):
  - 25 percent limit on advance payments for imports of goods.
  - Requirement for exchange bureaus to repatriate foreign exchange from their accounts abroad and to sell 25 percent of any foreign exchange receipts in the interbank market.
  - Prior SBP consent for outward remittances above $50,000 upon verification of bona fide nature.
  - Margin requirement of 35 percent for opening letters of credit for non-essential imports.
  - Government imposed regulatory duties on imports of luxury items.

### The authorities’ program — objectives and key elements
- Program objectives for 2008/09–2009/10:
  - Restore investor confidence by addressing macroeconomic imbalances.
  - Protect the poor and vulnerable during adjustment.
  - Strengthen international reserves and stop/reverse portfolio outflows.
- Program requested: 23-month SBA equivalent to 500 percent of quota, with front-loaded access to bolster reserves.
- Fiscal strategy:
  - Reduce fiscal deficit from 7.4 percent of GDP in 2007/08 to 4.2 percent in 2008/09 and to 3.3 percent in 2009/10.
  - Allow for increased spending on social safety net; seek additional donor support (program includes adjustors).
  - Fiscal adjustment primarily via phasing out energy subsidies, better prioritization of development spending, and tax policy and administration measures.
  - Commitment to eliminate SBP financing of the government during October 1, 2008–June 30, 2009.
  - Tax revenue programmed to increase by ½ percentage point of GDP in 2008/09 due to tax administration measures and a 1 percentage point GST rate increase implemented with the budget.
  - Expenditure measures equivalent to 2¾ percent of GDP include phasing out energy subsidies and reprioritizing development spending.
  - Actions already taken: domestic fuel prices raised; electricity tariffs increased by an average of 18 percent on September 5; plan with World Bank to complete elimination of electricity subsidies by end-June 2009 (structural benchmark, plan due end-December 2008).
- Monetary and financial sector strategy:
  - Tighten monetary policy to bring down inflation and protect reserves; SBP stands ready to further tighten as needed and recently increased its discount rate by 200 basis points to 15 percent (program summary).
  - Eliminate SBP financing of the government.
  - Design contingency plans to address problem banks.
  - Improve monetary management and strengthen SBP bank resolution capacity.
- External financing and reserve objectives:
  - Projected multilateral and bilateral disbursements to government of $4.8 billion in 2008/09 (including $1.4 billion from the World Bank and $2.2 billion from the Asian Development Bank; $500 million of the latter disbursed in September).
  - External current account deficit projected to decline to 6½ percent of GDP in 2008/09, and to 5.7 percent of GDP in 2009/10.
  - Estimated external financing gap of $4.7 billion for 2008/09 to be fully covered by Fund resources.
  - Target reserves: rebuild to at least $8.6 billion (level at end-June 2008) and to $11.3 billion by end-June 2010.
  - Financing gap for 2009/10 projected at $3.6 billion to be filled with Fund resources and privatization proceeds, including from GDRs.

### Macroeconomic framework — projections and medium-term outlook
- 2008/09:
  - Real GDP growth projected: 3–3½ percent.
  - CPI inflation targeted to decline to 20 percent by June 2009 (after accounting for administered price increases).
  - External current account deficit projected: 6½ percent of GDP.
- 2009/10:
  - Real GDP growth projected: 4½–5 percent.
  - CPI inflation projected: 6 percent by June 2010.
  - External current account deficit projected: 5.7 percent of GDP.
- Medium term (to 2012/13):
  - Real GDP growth projected: increase to 6½–7 percent a year by 2012/13.
  - Inflation projected: decline to 5 percent.
  - External current account deficit projected: decline to about 3½ percent of GDP.
  - International reserves projected: increase gradually to about $14.5 billion (2.6 months of imports) by end-June 2013.
  - Fiscal sustainability hinges on substantially raising tax revenue as a key condition.

### Risks, vulnerabilities, and financing needs
- Principal risks to the program:
  - Security and implementation uncertainties.
  - A more severe-than-anticipated slowdown in economic activity in trading partners.
  - Lower-than-expected private capital inflows.
- Urgent need to mobilize additional donor support to:
  - Strengthen resilience to potential shocks.
  - Help finance the expanded social safety net.
  - Allow for higher development spending.
- External financing gaps and IMF support:
  - 2008/09 external financing gap: $4.7 billion (to be fully covered by Fund resources).
  - 2009/10 external financing gap: $3.6 billion (to be filled with Fund resources and privatization proceeds, including GDRs).

### Fiscal targets and composition (program detail)
- Program targets a fiscal deficit of 3.3 percent of GDP in 2009/10.
- Revenue-side measures:
  - Tax administration measures, an increase in excises on tobacco, and a reduction in exemptions expected to yield an additional 0.8 percent of GDP (MEFP, ¶15).
- Expenditure-side:
  - Total expenditure programmed to remain broadly constant at about 19 percent of GDP in 2009/10.
  - Full-year effect of elimination of energy subsidies will create room for increasing development spending by 0.9 percent of GDP (MEFP, ¶14) and for maintaining social safety net spending.
- Medium-term objective:
  - Further increase in tax revenue of at least 2½ percentage points of GDP (MEFP, ¶15).
  - Reduce the fiscal deficit to 2.0–2.5 percent of GDP by 2012/13 (Table 6).

### Social safety net and mitigation measures
- Strengthening and better targeting of social assistance is essential.
- Specific measures:
  - Increase social safety net spending by 0.6 percentage points of GDP in 2008/09, to 0.9 percent of GDP (MEFP, ¶10).
  - Develop, by end-March 2009, a strategy and a time-bound action plan to strengthen the social safety net and improve targeting, in close collaboration with the World Bank, including under the Benazir Income Support Program.
  - Implement short-term social support measures by scaling up other existing programs (structural benchmark, MEFP, ¶11).
  - Electricity tariffs to include a “lifeline” minimum tariff shielding low-income households.
  - Authorities seeking additional external assistance from bilateral donors to cover expanded social safety net costs.

### Public financial management and fiscal reforms
- Key structural benchmarks/actions:
  - Transition to a single treasury account to be completed by end-June 2009 (structural benchmark).
  - Improve coordination on public investment program design and implementation (MEFP, ¶17).
  - Prepare plan by end-March 2009 (structural benchmark, MEFP, ¶12) to address large inter-corporate debt in the energy sector with limited use of budgetary resources.
- Tax policy and administration:
  - Action plan for tax administration measures to be finalized by end-December 2008 (structural benchmark, MEFP, ¶15).
  - Reduce GST exemptions and harmonize income and GST laws in 2009/10 budget discussions (performance criterion).
  - Submit new draft VAT law for public debate by end-2009; full revenue impact materializes over the medium term.

### Monetary policy and exchange rate stance
- Monetary tightening:
  - On November 12, 2008, SBP raised the discount rate by 200 basis points, to 15 percent.
  - Authorities committed to increasing the discount rate further at the time of the Monetary Policy Statement at end-January 2009, or earlier, if SBP’s actual net foreign assets fall short of monthly benchmarks.
- Exchange rate policy:
  - Flexible exchange rate policy with intervention geared to achieving monthly NFA targets and smoothing excessive volatility.
  - Phase out provision of foreign exchange for oil imports; shift to interbank market starting with furnace oil by February 1, 2009 (structural benchmark).
  - Eliminate exchange restriction on advance payments for imports by January 31, 2010.
  - Commitment not to impose or intensify existing restrictions or impose or modify multiple currency practices subject to Fund approval during the program period (MEFP, ¶21).
- Liquidity management:
  - Strengthen coordination between SBP and treasury on forecasting government cash flow requirements; quarterly volumes of treasury bill placements agreed consistent with zero SBP financing during October 1, 2008–June 30, 2009.
  - SBP to adopt a more transparent liquidity management framework by end-June 2009, envisaging the establishment of an interest rate corridor (MEFP, ¶19) and an increase in the frequency of SBP policy meetings.

### Central bank governance and financial sector resilience
- Governance:
  - Set up inter-agency committee to review and strengthen legal provisions relating to SBP operational independence; committee to determine steps by time of second program review (MEFP, ¶24).
  - Authorities intend to request Fund technical assistance.
- Financial sector vulnerabilities:
  - Stress tests indicate large banks resilient; some small and mid-sized banks vulnerable to large interest rate increases and deterioration in credit quality.
  - SBP preparing contingency plan for dealing with problem private banks, to be ready by end-December 2008 (structural benchmark, MEFP, ¶22).
  - SBP’s enforcement powers to be strengthened by submitting legislative amendments to parliament by end-June 2009 (performance criterion, MEFP, ¶23).
- Stock market support:
  - Floor on stock prices retained until macroeconomic conditions improve.
  - Authorities considered support measures (fund to buy shares in seven large state-owned companies; government guarantees of 12-month put options). Staff argued against use of public funds.

### Program financing, exceptional access, and SBA terms
- Financing needs:
  - Pakistan faces very sizeable financing needs; gross external financing needs remain large, particularly during the first year.
  - Privatization proceeds and additional bilateral support would help, but a sizable financing gap remains to build up reserves from low levels.
- SBA request and structure:
  - Authorities requested 23-month SBA in the amount of SDR 5.169 billion (500 percent of quota).
  - First Fund disbursement of $3.1 billion (200 percent of quota) available immediately; limited portion expected to be used for intervention to ensure orderly foreign exchange market conditions.
  - Arrangement subject to exceptional access policy; proposed exceptional access on SBA terms under “upper credit tranche” terms for a 23-month SBA.
- Exceptional access evaluation highlights:
  - Criterion 1: Decrease in capital inflows in 2007/08 compared with 2006/07 amounting to $2.5 billion or 163 percent of quota.
  - Criterion 2: External debt amounted to 27 percent of GDP at end-2007/08; public and publicly-guaranteed debt amounted to 58 percent of GDP at end-2007/08.
  - Criterion 3: Access to private capital markets existed until recently; FDI appears to be holding up.
  - Criterion 4: Strong policy reform program with recent steps to reduce fiscal deficit and capacity to implement, but risks remain very high.

### Financial risks, debt sustainability, and upside scenarios
- Downside risks:
  - Challenging political and security situation; potential policy reversals.
  - External sector risks: worse-than-expected downturn in trading partners, lower remittances from the GCC, delayed resumption of foreign portfolio investment.
  - DSA risk factors: exchange rate overshooting, higher interest rates, slower real GDP growth, higher current account deficit, lower FDI, use of public funds to support the banking system.
- Upside factors:
  - Stronger-than-expected decline in commodity prices, faster return of investor confidence, larger-than-expected donor assistance.
  - If larger-than-expected external budget support becomes available:
    - First $500 million (0.3 percent of GDP per year) used to replace noncentral bank domestic government borrowing assumed in the program to cover additional social safety net spending.
    - Any additional external financing beyond the first $500 million per year can be used to increase government spending up to a fiscal deficit of 4.7 percent of GDP in 2008/09 and 3.8 percent of GDP in 2009/10.
    - Beyond those limits, additional external financing assigned to retire government debt with the SBP and strengthen SBP’s international reserves.

### Capacity to repay and Fund exposure
- Staff view:
  - Given moderate initial external debt burden, Pakistan can discharge obligations to the Fund in a timely manner if the adjustment program is fully implemented.
  - Fund credit outstanding will peak at SDR 5.5 billion in 2010/11 (67 percent of gross reserves).
  - Debt service payments will reach about 22 percent of gross reserves and 8 percent of exports of goods and services in 2012/13 (Tables 9–10).
  - Authorities’ past record of servicing Fund obligations has been very satisfactory.

### Program phasing and monitoring
- SBA duration and reviews:
  - 23-month SBA subject to quarterly reviews.
  - Access will be frontloaded; remaining tranches disbursed per schedule (Table 11).
  - Staff to inform the Executive Board on implementation and market response within one to two months after approval.
- Monitoring framework and performance criteria:
  - Quarterly quantitative performance criteria (PC) and structural PCs and benchmarks (MEFP, Tables 1–2).
  - Key quantitative PCs include floors on SBP’s net foreign assets, ceilings on SBP’s net domestic assets, ceilings on the budget deficit, limits on SBP’s net credit to the government for end-December 2008, end-March 2009, and end-June 2009.
  - Structural PCs and benchmarks focus on social safety net, tax reform, public financial management, monetary and exchange rate policy, SBP supervisory enforcement capacity and contingency planning.
- Safeguards:
  - Updated safeguards assessment to be completed no later than at the time of the first review; Fund safeguards mission expected in January 2009.

### Key quantitative program figures and targets (selected exact stocks/flows)
- SBP net foreign assets floor (stock, in millions of U.S. dollars):
  - outst. end-Sept. 2008: 3,953
  - Prog. end-Dec. 2008: 1,165
  - Prog. end-Mar. 2009: 671
  - Prog. end-Jun. 2009: 2,782
- SBP net domestic assets ceiling (stock, in billions of Pakistani rupees):
  - outst. end-Sept. 2008: 1,250
  - Prog. end-Dec. 2008: 1,346
  - Prog. end-Mar. 2009: 1,412
  - Prog. end-Jun. 2009: 1,314
- Ceiling on net government borrowing from SBP (stock, in billions of Pakistani rupees):
  - outst. end-Sept. 2008: 1,227
  - Prog. end-Dec. 2008: 1,274
  - Prog. end-Mar. 2009: 1,274
  - Prog. end-Jun. 2009: 1,181
- Ceiling on overall budget deficit (cumulative flow, in billions of Pakistani rupees):
  - outst. end-Sept. 2008: 142
  - Prog. end-Dec. 2008: 261
  - Prog. end-Mar. 2009: 405
  - Prog. end-Jun. 2009: 562
- Maximum SBP net exposure under foreign exchange forwards and swaps: $2.75 billion (cap for end-December 2008, end-March 2009, end-June 2009).
  - SBP’s net exposure at end-September 2008: $1.9 billion.
- Stock of foreign currency deposits with resident banks at end-September 2008: $832 million.
- Fixed accounting exchange rate for adjustors: PRs 80 per $1.

### Adjustors, reporting, and TMU summary
- Adjustors related to net external program financing:
  - Excess net external program financing: excess (U.S. dollar terms) converted at PRs 80 per $1 will adjust SBP NFA floors upward and NDA and net borrowing ceilings downward in rupee terms.
  - Shortfall: floor on NFA adjusted downward by 50 percent of cumulative shortfall in U.S. dollar terms; NDA ceiling adjusted upward by 50 percent of cumulative shortfall converted at PRs 80 per $1.
- Other adjustors:
  - Project grants excess adjusts the consolidated overall budget deficit (excluding grants) upward by the cumulative excess.
  - Changes in required reserves adjust NDA ceilings per formula ∆NDA = ∆r B0 + r0 ∆B + ∆r ∆B.
  - NFA target adjusted for SBP net position under forwards and swaps and for changes in foreign currency deposits of resident banks with SBP.
- Program reporting requirements (selected timelines):
  - Monthly provisional statements on federal tax and nontax revenue, within one month.
  - Monthly (last-Saturday basis) monetary survey and SBP accounts within two weeks.
  - Monthly data on SBP’s foreign exchange reserves within one month.
  - Quarterly data on consolidated budgetary expenditure within two months.
  - Copies of new or revised ordinances/circulars regarding changes in tax policy, FX market regulations, and banking regulations no later than three days after official issuance.

### Program access, phasing, and disbursement schedule (selected)
- Board approval of SBA: November 24, 2008 — Purchase 2,067.40 million SDRs (200 percent of quota).
- Purchases and reviews (selected):
  - First Review (March 15, 2009): Purchase 568.54 million SDRs (55 percent of quota).
  - Second Review (June 15, 2009): Purchase 568.54 million SDRs (55 percent of quota).
  - Total: 5,168.50 million SDRs (500 percent of quota).

### Public finances, macro indicators, and projections (selected exact figures)
- Real GDP at factor cost (annual changes, percent):
  - 2004/05: 9.0; 2005/06: 5.8; 2006/07: 6.8; 2007/08: 5.8; 2008/09 (Est.): 3.4; 2009/10 (Proj.): 5.0.
- Consumer prices (period average, percent):
  - 2004/05: 9.3; 2005/06: 7.9; 2006/07: 7.8; 2007/08: 12.0; 2008/09 (Est.): 23.0; 2009/10 (Proj.): 13.0.
- Current account (percent of GDP; including official transfers):
  - 2006/07: -4.8; 2007/08: -8.4; 2008/09 (Est.): -6.5; 2009/10 (Proj.): -5.7.
- End-period gross official reserves (millions of U.S. dollars):
  - 2006/07: 14,302; 2007/08: 8,591; 2008/09 (Est.): 8,591; 2009/10 (Proj.): 11,291.
- Gross financing needs (millions of U.S. dollars):
  - 2007/08: 15,367; 2008/09 (Proj.): 13,373; 2009/10 (Proj.): 12,210.
- Remaining financing gap:
  - 2008/09: 4,652; 2009/10: 3,575.
  - Of which: use of Fund resources...4,752 (2008/09); 2,575 (2009/10).
- Public sector debt (percent of GDP):
  - 2004/05: 61.2; 2005/06: 55.8; 2006/07: 54.1; 2007/08: 57.9; 2008/09 (Est.): 54.6; 2009/10 (Proj.): 52.4.
- Total external debt (millions of U.S. dollars):
  - 2004/05: 34,037; 2005/06: 35,655; 2006/07: 38,699; 2007/08: 44,467; 2008/09 (Proj.): 51,315; 2009/10 (Proj.): 56,820.
- IMF obligations and projected Fund credit (millions of SDR):
  - 2008/09: 3,885.0; 2009/10: 5,466.5; 2010/11: 5,521.7; 2011/12: 4,770.1; 2012/13: 2,721.6.

### Debt sustainability, Fund exposure, and risks to the Fund
- Pakistan’s external debt-to-GDP ratio was 26½ percent by end-June 2008, down from 45 percent in 2001/02.
- Access under proposed arrangement would raise Fund GRA credit outstanding to Pakistan to:
  - 2008: 2,072.1 million SDRs (200.5 percent of quota);
  - 2009: 4,072.8 million SDRs (394.0 percent of quota);
  - 2010: 5,168.5 million SDRs (500.0 percent of quota).
- If fully disbursed, GRA credit outstanding will exceed 4 percent of GDP by June 2010 and account for about 14 percent of public external debt by 2009/10.
- Projected repayments to the Fund rise to nearly 30 percent of public external debt service in 2011/12 and about 45 percent in 2012/13.
- The proposed arrangement would reduce Fund liquidity by about 5 percent and reduce one-year forward commitment capacity (FCC) by SDR 5.2 billion.
- Major downside risks to the program: continued portfolio outflows; insufficient donor support; weak policy implementation.
- Staff conclusion: sustained and forceful implementation is essential to mitigate risks and safeguard Fund resources.

### Relations with the World Bank — coordination and joint actions
- Areas of Bank engagement (selected): PEPFM/PEFA, MTBF, PSDP review, procurement, PIFRA, PRSC, debt management TA; delivery mainly in 2009 and beyond.
- Shared responsibilities:
  - Tax administration and policy: Bank (PRSC, TARP, analytical work) and IMF (SBA) for 2008/09–2009/10.
  - Cash management and treasury single account: Bank (PRSC) and IMF (SBA), timing 2009.
  - Banking sector and financial sector reforms: Bank (TA, PRSC) and IMF (strengthening bank resolution framework), timing 2009–June 2009.
  - Energy sector reforms and pricing: Bank (automatic adjustment mechanisms; investment projects) and IMF (electricity tariff increases, SBA).

*Italic: Source — _cr08364 - 2003. Economic data are broadly adequate for surveillance and program monitoring.*

### 2003. Economic data are broadly adequate for surveillance and program monitoring.

### _cr08364 - 2003. Economic data are broadly adequate for surveillance and program monitoring.

### Executive Summary — core findings and program request
- Macroeconomic performance deteriorated significantly during 2007/08 and the first four months of 2008/09 due to adverse security developments, large increases in import prices (oil and food), and the global financial turmoil.
- Fiscal deficit rose to 7.4 percent of GDP in 2007/08, from 4.3 percent in 2006/07, driven by delays in passing through higher energy prices to consumers.
- Inflation reached 25 percent in October 2008.
- Real GDP growth slowed to 5.8 percent in 2007/08.
- Current account deficit widened to 8.4 percent of GDP (14 billion) in 2007/08.
- Gross international reserves fell to $3.4 billion (less than one month of imports) at end-October 2008.
- Authorities requested a 23-month Stand-By Arrangement for SDR 5.169 billion ($7.6 billion, 500 percent of quota) to support a macroeconomic stabilization program for 2008/09 and 2009/10.
- Program aims: tighten fiscal and monetary policies to bring down inflation, reduce the external current account deficit, and protect social stability.

### Recent developments — activity, inflation, external and fiscal balances, banking
- Real GDP growth: 5.8 percent in 2007/08 (down from 6.8 percent in 2006/07).
- Inflation: 12-month headline CPI inflation rose to 25 percent in October 2008; core inflation (excluding energy and food) increased to 18.3 percent in October 2008.
- External current account: widened to 14 billion or 8½ percent of GDP in 2007/08 (from 4.8 percent in 2006/07).
- Gross international reserves: declined from $14.3 billion at end-June 2007 to $3.4 billion at end-October 2008.
- Fiscal deficit (excluding grants): estimated 7.4 percent of GDP in 2007/08 (from 4.3 percent in 2006/07), driven by energy and food subsidies, higher interest payments, and security-related expenditures.
- State Bank of Pakistan (SBP) actions and outcomes:
  - Discount rate increased by 350 basis points starting June 2007, to 13 percent in July 2008; later increased by 200 basis points to 15 percent (noted in program summary).
  - SBP financing of the government reached PRs 950 billion ($12 billion) during July 2007–October 2008.
  - Negative real interest rates slowed rupee deposit growth and increased foreign currency deposits.
  - Credit growth to the private sector accelerated to 20 percent by September 2008.
- Banking system (as of end-June 2008) appeared well capitalized and liquid, but liquidity problems emerged for some small and mid-sized banks:
  - Authorities reduced cash reserve requirement by 4 percentage points during October–November and broadened eligible assets for statutory liquidity requirement.
  - SBP facilitated mergers of non-viable banks with sound banks.
- Financial market stress:
  - EMBIG spread for sovereign bonds rose above 2,000 basis points.
  - Karachi KSE-100 stock index fell by 40 percent by late August 2008 from record highs at end-April 2008; authorities imposed a price floor on August 27, 2008, halting trading.
- Exchange measures adopted in May 2008 (subject to Article VIII, Section 2(a) assessment for one measure):
  - 25 percent limit on advance payments for imports of goods.
  - Requirement for exchange bureaus to repatriate foreign exchange from their accounts abroad and to sell 25 percent of any foreign exchange receipts in the interbank market.
  - Prior SBP consent for outward remittances above $50,000 upon verification of bona fide nature.
  - Margin requirement of 35 percent for opening letters of credit for non-essential imports (staff is obtaining additional information to assess jurisdictional implications).
  - Government imposed regulatory duties on imports of luxury items.

### The authorities’ program — objectives and key elements
- Program objectives for 2008/09–2009/10:
  - Restore investor confidence by addressing macroeconomic imbalances.
  - Protect the poor and vulnerable during adjustment.
  - Strengthen international reserves and stop/reverse portfolio outflows.
- Program requested: 23-month SBA equivalent to 500 percent of quota, with front-loaded access to bolster reserves.
- Fiscal strategy:
  - Reduce fiscal deficit from 7.4 percent of GDP in 2007/08 to 4.2 percent in 2008/09 and to 3.3 percent in 2009/10.
  - Allow for increased spending on social safety net; seek additional donor support to fund expanded safety net and higher development spending (program includes adjustors).
  - Fiscal adjustment primarily via phasing out energy subsidies, better prioritization of development spending, and tax policy and administration measures.
  - Commitment to eliminate SBP financing of the government during October 1, 2008–June 30, 2009.
  - Tax revenue programmed to increase by ½ percentage point of GDP in 2008/09 due to tax administration measures and a 1 percentage point GST rate increase implemented with the budget.
  - Expenditure measures equivalent to 2¾ percent of GDP include phasing out energy subsidies and reprioritizing development spending.
  - Actions already taken: domestic fuel prices raised; electricity tariffs increased by an average of 18 percent on September 5; plan with World Bank to complete elimination of electricity subsidies by end-June 2009 (structural benchmark, plan due end-December 2008).
- Monetary and financial sector strategy:
  - Tighten monetary policy to bring down inflation and protect reserves; SBP stands ready to further tighten as needed and recently increased its discount rate by 200 basis points to 15 percent (program summary).
  - Eliminate SBP financing of the government.
  - Design contingency plans to address problem banks.
  - Improve monetary management and strengthen SBP bank resolution capacity.
- External financing and reserve objectives:
  - Projected financial inflows: multilateral and bilateral disbursements to government of $4.8 billion in 2008/09 (including $1.4 billion from the World Bank and $2.2 billion from the Asian Development Bank; $500 million of the latter disbursed in September).
  - External current account deficit projected to decline to 6½ percent of GDP in 2008/09, and to 5.7 percent of GDP in 2009/10.
  - Estimated external financing gap of $4.7 billion for 2008/09 to be fully covered by Fund resources.
  - Target reserves: rebuild to at least $8.6 billion (level at end-June 2008) and to $11.3 billion by end-June 2010.
  - Financing gap for 2009/10 projected at $3.6 billion to be filled with Fund resources and privatization proceeds, including from GDRs.

### Macroeconomic framework — projections and medium-term outlook
- 2008/09:
  - Real GDP growth projected: 3–3½ percent.
  - CPI inflation targeted to decline to 20 percent by June 2009 (after accounting for administered price increases).
  - External current account deficit projected: 6½ percent of GDP.
- 2009/10:
  - Real GDP growth projected: 4½–5 percent.
  - CPI inflation projected: 6 percent by June 2010.
  - External current account deficit projected: 5.7 percent of GDP.
- Medium term (to 2012/13):
  - Real GDP growth projected: increase to 6½–7 percent a year by 2012/13.
  - Inflation projected: decline to 5 percent.
  - External current account deficit projected: decline to about 3½ percent of GDP.
  - International reserves projected: increase gradually to about $14.5 billion (2.6 months of imports) by end-June 2013.
  - Fiscal sustainability hinges on substantially raising tax revenue as a key condition.

### Risks, vulnerabilities, and financing needs
- Principal risks to the program:
  - Security and implementation uncertainties.
  - A more severe-than-anticipated slowdown in economic activity in trading partners.
  - Lower-than-expected private capital inflows.
- Urgent need to mobilize additional donor support to:
  - Strengthen resilience to potential shocks.
  - Help finance the expanded social safety net.
  - Allow for higher development spending.
- External financing gaps and IMF support:
  - 2008/09 external financing gap: $4.7 billion (to be fully covered by Fund resources).
  - 2009/10 external financing gap: $3.6 billion (to be filled with Fund resources and privatization proceeds, including GDRs).

_Italic: Source — _cr08364 - 2003. Economic data are broadly adequate for surveillance and program monitoring._

### 18.      The program targets a further reduction in the fiscal deficit to 3.3 percent of

### _cr08364 - 18.      The program targets a further reduction in the fiscal deficit to 3.3 percent of

### Fiscal targets and composition
- The program targets a further reduction in the fiscal deficit to 3.3 percent of GDP in 2009/10.
- On the revenue side:
  - Tax administration measures, an increase in excises on tobacco, and a reduction in exemptions are expected to yield an additional 0.8 percent of GDP (MEFP, ¶15).
- On the expenditure side:
  - Total expenditure is programmed to remain broadly constant at about 19 percent of GDP in 2009/10.
  - The full-year effect of the elimination of energy subsidies will create room for increasing development spending by 0.9 percent of GDP (MEFP, ¶14) and for maintaining an adequate level of social safety net spending.
- Medium-term objective:
  - Further increase in tax revenue of at least 2½ percentage points of GDP (MEFP, ¶15).
  - Reduce the fiscal deficit to 2.0–2.5 percent of GDP by 2012/13 (Table 6).

### External accounts and exchange rate implications
- Projected current account deficits for 2008/09 and 2009/10 are high.
- Adjustment scenario:
  - Expected to reduce the deficit to slightly below the current account norm under the macroeconomic balance approach over the medium term (implying broad alignment of the exchange rate with fundamentals).
  - Medium-term deficit would still be above the NFA-stabilizing current account deficit, implying a 12 percent overvaluation under the external sustainability approach.

### Social safety net and mitigation measures
- Strengthening and better targeting of social assistance is an essential program element.
- Specific measures:
  - Increase social safety net spending by 0.6 percentage points of GDP in 2008/09, to 0.9 percent of GDP, to protect the poor and cushion the impact of subsidy elimination (MEFP, ¶10).
  - Develop, by end-March 2009, a strategy and a time-bound action plan to strengthen the social safety net and improve targeting to the poor, in close collaboration with the World Bank, including under the Benazir Income Support Program.
  - Implement short-term social support measures by scaling up other existing programs (structural benchmark, MEFP, ¶11).
  - Electricity tariffs incorporate a “lifeline” minimum tariff shielding low-income households consuming small amounts of electricity from a steep increase in tariffs.
  - Authorities seeking additional external assistance from bilateral donors to cover the cost of the expanded social safety net.

### Public financial management and fiscal reforms
- Key structural benchmarks and actions:
  - Transition to a single treasury account to be completed by end-June 2009 (structural benchmark) to improve control on cash disbursements and overall cash management.
  - Improve coordination among government agencies on public investment program design and implementation to strengthen project selection and execution (MEFP, ¶17).
  - Prepare a plan by end-March 2009 (structural benchmark, MEFP, ¶12) for addressing large inter-corporate debt in the energy sector, aiming for gradual settlement with limited use of budgetary resources (MEFP, ¶12).
- Tax policy and administration:
  - Initial focus on tax administration measures, with an action plan expected to be finalized by end-December 2008 (structural benchmark, MEFP, ¶15).
  - Reduce exemptions under the GST and harmonize income and GST laws in the context of the 2009/10 budget discussions (performance criterion).
  - Submit a new draft VAT law for public debate by end-2009; full revenue impact materializes over the medium term.

### Monetary policy and exchange rate stance
- Monetary tightening envisaged:
  - On November 12, 2008, the SBP raised the discount rate by 200 basis points, to 15 percent.
  - Authorities committed to increasing the discount rate further at the time of the Monetary Policy Statement at end-January 2009, or earlier, if SBP’s actual net foreign assets fall short of monthly benchmarks.
- Exchange rate policy:
  - Flexible exchange rate policy with intervention geared to achieving monthly NFA targets and smoothing excessive volatility.
  - Phase out provision of foreign exchange for oil imports; shift to interbank market starting with foreign exchange for furnace oil by February 1, 2009 (structural benchmark).
  - Eliminate exchange restriction from the limit on advance payments for imports by January 31, 2010.
  - Commitment not to impose or intensify existing restrictions or impose or modify multiple currency practices subject to Fund approval during the program period (MEFP, ¶21).
- Liquidity management and monetary policy implementation:
  - Strengthen coordination between SBP and treasury on forecasting government cash flow requirements; quarterly volumes of treasury bill placements consistent with zero SBP financing of the budget during October 1, 2008–June 30, 2009 have been agreed.
  - SBP to adopt a more transparent liquidity management framework by end-June 2009, envisaging the establishment of an interest rate corridor (MEFP, ¶19) and an increase in the frequency of SBP policy meetings.

### Central bank governance and financial sector resilience
- Governance:
  - Set up an inter-agency committee to review and strengthen legal provisions relating to SBP operational independence; committee to determine steps to align SBP legislation with best international practices by the time of the second program review (MEFP, ¶24).
  - Authorities intend to request Fund technical assistance for this purpose.
- Financial sector vulnerabilities:
  - Stress tests indicate large banks are resilient, while some small and mid-sized banks are vulnerable to large interest rate increases and deterioration in credit quality.
  - SBP preparing a contingency plan for dealing with problem private banks, to be ready by end-December 2008 (structural benchmark, MEFP, ¶22).
  - SBP’s enforcement powers to be strengthened by submitting necessary legislative amendments to parliament by end-June 2009 (performance criterion, MEFP, ¶23).
- Stock market support and policy:
  - Floor on stock prices retained until macroeconomic conditions improve.
  - Authorities considered support measures including: (i) a fund by four state-owned financial institutions to buy shares in seven large state-owned companies (with government-guaranteed borrowing); and (ii) government guarantees of 12-month put options to insure investors against stock price declines.
  - Staff argued against use of public funds to support the market; timing and terms for removal of the floor, including any use of public funds, to be decided after understandings with Fund staff.

### Program financing, exceptional access, and SBA terms
- Financing needs:
  - Pakistan faces very sizeable financing needs during the program period; overall gross external financing needs would remain large, particularly during the first year, owing to continued pressures on the financial account.
  - Private financial flows expected to be insufficient to meet balance of payments financing requirements despite large commitments from multilateral sources.
  - Privatization proceeds and additional bilateral support would help reduce external financing needs, but a sizable financing gap would remain given the need to build up reserves from low levels.
- SBA request and structure:
  - Authorities requested a 23-month SBA in the amount of SDR 5.169 billion (500 percent of quota).
  - Following the first Fund disbursement of $3.1 billion (200 percent of quota), a limited portion expected to be used for intervention to ensure orderly conditions in the foreign exchange market.
  - Arrangement is subject to exceptional access policy; proposed exceptional access on SBA terms under “upper credit tranche” terms for a 23-month SBA.
- Exceptional access evaluation (Box 1) highlights:
  - Criterion 1: Exceptional balance of payments pressure in the capital account, with a decrease in capital inflows in 2007/08 compared with 2006/07 amounting to $2.5 billion or 163 percent of quota.
  - Criterion 2: External debt amounted to 27 percent of GDP at end-2007/08; public and publicly-guaranteed debt amounted to 58 percent of GDP at end-2007/08.
  - Criterion 3: Access to private capital markets existed until recently; FDI appears to be holding up and could recover in two to three years if adjustment is successful.
  - Criterion 4: Strong policy reform program with recent steps to reduce the fiscal deficit and capacity to implement, but risks remain very high.

### Financial risks, debt sustainability, and upside scenarios
- Downside risks (significant):
  - Challenging political and security situation; program measures could intensify social tensions and lead to policy reversals.
  - External sector risks: worse-than-expected downturn in trading partners, lower remittances from the GCC, delayed resumption of foreign portfolio investment.
  - DSA risk factors: exchange rate overshooting, higher interest rates, slower real GDP growth, higher current account deficit, lower FDI, or use of public funds to support the banking system could negatively affect debt ratios.
  - Stress-test scenarios considered: combined shocks analyzed in external and fiscal DSAs; in both cases debt ratios remain sustainable.
- Upside factors:
  - Stronger-than-expected decline in commodity prices, faster return of investor confidence, larger-than-expected donor assistance.
  - If larger-than-expected external budget support becomes available:
    - The first $500 million (0.3 percent of GDP per year) will be used to replace noncentral bank domestic government borrowing assumed in the program to cover additional social safety net spending.
    - Any additional external financing beyond the first $500 million per year can be used to increase government spending up to a fiscal deficit of 4.7 percent of GDP in 2008/09 and 3.8 percent of GDP in 2009/10.
    - Beyond those limits, additional external financing will be assigned to retire government debt with the SBP and strengthen the SBP’s international reserves position.

### Capacity to repay and Fund exposure
- Staff view:
  - Given moderate initial external debt burden, Pakistan can discharge obligations to the Fund in a timely manner if the adjustment program is fully implemented.
  - Fund credit outstanding will peak at SDR 5.5 billion in 2010/11 (67 percent of gross reserves).
  - Debt service payments will reach about 22 percent of gross reserves and 8 percent of exports of goods and services in 2012/13 (Tables 9–10).
  - Authorities’ past record of servicing Fund obligations has been very satisfactory.

### Program phasing and monitoring
- SBA duration and reviews:
  - The SBA will cover 23 months and be subject to quarterly reviews.
  - Access will be frontloaded given large initial financing needs; remaining tranches to be disbursed per schedule in Table 11.
  - In line with EFM procedures, staff intends to inform the Executive Board on implementation and market response within one to two months after approval.

*Source: IMF staff report content provided in the supplied PDF extract.*

### 35.      Performance under the program will be monitored based on quarterly

### _cr08364 - 35.      Performance under the program will be monitored based on quarterly

### Monitoring framework and performance criteria
- Performance under the program will be monitored based on quarterly quantitative performance criteria (PC) and structural PCs and benchmarks (MEFP, Tables 1–2).
- Key quantitative PCs include:
  - floors on the SBP’s net foreign assets,
  - ceilings on the SBP’s net domestic assets,
  - ceilings on the budget deficit,
  - limits on SBP’s net credit to the government for end-December 2008, end-March 2009, and end-June 2009.
- Structural PCs and benchmarks focus on areas considered critical for achieving the program’s objectives, including:
  - the social safety net,
  - tax reform,
  - public financial management,
  - monetary and exchange rate policy,
  - the SBP’s supervisory enforcement capacity and contingency planning (Box 2).
- Note: The establishment of performance criteria for a 12-month period is not proposed because of substantial uncertainties on economic trends.

### Safeguards
- An updated safeguards assessment will be completed no later than at the time of the first review.
- The authorities are providing the required documentation and a Fund safeguards mission is expected to take place in January 2009.

### Rationale for proposed structural conditionality (Box 2)
- Monetary and exchange rate policy:
  - Subordinating foreign exchange intervention policy to the achievement of the SBP’s NFA targets is a key program commitment to ensure sufficient exchange rate flexibility, achieve reserve targets, and promote current account adjustment.
  - The SBP’s provision of foreign exchange for oil imports will be phased out according to a schedule (MEFP, ¶20), with the elimination of provisions for furnace oil by February 1, 2009 being the first step (structural benchmark, MFEP, ¶20).
- Banking sector issues:
  - The SBP will finalize a contingency plan for handling problem private banks by end-December 2008 (structural benchmark, MEFP, ¶22).
  - Submitting amendments to the banking legislation to Parliament by end-June 2009 is essential to enhance the effectiveness of SBP enforcement powers (performance criterion, MEFP, ¶23).
- Fiscal structural issues:
  - Structural performance criteria and benchmarks relate to expenditure and revenue measures and fiscal management to reduce the fiscal deficit and eliminate SBP financing of the government.
  - A full description of required reforms in tax administration, including an action plan for harmonizing the GST and income tax administration, will be finalized by end-December 2008 (structural benchmark, MFEP, ¶15).
  - The government will submit, by end-June 2009, draft legislative amendments to parliament to harmonize the income tax and GST laws and reduce exemptions (performance criterion, MFEP, ¶15).
  - The government will finalize, by end-December 2008, the schedule for further electricity tariff adjustments during 2008/09 with a view to eliminating tariff differential subsidies by end-June 2009 (structural benchmark, MFEP, ¶9).
  - The government will prepare a plan for eliminating the inter-corporate circular debt by end-March 2009 (structural benchmark, MFEP, ¶12).
  - The transition to a single treasury account will be completed by end-June 2009 (structural benchmark, ¶17).
- Social protection measures:
  - In close collaboration with the World Bank, the government will develop a strategy and a time-bound action plan, by end-March 2009, for the adoption of specific measures to strengthen the social safety net and improve targeting to the poor (structural benchmark, MFEP, ¶11).

### Staff appraisal — macroeconomic assessment and program objectives
- Current macroeconomic situation:
  - Pakistan’s economy has been severely affected by adverse security developments, large exogenous shocks, and policy inaction during the political transition.
  - Delayed pass-through of international oil and food price increases contributed to a marked deterioration of the external and fiscal positions.
  - Monetization of the fiscal deficit fueled inflationary pressures and contributed to a significant widening of the external current account deficit.
  - Weakening investor confidence and global financial turmoil resulted in a slowdown of capital inflows, reversal of portfolio flows, and capital flight.
  - Gross official reserves have declined sharply to a precarious level of less than one month of imports, even after a substantial depreciation of the rupee.
- Program objectives for 2008/09 and 2009/10:
  - Address current macroeconomic imbalances while preserving social stability and protecting the poor.
  - Envisaged fiscal and monetary tightening to bring down inflation and reduce the external current account deficit.
  - Scaled up donor support and restoration of investor confidence are expected to strengthen international reserves.
  - Forceful and sustained implementation is key to program success.

### Fiscal policy and public financial management
- Fiscal consolidation is essential to put public finances on a sustainable path and eliminate SBP financing of the government.
- The authorities have prepared a comprehensive package of revenue and expenditure measures for substantial fiscal adjustment in 2008/09 and 2009/10.
- Fiscal program priorities:
  - Phase out energy subsidies and significantly strengthen tax revenue, which is exceptionally low by international standards.
  - Accommodate an expanded and more effective social safety net.
- Specific actions and rationale:
  - Significant adjustment in domestic fuel prices already implemented, leading to elimination of fuel subsidies.
  - Completing elimination of electricity subsidies would help achieve program budget targets and reduce distortions.
  - Implementing tax policy and administration measures will require sustained efforts and strong political determination.
  - Public financial management reforms are necessary to ensure transparency, accountability, and improve budget cash management.
  - A plan to address the inter-corporate circular debt in the energy sector should be developed without further delay.
- Medium-term fiscal goal:
  - Fiscal efforts should continue beyond the program period to reduce the fiscal deficit to 2–2½ percent of GDP while allowing for significantly higher spending in infrastructure and the social sectors.
  - Measures needed include broadening the GST base, significantly reducing income tax exemptions, and further improving tax enforcement.

### Social safety net
- A comprehensive and effective social safety net is a key priority.
- Urgent need to improve targeting and delivery mechanisms.
- While a comprehensive system is being designed with World Bank assistance, existing social support programs could be scaled up.

### Monetary policy, exchange rate, and reserves
- A tighter monetary policy is essential to:
  - Protect international reserves,
  - Help bring down inflation,
  - Avoid further central bank financing of the government.
- The recent increase in the SBP’s discount rate is a step in the right direction; authorities should be ready to raise the discount rate further if monthly program benchmarks for reserves are not achieved or treasury bill auction results are insufficient to eliminate SBP financing of the government.
- SBP and the treasury should improve coordination in forecasting the government’s cash flow and domestic debt management to ensure targeted placement of treasury bills with commercial banks and non-banks.
- Reforms to strengthen SBP’s operational independence and improve liquidity management will increase the credibility and agility of monetary policy.
- Exchange rate flexibility is needed to achieve reserves targets.
  - The schedule for eliminating the SBP’s allocation of foreign exchange for oil imports should be adhered to.
  - Given the authorities’ intention to eliminate the exchange restriction related to advance payments for imports by end-January 2010, the staff proposes the approval of this restriction as temporary, nondiscriminatory among Fund members, and imposed for balance of payments reasons.

### Financial sector stability and crisis management
- Financial sector vulnerabilities need close monitoring and a crisis management framework should be put in place without delay.
- SBP actions:
  - Finalize contingency plans for handling problem banks promptly.
  - Strengthen enforcement powers by amending current legislation.
  - If liquidity pressures reoccur, provide targeted support to solvent banks and seek resolution of insolvent banks rather than generalized liquidity injections.
- Market measures:
  - Removal of the current floor on stock prices should occur only after macroeconomic stabilization and improved investor confidence.
  - Authorities should avoid using public funds to support stock prices.

### Access, risks, and donor assistance
- The exceptional level of access under the proposed arrangement is 500 percent of quota, justified by Pakistan’s balance of payments needs.
- Risks to the program and financial stability remain high, arising from:
  - security uncertainties,
  - possible policy reversals,
  - a more severe-than-anticipated slowdown in trading partners,
  - lower-than-expected private capital inflows,
  - possible negative impact of removing the floor on stock prices on portfolio flows.
- In the absence of Fund financing, Pakistan is likely to experience a severe balance of payments crisis with significant hardship and possible region-wide spillover effects.
- Additional donor assistance is urgently needed:
  - Additional concessional financing (preferably in the form of grants) will allow higher social and development spending, enhancing social stability and domestic political support for the program.
  - Additional concessional financing will contribute to faster accumulation of international reserves, bolstering investor confidence and external viability.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08364.pdf*

### 48.      In view of Pakistan’s balance of payments needs and the comprehensive package

### _cr08364 - 48.      In view of Pakistan’s balance of payments needs and the comprehensive package

### Stand-By Arrangement (SBA) request
- Staff supports the authorities’ request for an SBA in the amount of SDR 5.169 billion.
- Government request: Stand-By Arrangement with exceptional access in an amount of SDR 5.169 billion (23-month SBA covering 2008/09–2009/10).

### Macroeconomic outcomes and near-term projections (selected indicators)
- Real GDP at factor cost (annual changes, percent): 2004/05: 9.0; 2005/06: 5.8; 2006/07: 6.8; 2007/08: 5.8; 2008/09 (Est.): 3.4; 2009/10 (Proj.): 5.0.
- Consumer prices (period average, percent): 2004/05: 9.3; 2005/06: 7.9; 2006/07: 7.8; 2007/08: 12.0; 2008/09 (Est.): 23.0; 2009/10 (Proj.): 13.0.
- Consumer prices (end of period, percent): 2004/05: 8.7; 2005/06: 7.6; 2006/07: 7.0; 2007/08: 21.5; 2008/09 (Est.): 20.0; 2009/10 (Proj.): 6.0.
- Pakistani rupees per U.S. dollar (period average): 2004/05: 3.10; 2005/06: 0.8; 2006/07: 1.3. (Source table shows additional entries omitted here.)
- GDP at market prices (in billions of Pakistani rupees): 2004/05: 6,500; 2005/06: 7,623; 2006/07: 8,723; 2007/08: 10,478; 2008/09 (Proj.): 13,384; 2009/10 (Proj.): 15,880.
- GDP at market prices (in billions of U.S. dollars): 2004/05: 109.6; 2005/06: 127.5; 2006/07: 144.0; 2007/08: 167.6.

### External sector—imbalances, reserves, and financing needs
- Current account (in percent of GDP; including official transfers): 2006/07: -4.8; 2007/08: -8.4; 2008/09 (Est.): -6.5; 2009/10 (Proj.): -5.7.
- Current account (in millions of U.S. dollars): 2006/07: -6,878; 2007/08: -14,036; 2008/09 (Est.): -10,622; 2009/10 (Proj.): -9,738.
- Exports, f.o.b. (U.S. dollars): 2006/07: 17,278; 2007/08: 20,122; 2008/09 (Est.): 22,537; 2009/10 (Proj.): 25,016.
- Imports, f.o.b. (U.S. dollars): 2006/07: -26,989; 2007/08: -35,417; 2008/09 (Est.): -35,810; 2009/10 (Proj.): -37,864.
- End-period gross official reserves (millions of U.S. dollars): 2006/07: 14,302; 2007/08: 8,591; 2008/09 (Est.): 8,591; 2009/10 (Proj.): 11,291.
- Gross financing needs (in millions of U.S. dollars): 2007/08: 15,367; 2008/09 (Proj.): 13,373; 2009/10 (Proj.): 12,210.
- Table 8 (Gross Financing Requirements and Financing Gaps): Gross external financing requirements—2007/08: 15,367; 2008/09 (Proj.): 13,373; 2009/10 (Proj.): 12,210.
  - Current account deficit component (millions of U.S. dollars): 2007/08: 14,036; 2008/09: 10,622; 2009/10: 9,738.
  - Amortization of medium- and long-term debt (millions of U.S. dollars): 2007/08: 1,306; 2008/09: 2,039; 2009/10: 1,927.
  - Available financing (millions of U.S. dollars): 2007/08: 15,367; 2008/09: 8,722; 2009/10: 8,635.
  - Remaining financing gap: 2007/08: 0; 2008/09: 4,652; 2009/10: 3,575.
  - Of which: use of Fund resources...4,752 (2008/09); 2,575 (2009/10).

### Public finances, deficits, and debt
- Revenue and grants (percent of GDP): 2004/05: 14.1; 2005/06: 14.7; 2006/07: 15.2; 2007/08: 14.6; 2008/09 (Est.): 15.1; 2009/10 (Proj.): 16.1.
- Expenditure (including statistical discrepancy, percent of GDP): 2004/05: 17.2; 2005/06: 18.4; 2006/07: 19.2; 2007/08: 21.7; 2008/09 (Est.): 19.1; 2009/10 (Proj.): 19.2.
- Budget balance (including grants, percent of GDP): 2004/05: -3.0; 2005/06: -3.7; 2006/07: -4.0; 2007/08: -7.1; 2008/09 (Est.): -4.0; 2009/10 (Proj.): -3.1.
- Primary balance (percent of GDP): 2004/05: 0.2; 2005/06: -0.6; 2006/07: 0.2; 2007/08: -2.5; 2008/09 (Est.): 0.6; 2009/10 (Proj.): 1.6.
- Total government debt (percent of GDP): 2004/05: 61.2; 2005/06: 55.8; 2006/07: 54.1; 2007/08: 57.9; 2008/09 (Est.): 54.6; 2009/10 (Proj.): 52.4.
- External government debt (percent of GDP): 2004/05: 27.7; 2005/06: 25.2; 2006/07: 24.2; 2007/08: 26.2; 2008/09 (Est.): 26.9; 2009/10 (Proj.): 27.1.
- Domestic government debt (percent of GDP): 2004/05: 33.5; 2005/06: 30.7; 2006/07: 29.9; 2007/08: 31.7; 2008/09 (Est.): 27.7; 2009/10 (Proj.): 25.4.
- Consolidated government budget (2008/09 estimates, in billions of Pakistani rupees):
  - Revenue and grants (2008/09 Year): 2,018; Revenue: 1,995; Tax revenue: 1,468.
  - Expenditure (2008/09 Year): 2,546.
  - Overall Deficit (including grants, 2008/09 Year): -540 (financing 540).
  - Underlying budget balance (excluding grants and earthquake, 2008/09 Year): -535.
- Table 12 (Public Sector Debt Sustainability summary):
  - Public sector debt (percent of GDP): 2004/05: 61.2; 2005/06: 55.8; 2006/07: 54.1; 2007/08: 57.9; 2008/09 (Est.): 54.6; 2009/10 (Proj.): 52.4; 2010/11 (Proj.): 50.7; 2011/12 (Proj.): 48.8; 2012/13 (Proj.): 46.2; 2013/14 (Proj.): 43.8.
  - Debt-stabilizing primary balance (percent of GDP): -0.9 (reported in table footnote).
  - Gross financing need (percent of GDP): 2004/05: 19.0; 2005/06: 20.7; 2006/07: 22.0; 2007/08: 24.2; 2008/09 (Est.): 19.7; 2009/10 (Proj.): 17.3.

### Debt sustainability and stress/test scenarios
- Public debt stress tests (Figure 5 / Table 12 summaries):
  - Baseline public debt projections: see Public sector debt series (54.6 in 2008/09; 52.4 in 2009/10).
  - Scenarios include: Growth shock, Interest rate shock, Primary balance shock, Combined shock, Real depreciation and contingent liabilities shock.
  - One scenario includes a one-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2009/10 (definition provided).
- External debt stress tests (Figure 6 / Table 13 summaries):
  - External debt (percent of GDP): Baseline series shows 31.4 in 2008/09; 33.2 in 2009/10; projections decline thereafter.
  - Individual shocks include: CA shock, FDI shock, Real depreciation shock (one-time real depreciation of 30 percent occurs in 2008/09), Growth shock.
  - Combined shock defined as combined impact of shocks to growth, current account, FDI, and real depreciation.
- Table 13 (External Debt Sustainability Framework): gross external financing need (in percent of GDP): 2004/05: 3.0; 2005/06: 5.2; 2006/07: 5.8; 2007/08: 9.2; 2008/09 (Est.): 8.2; 2009/10 (Proj.): 7.1.

### Monetary and financial sector indicators
- Broad money (12-month percent change): 2003/04–2007/08 series shown in figures; specific table values:
  - Broad money growth (12-month): e.g., Table 4 shows broad money 3,407 (2005/06), 4,065 (2006/07), 4,689 (2007/08) in billions of Pakistani rupees; growth rates (12-month) listed (e.g., Broad money 19.3 percent for 2006/07 in one table).
- Reserve money (end-period, in billions of Pakistani rupees): 2005/06: 1,001; 2006/07: 1,210; 2007/08: 1,471; 2008/09 (Est.): 1,559; 2009/10 (Proj.): 1,447.
- Banks' net claims on government (end-year stocks; in billions of rupees): chart indicates large increases up to roughly 1,600 (2007/08).
- Interest rates (selected): Six-month treasury bill rate (period average): 2004/05: 4.7; 2005/06: 8.2; 2006/07: 8.8. KIBOR, lending and deposit rates shown in figures across 2005–2008.
- Financial sector vulnerability indicators (Table 9 highlights):
  - Real GDP growth (market prices, percent): 2005/06: 6.2; 2006/07: 6.2; 2007/08: 5.8; 2008/09: 3.4; 2009/10: 5.0.
  - EMBI spread and KSE-100 indices shown in figures for July-07–Oct-08 (indicative market stress).

### External debt and composition
- Total external debt (Table 14, end-period, in millions of U.S. dollars): 2004/05: 34,037; 2005/06: 35,655; 2006/07: 38,699; 2007/08: 44,467; 2008/09 (Proj.): 51,315; 2009/10 (Proj.): 56,820; 2010/11 (Proj.): 59,628; 2011/12 (Proj.): 61,799.
- Public and publicly guaranteed debt (excl. IMF) (millions of U.S. dollars): 2004/05: 31,084; 2005/06: 32,579; 2006/07: 35,290; 2007/08: 40,243; 2008/09 (Proj.): 42,379; 2009/10 (Proj.): 45,244.
- IMF obligations and projected Fund credit (Table 10):
  - Projected level of credit outstanding (Total, in millions of SDR): 2008/09: 3,885.0; 2009/10: 5,466.5; 2010/11: 5,521.7; 2011/12: 4,770.1; 2012/13: 2,721.6.
  - Stand-by Arrangements component (in millions of SDR): 2008/09: 3,204.5; 2009/10: 4,941.1; 2010/11: 5,168.5.
  - Projected Debt Service to the Fund (Total, in millions of SDR): 2008/09: 184.6; 2009/10: 286.4; 2010/11: 360.8; 2011/12: 942.8; 2012/13: 2,189.1.

### Program access, phasing, and review schedule (proposed SBA)
- Board approval of SBA: November 24, 2008 — Purchase 2,067.40 million SDRs (200 percent of quota).
- Phased reviews and purchases (table of access and phasing):
  - First Review (March 15, 2009): Purchase 568.54 million SDRs (55 percent of quota).
  - Second Review (June 15, 2009): Purchase 568.54 million SDRs (55 percent of quota).
  - Third Review (September 15, 2009): Purchase 434.15 million SDRs (42 percent of quota).
  - Fourth Review (December 15, 2009): Purchase 434.15 million SDRs (42 percent of quota).
  - Fifth Review (March 15, 2010): Purchase 434.15 million SDRs (42 percent of quota).
  - Sixth Review (June 15, 2010): Purchase 434.15 million SDRs (42 percent of quota).
  - Seventh Review (September 15, 2010): Purchase 227.42 million SDRs (22 percent of quota).
  - Total: 5,168.50 million SDRs (500 percent of quota).

### Key program elements and institutional commitments (from attachments)
- Attachment I: Letter of Intent (November 20, 2008) from Pakistani authorities requests SBA with exceptional access of SDR 5.169 billion; government commits to provide information and to consult with the Fund on revisions.
- Attachment II: Memorandum on Economic and Financial Policies (MEFP) covering November 2008–June 2010 sets out macro stabilization and structural policies underpinning the SBA.

*Sources: Pakistani authorities; and Fund staff estimates and projections, as presented in the referenced IMF document.*

### 1.      In the last decade, Pakistan’s economy witnessed a major economic

### _cr08364 - 1.      In the last decade, Pakistan’s economy witnessed a major economic

### Economic transformation and key outcomes (2000/01–2007/08)
- Real GDP increased from $60 billion in 2000/01 to $170 billion in 2007/08 (fiscal year starts July 1st).
- Per capita income rose from under $500 to over $1,000.
- Volume of international trade increased from about $20 billion to nearly $60 billion.
- For most of this period, real GDP grew at more than 7 percent a year with relative price stability.
- Gross official reserves increased to $14.3 billion (3.8 months of imports) at end-June 2007.
- Large capital inflows financed the current account deficit and facilitated re-entry into international capital markets.
- Buoyant output growth, low inflation, and social policies contributed to a reduction in poverty and improvement in many social indicators.
- Structural reforms implemented with IFI support included market liberalization, privatization of large state-owned enterprises, establishment of market-based regulatory bodies, and measures to reduce the cost of doing business.

### Deterioration in 2007/08 and early 2008/09: shocks and outcomes
- Real GDP growth slowed to 5.8 percent in 2007/08 (6.8 percent in 2006/07), driven by weaker agricultural and manufacturing sectors.
- Headline CPI 12-month inflation rose to 25 percent in October 2008; core inflation (excluding energy and food) increased to 18 percent.
- External current account deficit widened to about $14 billion or 8½ percent of GDP in 2007/08.
  - Imports rose by more than 30 percent, including an increase of $4 billion (2½ percent of GDP) in the value of oil imports.
  - Surplus in the financial account declined to $7.7 billion from $10.1 billion in 2006/07.
  - Gross international reserves of SBP declined by $5.7 billion to $8.6 billion at end-June 2008, and dwindled to $3.4 billion (less than one month of imports) as of end-October 2008.
- Fiscal deficit (excluding grants) estimated to have risen to 7.4 percent of GDP in 2007/08, from 4.3 percent in 2006/07, driven by:
  - Substantial increase in energy and food subsidies (international price rises not passed through to consumers),
  - Higher than envisaged interest payments,
  - Additional security-related expenditures.
  - The deficit was largely covered through SBP financing.
- Monetary policy actions and liquidity:
  - SBP increased its discount rate by 350 basis points to 13 percent between July 2007 and July 2008.
  - SBP financing of the government continued in July–October 2008.
  - Banking system well capitalized and liquid as of end-June 2008, but liquidity problems emerged during July–October 2008 due to dollarization and deposit outflows.
  - SBP reduced reserve requirement by 4 percentage points in October and eased liquidity requirements; encouraged merger of four small banks.
- Financial markets and exchange rate:
  - Karachi KSE-100 index dropped by one third after record highs by end-April 2008; floor on declines imposed August 27, 2008.
  - EMBIG spread increased to over 2,000 basis points.
  - Rupee depreciated by 30 percent since end-March 2008.
  - SBP adopted temporary exchange measures in May 2008; government imposed regulatory duties on imports of luxury items.

### Stabilization policies: macroeconomic outlook and objectives
- Government program aims to stabilize macroeconomic situation and restore investor confidence through significant fiscal consolidation and tighter monetary policy.
- Projections and targets:
  - 12-month inflation projected to decline to 20 percent at end-June 2009 (after accounting for administered energy price increases).
  - Real GDP growth projected to slow to 3–3½ percent in 2008/09.
  - External current account deficit projected to narrow to $10.6 billion (6.5 percent of GDP) in 2008/09.
  - Financial account surplus projected to decline to $6.2 billion in 2008/09, with IFI disbursements of about $4 billion offset by weaker FDI and portfolio flows.
  - Target to increase gross official reserves to $8.6 billion by end-June 2009 (the level at end-June 2008); residual financing gap of $4.7 billion to be covered by drawing on IMF resources.
  - Medium-term growth: real GDP growth to increase to 5 percent in 2009/10, rising gradually to 6½–7 percent a year by 2012/13, driven by increased investment and structural reforms.
  - Average inflation targeted to decline to 13 percent in 2009/10, and to 5 percent by 2012/13.
  - External current account deficit projected to decline to 5.7 percent of GDP in 2009/10 and to 3.6 percent of GDP by 2012/13.
  - Gross international reserves expected to increase to $14.5 billion (2.6 months of projected imports) by 2012/13.
  - External debt projected to be reduced to 29 percent of GDP by 2012/13.
  - External financing gap for 2009/10 projected at $3.6 billion, to be covered by IMF disbursements and GDR proceeds; external financing gaps to be fully eliminated by end of the SBA.

### Fiscal policy: targets, measures, and social protection
- Fiscal targets and composition:
  - Fiscal deficit (excluding grants) targeted to decline to 4.2 percent of GDP (PRs 562 billion) in 2008/09, from 7.4 percent in 2007/08.
  - Measures to achieve the target: increase tax revenue by 0.6 percentage points of GDP; reduce non-interest current expenditure by about 1½ percentage points of GDP (mainly by eliminating oil subsidies by December 2008 and electricity subsidies by June 2009); reduce domestically-financed development spending by about 1 percentage point of GDP.
- Implemented measures:
  - Petroleum prices adjusted three times since June 2008, leading to complete elimination of petroleum subsidies.
  - Electricity tariffs adjusted by an average of 18 percent effective September 5, 2008.
  - Pace of development spending slowed; research and development subsidy for textile industry fully eliminated; wheat procurement prices raised to international levels; GST rate raised by one percentage point to 16 percent.
- Additional planned measures:
  - Electricity tariff differential subsidies to be fully eliminated by end-June 2009; average base tariff to be further increased during 2008/09 according to a schedule to be agreed with the World Bank by end-December 2008 (structural benchmark); fuel and other surcharges to be used as necessary.
  - Strengthen tax enforcement during the remainder of the fiscal year; continue fuel price adjustments to pass through international price changes.
- Social safety net expansion:
  - Fiscal program envisages increase in social safety net spending of 0.6 percentage points of GDP, to 0.9 percent of GDP in 2008/09.
  - Benazir Income Support Program (BISP) launched with budget allocation PRs 34 billion (0.3 percent of GDP).
  - Design of BISP (targeting and delivery) to be reviewed in first half of 2009 in consultation with the World Bank.
  - Plans to expand social safety net spending by an additional 0.3 percent of GDP, seeking external assistance (mainly grants) from donors; additional funds to scale up existing programs, in particular cash transfers under the Bait-ul-Mal program; part of resources may cover larger than envisaged electricity subsidies for poor households.
  - Government to prepare, by end-March 2009, a strategy and time-bound action plan for adoption of specific social safety net measures (in cooperation with the World Bank); first program review to assess progress.
- Circular debt and public financial management:
  - Government to prepare, by end-March 2009, a plan for eliminating inter-corporate circular debt within the fiscal deficit target, identifying all elements, validating claims, scheduling discharges, and setting a timeframe for Federal Adjuster interventions.
  - Commitment to limit SBP financing of the budget to zero on a cumulative basis during October 1, 2008–June 30, 2009; financing during this period to come from available external disbursements (already committed), accelerated privatization, issuance of treasury bills, Pakistan Investment Bonds, Ijara Sukuk, and National Savings Scheme instruments.
  - Fiscal deficit envisaged to fall further to 3.3 percent of GDP in 2009/10 and to 2–2½ percent of GDP by 2012/13.
  - Government committed to increasing tax revenue by at least 3½ percentage points of GDP over the medium term through broadening the GST base, reducing income tax exemptions, and improving tax enforcement.
  - Public financial management reforms to continue, including implementation of a single treasury account with consolidation of government funds in SBP account by end-June 2009; strengthened coordination between the Planning Commission and Ministry of Finance in implementing the medium-term budget framework.

### Monetary policy, exchange rate policy, and financial sector measures
- Monetary policy tightening and liquidity framework:
  - SBP recently increased its discount rate by 200 basis points to 15 percent.
  - Interest rate policy to be flexible to protect reserves, bring down inflation, and allow government to place T-bills and other securities with banks and non-banks to avoid central bank financing.
  - Further increase in the discount rate to be considered at the monetary policy statement scheduled for end-January 2009; earlier increase triggered if actual reserves for end-November and end-December 2008 fall short of program monthly floors on SBP’s net foreign assets.
  - Corrective measures to be agreed with Fund staff if T-bill auction scheduled for November 19 falls short of announced target.
- Improvements in liquidity management:
  - SBP and Ministry of Finance agreed on quarterly volumes of treasury bill placements consistent with zero SBP financing of the budget during October 1, 2008–June 30, 2009.
  - SBP issued an auction calendar for November–December 2008 on November 1, 2008; future calendars to be issued quarterly one month in advance.
  - SBP to review liquidity management procedures and adopt and publicize a transparent liquidity management framework by end-July 2009 as part of its Monetary Policy Statement. Framework key elements:
    - Announcement of an explicit corridor for money market interest rates: SBP’s reverse repo rate as the ceiling, and a standing repo facility to absorb excess liquidity as the floor.
    - Treasury to provide SBP with T-bills, as needed, to conduct open market operations.
- Exchange rate policy and foreign exchange measures:
  - SBP committed to pursuing a flexible exchange rate policy; interventions (including provision of foreign exchange for oil imports) aimed at meeting program reserve targets.
  - Phasing out SBP provision of foreign exchange for oil imports according to schedule:
    - Furnace oil—by February 1, 2009.
    - Diesel and other refined products—by August 1, 2009.
    - Crude oil—by February 1, 2010.
  - SBP intends to eliminate any exchange restriction subject to approval under Article VIII of the IMF’s Articles of Agreement during the program period.
    - Exchange restriction on advance import payments against letters of credit to be eliminated by end-January 2010, subject to marked improvement in the balance of payments.
    - No intensification of existing restrictions and no new exchange restrictions or multiple currency practices to be introduced during the program period.
- Financial sector contingency and bank resolution:
  - SBP to prepare a contingency plan to deal with problem private banks by end-December 2008, including criteria for SBP liquidity support, assessment of bank problems, and intervention procedures.
  - SBP has already addressed problem banks through mergers; guarantees in the interbank market would be provided in limited amounts only to solvent banks if severe strains emerge.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08364.pdf*

### 23.      To enhance the effectiveness of SBP enforcement powers, necessary amendments

### 23.      To enhance the effectiveness of SBP enforcement powers, necessary amendments

### Strengthening SBP enforcement powers and bank resolution (paras 23, 24)
- Amendments to the Banking Companies Ordinance will be submitted to Parliament by end-June 2009 to strengthen the SBP’s ability to:
  - (i) change management in banks;
  - (ii) impose losses on shareholders by writing down their capital;
  - (iii) intervene and take ownership of banks;
  - (iv) appoint administrators to operate banks; and
  - (v) restructure banks.
- Legal provisions relating to the operational independence of the SBP will be reviewed and strengthened based on:
  - recommendations of an interagency committee to be established by mid-November 2008; and
  - technical recommendations from the IMF.
- The second program review will focus on specific details regarding required legislative changes in this area.

### Stock market support and floor on stock prices (para 25)
- The government does not intend to remove the current floor on stock prices until after the Fund-supported program is approved and the international reserves position is strengthened.
- The timing and terms for removing the floor on stock prices, including any use of public funds to support the stock market, will be decided after reaching understandings with Fund staff.

### Risks and contingencies (paras 26–27)
- Potential availability of larger-than-expected external budget support in 2008/09 and 2009/10:
  - Any additional external budget support to cover increased social safety net spending up to $500 million per year (0.3 percent of GDP) will be used to replace non-central bank domestic borrowing assumed under the program.
  - Provided that downside risks do not materialize, government will use additional external budget financing beyond the first $500 million per year to further increase spending, up to:
    - a fiscal deficit of 4.7 percent of GDP in 2008/09, and
    - a fiscal deficit of 3.8 percent of GDP in 2009/10.
  - Any external financing support exceeding these limits will be used to retire government debt with the SBP and strengthen the SBP’s international reserves position.
- Key downside risks to the program:
  - lower-than-expected private capital inflows;
  - a reversal of the current trend of declining oil prices;
  - a more severe-than-anticipated economic slowdown in trading partner countries.
- If these risks materialize, the government will adjust policies in close consultation with IMF staff to ensure a sustainable external position by the end of the program period.

### Program monitoring and reviews (paras 28–30)
- The program will be subject to quarterly reviews and quarterly performance criteria as set out in the Technical Memorandum of Understanding (TMU).
- Completion of the first two reviews (scheduled for end-March 2009 and end-June 2009) requires observance of the quantitative performance criteria for:
  - end-December 2008 and end-March 2009, respectively, as specified in Table 1.
- An updated safeguards assessment of the SBP will be conducted in the context of the first review.
- The government authorizes the IMF to publish the Letter of Intent, its attachments, and the related staff report.

### Key quantitative performance criteria and targets (Table 1; exact stocks/flows as reported)
- Floor on net foreign assets of the SBP* (stock, in millions of U.S. dollars):
  - outst. end-Sept. 2008: 3,953
  - Prog. end-Dec. 2008: 1,165
  - Prog. end-Mar. 2009: 671
  - Prog. end-Jun. 2009: 2,782
- Ceiling on net domestic assets of the SBP* (stock, in billions of Pakistani rupees):
  - outst. end-Sept. 2008: 1,250
  - Prog. end-Dec. 2008: 1,346
  - Prog. end-Mar. 2009: 1,412
  - Prog. end-Jun. 2009: 1,314
- Ceiling on net government borrowing from SBP* (stock, in billions of Pakistani rupees):
  - outst. end-Sept. 2008: 1,227
  - Prog. end-Dec. 2008: 1,274
  - Prog. end-Mar. 2009: 1,274
  - Prog. end-Jun. 2009: 1,181
- Ceiling on overall budget deficit* (cumulative flow, in billions of Pakistani rupees):
  - outst. end-Sept. 2008: 142
  - Prog. end-Dec. 2008: 261
  - Prog. end-Mar. 2009: 405
  - Prog. end-Jun. 2009: 562
- Ceiling on outstanding stock of short-term public and publicly guaranteed external debt* (in millions of U.S. dollars):
  - outst. end-Sept. 2008: 515
  - Prog. end-Dec. 2008: 1,500
  - Prog. end-Mar. 2009: 1,500
  - Prog. end-Jun. 2009: 1,500
- Cumulative ceiling on contracting of nonconcessional medium- and long-term public and publicly guaranteed external debt* (in millions of U.S. dollars) 1/:
  - outst. end-Sept. 2008: 9,500
  - Prog. end-Dec. 2008: 9,500
  - Prog. end-Mar. 2009: 9,500
  - Prog. end-Jun. 2009: 9,500
- Accumulation of external payments arrears (continuous performance criterion during the program period)* (in millions of U.S. dollars):
  - outst. and Prog. entries: 0 0 0 0
- Continuous ceiling on SBP's foreign currency swaps and forward sales* (in millions of U.S. dollars):
  - outst. end-Sept. 2008: 1,900
  - Prog. end-Dec. 2008: 2,750
  - Prog. end-Mar. 2009: 2,750
  - Prog. end-Jun. 2009: 2,750
- Memorandum items (selected):
  - Net external program financing (in millions of U.S. dollars): outst. -531; Prog. end-Dec. 2008: 379; Prog. end-Mar. 2009: 182,503
  - External project grants (in millions of U.S. dollars): outst. 139; Prog. end-Dec. 2008: 95; Prog. end-Mar. 2009: 180
  - Foreign Exchange cash reserve requirement (CRR, incl. special CRR) deposits in SBP (in millions of U.S. dollars): 832 (for outst. and all Prog. dates)
  - Weekly cash reserve requirement ratios (in percentage points):
    - Rupee deposits (less than one year maturity): 9 5 5 5
    - Rupee deposits (more than one year maturity): 0 0 0 0
    - Foreign currency deposits CRR: 5 5 5 5
    - Foreign currency deposits special CRR: 15 15 15 15
- Notes:
  - * denotes performance criteria.
  - 1/ Excludes IMF.

### Prior actions, structural performance criteria, and benchmarks (Table 2; selections)
- Prior actions (implemented before Board consideration of the program):
  - The SBP’s discount rate was increased by 200 basis points.
  - Electricity tariffs were increased by an average 18 percent effective September 5, 2008.
  - The SBP and the government agreed on quarterly volumes of treasury bills to be issued, and published the expected volume for the remainder of the second quarter of 2008/09.
- Performance criteria:
  - Amendments to the banking legislation will be submitted to Parliament by end-June 2009 to enhance the effectiveness of SBP enforcement powers in the area of banking supervision.
  - The government will submit, by end-June 2009, draft legislative amendments to parliament to harmonize the income tax and GST laws, including for tax administration purposes, and to reduce exemptions for both taxes.
- Benchmarks (selected):
  - A contingency plan for handling problem private banks to be finalized by end-December 2008.
  - A full description of required reforms in tax administration, including an action plan for harmonizing the GST and income tax administration, to be finalized by end-December 2008.
  - Schedule for further electricity tariff adjustments during 2008/09 to be finalized by end-December 2008, with a view to eliminating tariff differential subsidies by end-June 2009.
  - The SBP’s provision of foreign exchange for furnace oil to be eliminated by February 1, 2009.
  - A strategy and time-bound action plan for strengthening the social safety net and improving targeting to the poor to be developed by end-March 2009.
  - The government will prepare a plan for eliminating the inter-corporate circular debt by end-March 2009.
  - The transition to a single treasury account will be completed by end-June 2009.

### SBP monthly NFA and reserve-related targets (Table 3; selected monthly figures)
- Gross reserves (in millions of U.S. dollars):
  - Sept.: 5,171
  - Oct.: 3,530
  - Nov.: 5,400
  - Dec.: 5,400
  - Jan.: 5,300
- Fund disbursement (table entry):
  - Nov.: 3,066
- Cumulative increase in gross reserves since program (table entry):
  - Nov.: 1,870
  - Dec.: 1,870
  - Jan.: 1,770
- NFA (in millions of U.S. dollars):
  - Sept.: 3,953
  - Oct.: 2,312
  - Nov.: 1,117
  - Dec.: 1,165
  - Jan.: 1,065
- Change in NFA (table entry):
  - Oct.: ...-1,641
  - Nov.: -1,196
  - Dec.: 49
  - Jan.: -100
- Memorandum items:
  - Stock of forward/swap: 1,900 (for Sept.–Jan.)
  - Repurchase (of existing Fund credits): Nov. entry: 49

### TMU definitions and adjustors (Attachment III; selected)
- Valuation and conversion rules:
  - Assets, liabilities, debt in SDRs or non-U.S. currencies will be converted into U.S. dollars at exchange rates prevailing at test dates, as posted by the SBP on its web site.
  - Net external budget financing and external cash grants will be converted into Pakistani rupees at exchange rates prevailing at the day of the transaction, as posted by the SBP on its web site, unless otherwise indicated.
- Reserve money (RM) definition (¶3):
  - Sum of: currency outside scheduled banks; scheduled banks’ domestic cash in vaults; scheduled banks’ required and excess rupee and foreign exchange deposits with the SBP; and deposits of the rest of the economy with the SBP, excluding those held by the federal and provincial governments and the SBP staff retirement accounts.
- Net foreign assets (NFA) definition (¶4):
  - Difference between SBP foreign assets and foreign liabilities.
  - Foreign assets include gold, foreign exchange, balances held outside Pakistan, foreign securities, foreign bills purchased and discounted, the reserve position with the IMF, and SDR holdings.
  - Gold will be valued at $20.27 per troy ounce per fine troy ounce.
- Net domestic assets (NDA) definition (¶5):
  - NDA = RM − NFA of the SBP.
- Net borrowing definitions (¶6–7):
  - Net borrowing from the banking system by the government: banking system’s claims on governments minus government deposits with the banking system; excludes credit for commodity operations and certain deposits; includes bonds issued to banks in substitution of outstanding nonperforming loans being fully serviced by the government.
  - Net borrowing from the SBP by the government: SBP claims on the government minus government deposits with the SBP; SBP claims include government securities, treasury bills, ways and means advances, treasury currency, and debtor balances; exclude accrued profits on government securities.
- Overall budget deficit (excluding grants) definition (¶8):
  - Consolidated budget deficit excluding grants, including district government operations financed from local funds; measured by sum of (a) total net financing to federal, provincial, and local governments; and (b) total external grants to federal and provincial governments.
- Net external program financing and net external budget financing definitions (¶9–10):
  - Net external program financing includes external privatization receipts; budget support grants; budget support loans from multilateral (other than IMF), official bilateral budget support loans, private sector sources; rescheduled government debt service and change in stock of external debt service arrears net of government debt amortization; foreign loans onlent to financial institutions and companies; emergency relief lending. Excludes external financing counted as reserve liabilities of the SBP.
  - Net external budget financing = net external program financing − privatization receipts − budget support grants + other external loans for public projects + transfers of external privatization receipts from privatization account to budget.
- External debt definitions and exclusions (¶12–13):
  - Short-term external debt refers to debt with original maturity of up to and including one year.
  - Medium- and long-term external debt comprises debt with initial maturity of over one year.
  - Nonconcessional borrowing: grant element < 35 percent per defined methodology; discount rates used are six-month and ten-year CIRRs averages (six-month CIRRs for loans with maturity <15 years; ten-year CIRRs for loans with maturity ≥15 years).
- Adjustors related to net external program financing (¶14–16):
  - If actual cumulative net external program financing (U.S. dollar terms) exceeds projected value by more than $500 million, the excess is: actual − projected − $500 million.
  - The excess in U.S. dollar terms multiplied by a fixed accounting exchange rate of RPs 80 per $1 represents the excess in rupee terms.
  - The ceiling on the consolidated overall budget deficit (excluding grants) will be adjusted upward for cumulative excess in net external program financing in rupee terms for up to:
    - PRs 27.0 billion at end-December 2008,
    - PRs 67.0 billion at end-March 2009, and
    - PRs 67.0 billion at end-June 2009.

*Source: Excerpt from the IMF staff report and Technical Memorandum of Understanding (TMU) as provided in content unit _cr08364.*

### 17.      The cumulative excess net external program financing in U.S. dollar terms may

### _cr08364 - 17.      The cumulative excess net external program financing in U.S. dollar terms may

### Adjustor: definition and accounting treatment for surplus net external program financing
- If cumulative excess net external program financing in U.S. dollar terms exceeds the cumulative maximum limits for end-December 2008, end-March 2009, and end-June 2009 when converted at a fixed accounting exchange rate of PRs 80 per $1, then:
  - The cumulative excess in U.S. dollar terms minus the maximum cumulative amounts (converted at PRs 80 per $1) is defined as “surplus net external program financing in U.S. dollar terms.”
  - That amount multiplied by a fixed accounting exchange rate of PRs 80 per $1 constitutes “surplus net external program financing in rupee terms.”
- Policy implications of surplus:
  - The floors on the NFA of the SBP will be adjusted upward by the cumulative surplus net external program financing in U.S. dollar terms.
  - The ceilings on the NDA of the SBP and net borrowing from the SBP by the government will be adjusted downward by the cumulative surplus net external program financing in rupee terms.

### Adjustor: shortfall in net external program financing
- If actual cumulative net external program financing in U.S. dollar terms is lower than projected, the shortfall is defined as projected minus actual values in U.S. dollar terms. In that case:
  - The floor on the NFA of the SBP is adjusted downward by the amount equivalent to 50 percent of the cumulative shortfall in net external program financing in U.S. dollar terms.
  - The ceiling on the NDA of the SBP is adjusted upward by the amount equivalent to 50 percent of the cumulative shortfall in net external program financing in U.S. dollar terms converted into rupees at a fixed accounting exchange rate of PRs 80 per $1.
  - The ceiling on net borrowing from the SBP by the government is not subject to adjustment.

### Adjustor related to project grants
- If project grants exceed program assumptions, the ceiling on the consolidated overall budget deficit (excluding grants) will be adjusted upward by the cumulative excess in project grants.
- This adjustor is applied in addition to any adjustment to the consolidated overall budget deficit (excluding grants) made under paragraph 16.

### Adjustor related to changes in required reserves
- Ceilings on the NDA of the SBP will be adjusted downward/upward by the amount of:
  - (a) banks’ Pakistani rupee reserves freed/seized by any reduction/increase of the daily CRR relative to the baseline; and
  - (b) any reduction/increase in the reservable deposit base related to definitional changes.
- Formula provided: ∆NDA = ∆r B0 + r0 ∆B + ∆r ∆B, where:
  - r0 denotes the reserve requirement ratio prior to any change;
  - B0 denotes the level of reservable deposits in the initial definition;
  - ∆r is the change in the reserve requirement ratio;
  - ∆B denotes the change in reservable deposits due to definitional changes.
- In case of significant liquidity and other financial sector pressures, the SBP will consult with IMF staff to reach understanding on appropriate monetary policy response.

### Adjustor related to SBP’s net position under foreign exchange forwards and swaps
- The NFA target of the SBP will be adjusted upward/downward by the amount of the increase/decrease in the SBP’s net position under foreign exchange forwards and swaps.
- The maximum SBP net exposure under foreign exchange forwards and swaps is capped at $2.75 billion as of end-December 2008, end-March 2009, and end-June 2009.
- The SBP’s net exposure under foreign exchange forwards and swaps was $1.9 billion at end-September 2008.

### Adjustor related to foreign currency deposits of resident banks with the SBP
- The NFA target of the SBP will be adjusted upward/downward by the amount of increase/decrease in foreign currency deposits of resident banks with the SBP.
- The stock of foreign currency deposits with resident banks was $832 million at end-September 2008.

### Program reporting requirements: data types and reporting timelines
- Data flow: information, including any revisions to historical data, to be provided to the Middle East and Central Asia Department of the IMF through the IMF Resident Representative in Pakistan within the timeframes indicated below.
- Core fiscal and budget reporting:
  - Monthly provisional statements on federal tax and nontax revenue, within one month.
  - Deposits into and withdrawals from privatization accounts each quarter, within one month; withdrawals reported with breakdowns: (a) budgetary use of privatization proceeds; (b) costs of privatization; (c) other (with explanation), and breakdown between domestic and external privatization receipts.
  - Quarterly statements on budgetary capital receipts and disbursements, including repayments of bonds, recovery of loans from provinces and “others,” within two months.
  - Monthly (unreconciled) provisional data on federal expenditure and net lending (separate data on disbursements and repayments), within one month.
  - Quarterly statement on consolidated budgetary expenditure, with federal data approved by the Accountant General Pakistan Revenue (AGPR), within two months.
  - Quarterly numbers on expenditure on social programs.
  - Quarterly data on the stock of domestic government debt, broken down by instrument, within one month (Table 3).
  - Quarterly data on WAPDA receivables within one month.
  - Monthly data on Outstanding Audited Price Differential Claims.
- External financing and debt reporting:
  - Monthly data on external budget financing, including:
    - (i) loan-by-loan program disbursements in U.S. dollar terms and rupee terms converted at exchange rates prevailing at the time of each transaction;
    - (ii) cumulative amortization in U.S. dollar terms and rupee terms converted at exchange rates prevailing at the time of each transaction;
    - (iii) cumulative project loan disbursements in U.S. dollar terms and in rupees converted at exchange rates prevailing at the time of each transaction.
  - The following data on external debt, within one month:
    - (i) Quarterly stock of public- and publicly-guaranteed external debt (including deferred payments arrangements), by maturity (initial maturities of up to and including one year, and over one year), by creditor and by debtor (central government and publicly guaranteed);
    - (ii) Quarterly contracting or guaranteeing of nonconcessional medium- and long-term government debt;
    - (iii) Information on any rescheduling on public- and publicly-guaranteed debt reached with creditors.
  - Quarterly data on external payments arrears on public and publicly guaranteed debt with details as in (i) within one month.
- Monetary and central bank reporting:
  - Monthly (last-Saturday basis) within two weeks:
    - (i) monetary survey;
    - (ii) accounts of the SBP;
    - (iii) consolidated accounts of the scheduled banks;
    - (iv) banks’ lending to the government;
    - (v) detailed table on net foreign assets (both for the SBP and scheduled banks);
    - (vi) detailed table of scheduled banks’ reserves with the SBP.
  - Same tables on end-month and end-quarter basis (last business day), both at current and program exchange rates, within one month.
  - SBP Table on outstanding stock of foreign currency deposits, amended to include classification of new FCA according to residency of the holder.
  - Daily data on exchange rates (interbank, retail market, and Telegraphic Transfers for SBP purchases in the retail market), SBP’s sales and purchases in the foreign exchange markets, swaps and forward outright sales, within two business days.
  - Monthly data on the outstanding stock of the SBP’s forward foreign currency operations, including swaps and outright forward sales and purchases, within two weeks; terms of any new transactions (including rollover/renewal) to be provided.
  - Monthly data on the SBP’s foreign exchange reserves, with details on the currencies, instruments, and institutions in which the reserves are held, within one month.
  - Monthly data on SBP direct or bridge loans to nationalized banks in the context of restructuring and privatization, within four weeks.
  - Monthly data on any other quasi-fiscal operations undertaken by the SBP on behalf of the government.
  - Monthly data on SBP holding of discounted export finance credit under the export finance scheme, within one month.
  - Monthly data on outstanding credit to agriculture under the Agriculture Mandatory Credit Targets, within one month.
- Other reporting requirements:
  - Monthly data on Banks’ Budgetary Support (Table 1) within one month.
  - Copies of new or revised ordinances/circulars regarding changes in: tax policy, tax administration, foreign exchange market regulations, and banking regulations no later than three days after official issuance, or notification that ordinances have been posted on the FBR and SBP websites.
  - Copies of official notification of changes in gas and electricity tariffs and any surcharges (automatic or structural) and in ex-refinery petroleum product prices as well as of gas and petroleum surcharges/levies.
  - Monthly data on the import parity prices as well as central depot prices of the six major oil products, within one month.
  - Quarterly data on KESC and WAPDA loans and debt outstanding, within one month.
  - Upon adoption of the plan for elimination of inter-corporate circular debt, monthly reports on inter-corporate circular debt will be reported within 1 month.

### Key quantitative program figures and ceilings reported in the text
- Fixed accounting exchange rate used for convertibility in adjustors: PRs 80 per $1.
- Maximum SBP net exposure under foreign exchange forwards and swaps: $2.75 billion (cap for end-December 2008, end-March 2009, end-June 2009).
- SBP’s net exposure under foreign exchange forwards and swaps at end-September 2008: $1.9 billion.
- Stock of foreign currency deposits with resident banks at end-September 2008: $832 million.

*Source: _cr08364 - 17.      The cumulative excess net external program financing in U.S. dollar terms may*

### ANNEX II. PAKISTAN: RELATIONS WITH THE WORLD BANK

### ANNEX II. PAKISTAN: RELATIONS WITH THE WORLD BANK

### World Bank: Areas, Issues, Products, Delivery, and Dates
- Efficiency and equity of expenditure allocation
  - Issues: Public Expenditure, Procurement and Financial Management Review (PEPFM), Public Expenditure and Financial Accountability (PEFA), Sub-national operations
  - Product: PEPFM, PEFA, Sub-national operations
  - Delivery: March-April 2009
- Medium-Term Budget Framework (MTBF)
  - Issues: PEPFM, Poverty Reduction Support Credit (PRSC), sub-national operations
  - Product: MTBF
  - Delivery: March-April 2009
- Public Sector Development Program (PSDP) review
  - Issues: PEPFM, PRSC
  - Delivery: 2009
- Public procurement
  - Issues/Products: PEPFM, PRSC, TA
  - Delivery: 2009
- Fiscal Sector — Financial reporting, accounting and auditing
  - Product: Project for the Improvement of Financial Reporting and Auditing (PIFRA), PEFA
  - Delivery: June 2009
- Competition policy
  - Product: PRSC, TA
  - Delivery: 2009
- Business entry and exit
  - Product: PRSC, Insolvency and Creditor Right ROSC
  - Delivery: 2009-2010
- Private Sector Development — Labor market flexibility
  - Product: PRSC, analytical work
  - Delivery: 2009
- Poverty & Social Protection — Income transfer targeting, implementation and monitoring arrangements
  - Product: PRSC, social protection operation
  - Delivery: 2009
- PRSC (general)
  - Delivery: 2009
- Government debt management — Debt management strategy
  - Product: Debt management TA and analytical work
  - Delivery: 2009

### IMF: Areas, Issues, Requests, and Timing
- Fiscal Sector — Revenue mobilization, deficit target
  - Product/Action: Request for SBA
  - Timing: Fiscal years 2008/09, 2009/10
- Monetary Policy Framework
  - Issues: Strengthening of liquidity management framework; Strengthening of central bank independence
  - Product/Action: Request for SBA
  - Timing: July 2009; 2009
- Exchange Restrictions
  - Issue: Elimination of exchange restrictions
  - Product/Action: Request for SBA
  - Timing: January 2010

### Shared Responsibility / Joint and Parallel Operations (Bank and IMF)
- Tax administration and policy
  - Bank: PRSC, Tax Administration Reform Program (TARP), programmatic analytical work on tax policy; Review of FBR tax administration, and follow-up work
  - Delivery/Timing for Bank work: 2009; 2009; January 2009; fall 2009; September 2008; June 2009
  - IMF: Request for SBA
  - Timing: 2008/09–2009/10
- Cash Management, treasury single account
  - Bank: PRSC
  - IMF: Request for SBA
  - Timing: 2009
- Fiscal Sector — Debt sustainability analysis
  - IMF: Request for SBA
  - Timing: November 2008
- Joint Bank-IMF: FSAP update
  - Timing: 2009
- Banking sector and financial sector reforms
  - Bank: Strengthening banking sector supervision; Strengthening securities market regulation
  - Products: Banking sector TA; PRSC
  - Delivery/Timing: 2009
  - IMF: Strengthening of bank resolution framework
  - Product/Action: Request for SBA
  - Timing: June 2009
- Energy sector reforms and pricing
  - Bank: Automatic adjustment mechanism for power tariffs and domestic fuel prices; Improving efficiency of distribution and transmission networks
  - Product: PRSC; Energy sector investment project and analytical work
  - Delivery/Timing: 2009; ongoing
  - IMF: Electricity tariff increases
  - Product/Action: Request for SBA
  - Timing: November 2008

*Source: _cr08364 - ANNEX II. PAKISTAN: RELATIONS WITH THE WORLD BANK_*

### 4.      The large and sustained decline in the external debt-to-GDP ratio was one of

### 4.      The large and sustained decline in the external debt-to-GDP ratio was one of

### External debt levels and composition — Pakistan (key findings)
- By end-June 2008 (the end of fiscal year 2007/08), Pakistan’s external debt-to-GDP ratio was 26½ percent, down from 45 percent in 2001/02.
- Total external debt (in billions of U.S. dollars) and public/private breakdown (2005/06–2008/09):
  - Total External Debt: 35.7, 38.7, 44.5, 51.3
  - of which: Public: 34.1, 36.7, 41.6, 48.1
  - Multilateral: 18.0, 20.1, 22.9, 30.0
  - IMF: 1.5, 1.4, 1.3, 5.8
  - Other Multilateral 2/: 16.5, 18.7, 21.6, 24.2
  - Bilateral & Commercial: 16.0, 16.6, 18.7, 18.1
  - Private: 1.6, 2.0, 2.9, 3.2
- Same series expressed (in percent of GDP):
  - Total External Debt: 28.0, 26.9, 26.5, 31.4
  - of which: Public: 26.7, 25.5, 24.8, 29.5
  - Multilateral: 14.1, 14.0, 13.7, 18.4
  - IMF: 1.2, 1.0, 0.8, 3.5
  - Other Multilateral 2/: 13.0, 13.0, 12.9, 14.8
  - Bilateral & Commercial: 12.6, 11.5, 11.1, 11.1
  - Private: 1.2, 1.4, 1.7, 1.9
- Public and publicly guaranteed debt accounts for more than 90 percent of total external debt and over 90 percent of public external debt is owed to bilateral and multilateral creditors.
- Implicit interest rate on external debt is about 2½–3 percent.
- Note on data: Figures for 2008/09 are staff projections for end-June 2009. 2/ Includes the World Bank, the Asian Development Bank, and the Islamic Development Bank.

### Comparisons with recent exceptional access cases
- Debt ratios in recent exceptional access cases (in percent of GDP):
  - A. Earlier arrangements, 2003-05:
    - Argentina (2003) 129.0 82.5 12.2
    - Brazil (2003) 38.6 21.5 5.1
    - Turkey (2005) 35.0 17.8 3.0
    - Uruguay (2005) 82.0 60.8 13.8
  - B. Newly approved arrangements (2008):
    - Georgia 2/ 34.6 21.0 2.8
    - Hungary 3/ 106.4 37.6 4.2
    - Iceland 4/ 165.0 99.9 5.1
    - Ukraine 5/ 54.3 10.4 2.5
    - Pakistan (2008/09) 6/ 31.4 29.5 3.5
- Pakistan’s level of external debt is significantly lower than those of countries that have had exceptional access arrangements in recent years.

### Proposed SBA — scale of access and immediate implications for the Fund
- Access under the proposed arrangement would far exceed that in previous arrangements for Pakistan and would surpass both the annual and cumulative limits.
- If all purchases are made as scheduled:
  - Pakistan’s total outstanding use of GRA resources would rise to slightly over 200 percent of quota with the first drawing and peak at 500 percent in September 2010, remaining at this level through January 2012.
  - In terms of SDRs, this access would be more than 3½ times higher than Pakistan’s previous peak of Fund credit outstanding.
  - In terms of quota, this peak exposure would be comparable to recent exceptional access cases, but lower than the peak exposure of Hungary, Iceland and Ukraine.
- Surcharge regime on currency holdings from scheduled purchases:
  - Level-based surcharges of 100 basis points over the basic rate of charge on GRA credit outstanding exceeding 200 of quota from the time of the first purchase through July 2013.
  - Surcharges of 200 basis points on the credit outstanding exceeding 300 percent of quota starting in May 2009 through April 2013.

### Impact on Pakistan’s debt metrics and capacity to repay (projections and ratios)
- If the proposed SBA is fully disbursed, GRA credit outstanding to Pakistan will exceed 4 percent of GDP by June 2010.
- Pakistan’s outstanding use of Fund GRA resources would account for about 14 percent of public external debt by 2009/10 (compared to close to zero at present).
- Pakistan’s projected repayments to the Fund:
  - Rise from about 5 percent of public external debt service in 2008/09 to nearly 30 percent in 2011/12 and about 45 percent in 2012/13.
- In terms of exports of goods and services:
  - Pakistan’s external debt service to the GRA would amount to about 3 percent in 2011/12 and nearly 8 percent in 2012/13, similar to ratios projected for Iceland and Ukraine.

### Impact on the Fund’s liquidity position and risk exposure
- The proposed arrangement for Pakistan would reduce Fund liquidity by about 5 percent.
- Commitments under the proposed arrangement would reduce the one-year forward commitment capacity (FCC) by SDR 5.2 billion—from an estimated level of SDR 104.8 billion at the time of program approval.
- After the first drawing:
  - Fund GRA credit to Pakistan as a share of total Fund credit from the GRA would be about 12 percent.
  - Outstanding GRA credit to Pakistan following the first purchase would be equivalent to 30 percent of the Fund’s current stock of precautionary balances.
- Top-five borrowers and proposed positions (selected figures as of end-October 2008 and after first purchases):
  - Top five borrowers as of end-October 2008 (SDR Millions and related shares): Turkey 5,742.5; Liberia 342.8; Dominican Republic 331.6; Sudan 220.9; Georgia 161.7.
  - Proposed and newly approved exceptional access arrangements (SDR Millions): Iceland 560.0; Hungary 4,215.0; Ukraine 3,068.5; Pakistan 2,075.3.
- Pakistan’s projected Fund GRA credit outstanding (in millions of SDRs; end of period unless otherwise noted):
  - 2008: 2,072.1
  - 2009: 4,072.8
  - 2010: 5,168.5
  - 2011: 5,168.5
  - 2012: 3,725.2
  - 2013: 1,389.0
  - 2014: 248.1
  - 2015: 0.0
- Corresponding percent of quota (Fund GRA credit outstanding to Pakistan):
  - 2008: 200.5
  - 2009: 394.0
  - 2010: 500.0
  - 2011: 500.0
  - 2012: 360.4
  - 2013: 134.4
  - 2014: 24.0
  - 2015: 0.0
- Memorandum and prudential items (selected):
  - Pakistan's GRA credit outstanding (percent of total public external debt) by year: 2008: 0.0; 2009: 9.9; 2010: 13.7; 2011: 13.7; 2012: 11.7; 2013: 6.7; 2014: 1.7; 2015: 0.1
  - Pakistan's GRA credit outstanding (percent of GDP) by year: 2008: 0.0; 2009: 2.9; 2010: 4.3; 2011: 4.2; 2012: 3.4; 2013: 1.8; 2014: 0.4; 2015: 0.0
  - Pakistan's GRA credit outstanding (percent of gross international reserves) by year: 2008: 0.2; 2009: 55.3; 2010: 64.9; 2011: 62.4; 2012: 50.3; 2013: 27.1; 2014: 6.3; 2015: 0.2
  - Pakistan's GRA debt service to the Fund (percent of exports of goods and services) by year: 2008: 0.1; 2009: 0.3; 2010: 0.6; 2011: 0.9; 2012: 3.2; 2013: 7.7; 2014: 6.8; 2015: 2.1
  - Pakistan's GRA debt service to the Fund (percent of public external debt service) by year: 2008: 0.8; 2009: 1.6; 2010: 3.9; 2011: 6.6; 2012: 22.6; 2013: 43.1; 2014: 43.1; 2015: 19.1
  - Pakistan's total debt to the Fund (percent of total public external debt) 8/: 2008: 3.2; 2009: 12.0; 2010: 15.2; 2011: 14.6; 2012: 12.2; 2013: 6.9; 2014: 1.8; 2015: 0.1
  - Pakistan's total debt service to the Fund (percent of total public external debt service) 8/: 2008: 5.2; 2009: 5.8; 2010: 8.7; 2011: 12.8; 2012: 27.4; 2013: 45.6; 2014: 44.2; 2015: 19.6
  - Projected payment of charges to the Fund on GRA credit outstanding (SDR millions): 2008: 10.3; 2009: 87.0; 2010: 165.3; 2011: 191.8; 2012: 173.7; 2013: 97.3; 2014: 28.6; 2015: 4.1
  - Projected debt service payments to the Fund on GRA credit outstanding (SDR millions): 2008: 13.5; 2009: 91.7; 2010: 165.3; 2011: 191.8; 2012: 1,617.0; 2013: 2,433.4; 2014: 1,169.5; 2015: 252.1
  - Fund's precautionary balances (SDR millions): 6,938.6 (as of end-April 2008, used as benchmark)
- Charges on the new GRA obligations will be about SDR 87 million over the next year; this would exceed the Fund’s estimated residual burden-sharing capacity, taking into account the newly approved arrangements.

### Risks to the Fund and program downside risks
- The proposed arrangement for Pakistan entails considerable financial risks for the Fund:
  - Proposed level of access is large in terms of most relevant metrics, including the size of Pakistan’s economy and its debt servicing capacity.
  - Proposed access is more than 3½ times higher than the previous peak Fund exposure to Pakistan.
- Major downside risks to the program:
  - Continued portfolio outflows.
  - Insufficient financial support from donors and other creditors.
  - Weak policy implementation.
- Contextual vulnerabilities:
  - Pakistan’s large external imbalances and weak reserves position leave little room for accommodating additional delays in adopting measures to restrain demand or for absorbing new external shocks.
  - A difficult security situation in the context of global financial turmoil increases the risk that a balance of payments crisis, despite the Fund’s financial support, cannot be ruled out.

*Source: Pakistani authorities and IMF staff estimates; staff report and tables cited in the original document.*

### 14.      The above risks may adversely affect Pakistan’s capacity to repay the Fund. The

### _cr08364 - 14.      The above risks may adversely affect Pakistan’s capacity to repay the Fund. The

### Risks to Fund repayment and required implementation
- The proposed access is significant in terms of both the Fund’s resources and the debt service burden it generates in a very challenging economic and security environment.
- A sustained and forceful implementation of the program, and a prompt response to changes in underlying conditions and deviations from program assumptions are essential to mitigating these risks and safeguarding Fund resources.
- Under the burden-sharing mechanism:
  - The financial consequences for the Fund that stem from the existence of overdue financial obligations are shared between creditors and debtors through a decrease in the rate of remuneration and an increase in the rate of charge, respectively.
  - The mechanism is used to accumulate precautionary balances in the special contingent account (SCA-1) and to compensate the Fund for a loss in income when debtors do not pay charges.
  - The Executive Board has set a floor for remuneration at 85 percent of the SDR interest rate.
  - No corresponding ceiling applies to the rate of charge.
  - The adjustment for the SCA-1 was suspended, effective November 1, 2006, by the Executive Board (Decision No. 13858-(07/1), adopted January 3, 2007).

### IMF arrangement approved and immediate access
- The Executive Board approved a 23-month Stand-By Arrangement for Pakistan in an amount equivalent to SDR 5.169 billion (about US$7.6 billion).
- Upon Board approval:
  - An amount equivalent to SDR 2.067 billion (about US$3.1 billion) becomes immediately available to Pakistan.
  - The remaining amount will be phased in, subject to quarterly reviews.
- The total amount of IMF resources made available under the arrangement equals 500 percent of the country’s quota.
- The arrangement was approved under the Fund's fast-track Emergency Financing Mechanism procedures.

### Program objectives
- Two key objectives:
  - Restore macroeconomic stability and confidence through a tightening of macroeconomic policies.
  - Ensure social stability and adequate support for the poor and vulnerable in Pakistan.
- Program requires forceful and sustained implementation to succeed.
- The IMF’s large financial support is intended to signal improved macroeconomic prospects to the donor community and help mobilize additional donor financial support to consolidate reserves and finance the expanded social safety net.

### Fiscal policy targets and measures
- Fiscal deficit targets (fiscal year July-June):
  - Reduce fiscal deficit from 7.4 percent of GDP in 2007/2008 to 4.2 percent in 2008/2009 and 3.3 percent in 2009/2010.
- Fiscal adjustment instruments:
  - Phase out energy subsidies.
  - Better prioritize development spending.
  - Implement tax policy and tax administration reforms, including design and implementation of VAT and full implementation of a global income tax law.
  - Rationalize development spending and reduce investment outlays.
  - Freeze current (non-interest) expenditures except for increased social safety net spending.
- Social safety net:
  - Increase spending on the social safety net by 0.6 percentage point of GDP, to 0.9 percent of GDP in 2008/2009.
  - Identify the poor and provide cash support through the Benazir Income Support Scheme; World Bank advising on modalities.
  - Utilize and scale up existing social programs in the interim.

### Monetary policy, reserves, and banking sector measures
- Monetary tightening to bring down inflation and strengthen international reserves:
  - State Bank of Pakistan (SBP) increased its discount rate by 200 basis points to 15 percent (noting a cumulative 350 basis point increase over the past year plus the additional 200 basis point adjustment last week referenced elsewhere).
  - SBP stands ready to further tighten monetary conditions as needed.
  - Central bank financing of the government will be eliminated.
- Structural measures:
  - Design contingency plans to address problem banks.
  - Improve monetary management and strengthen SBP’s bank resolution capacity.
- Exchange rate policy:
  - Pursue a flexible exchange rate policy with intervention geared toward achieving reserve targets and smoothing excessive exchange rate volatility.
  - Present rate (November 21, 2008): PRs 79.3 = US$ 1.
  - Exchange regime: Managed float.

### Recent macroeconomic developments and vulnerabilities
- Shocks facing Pakistan:
  - Adverse security developments.
  - Higher oil and food import prices.
  - Global financial turmoil.
- Consequences observed:
  - External current account deficit widened.
  - Net capital inflows declined significantly.
  - Currency depreciated substantially.
  - Delay in pass-through of higher international prices to domestic consumers led to a large increase in the fiscal deficit.
  - Monetization of the fiscal deficit by the State Bank of Pakistan contributed to rising inflation and a sharp decline in international reserves.
- The program aims to reduce the external current account deficit and move toward a more sustainable fiscal position while protecting the poor.

### Key program indicators and projections (selected)
- Fiscal year ends June 30.
- Real economy (change in percent):
  - Real GDP: 2004/05: 9.0; 2005/06: 5.8; 2006/07: 6.8; 2007/08: 5.8; 2008/09: 3.4; 2009/10: 5.0 (Proj.).
  - CPI (average): 2004/05: 9.3; 2005/06: 7.9; 2006/07: 7.8; 2007/08: 12.0; 2008/09: 23.0; 2009/10: 13.0 (Proj.).
  - CPI (end year): 2004/05: 8.7; 2005/06: 7.6; 2006/07: 7.0; 2007/08: 21.5; 2008/09: 20.0; 2009/10: 6.0 (Proj.).
- Savings, investment, and debt (percent of GDP):
  - Gross national saving: 2004/05: 17.7; 2005/06: 17.8; 2006/07: 18.2; 2007/08: 12.9; 2008/09: 13.5; 2009/10: 15.7 (Proj.).
  - Gross capital formation: 2004/05: 19.1; 2005/06: 21.7; 2006/07: 23.0; 2007/08: 21.3; 2008/09: 20.0; 2009/10: 21.3 (Proj.).
  - General government overall balance (excluding grants): 2004/05: -3.3; 2005/06: -4.3; 2006/07: -4.3; 2007/08: -7.4; 2008/09: -4.2; 2009/10: -3.3 (Proj.).
  - Primary balance: 2004/05: 0.2; 2005/06: -0.6; 2006/07: 0.2; 2007/08: -2.5; 2008/09: 0.6; 2009/10: 1.6 (Proj.).
  - Debt: 2004/05: 61.2; 2005/06: 55.8; 2006/07: 54.1; 2007/08: 57.9; 2008/09: 54.6; 2009/10: 52.4 (Proj.).
- Money and credit (end-of-period, percent change):
  - M2: 2004/05: 19.3; 2005/06: 14.9; 2006/07: 19.3; 2007/08: 15.3; 2008/09: 10.8; 2009/10: 15.9 (Proj.).
  - Credit to non-government: 2004/05: 33.2; 2005/06: 23.2; 2006/07: 17.2; 2007/08: 16.4; 2008/09: 25.2; 2009/10: 19.5 (Proj.).
- Interest rates:
  - Six-month treasury bill rate (average, in percent): 2004/05: 4.7; 2005/06: 8.2; 2006/07: 8.8; 2007/08: 11.0.
- Balance of payments:
  - Current account (in percent of GDP): 2004/05: -1.4; 2005/06: -3.9; 2006/07: -4.8; 2007/08: -8.4; 2008/09: -6.5; 2009/10: -5.7 (Proj.).
  - External debt (in percent of GDP): 2004/05: 31.3; 2005/06: 28.0; 2006/07: 26.9; 2007/08: 26.5; 2008/09: 31.4; 2009/10: 33.2 (Proj.).
  - Reserves (in millions of U.S. dollars, excluding gold and foreign deposits of commercial banks held with the SBP): 2004/05: 9,805; 2005/06: 10,765; 2006/07: 14,302; 2007/08: 8,591; 2008/09: 8,591; 2009/10: 11,291 (Proj.).
- Quota at the Fund:
  - SDR 1,033.7 million.

### Authorities’ structural and administrative reforms
- Revenue mobilization and tax administration:
  - Plan to revamp tax administration; World Bank/DFID project expected to conclude by end-2009.
  - Review of tax policy options with focus on establishment of a proper VAT and coordination with provinces and the new Finance Commission.
  - Implementation of a global income tax law prepared with IMF assistance.
  - Renewed emphasis on subnational tax heads to engender greater accountability for the provinces.
- Public financial management:
  - Implement a treasury single account during the current year.
  - Address weaknesses in the Government Financial Information Management System by adding commitment control systems.

### Political and external financing considerations
- Transition to civilian rule completed in September 2008.
- The government prepared a stabilization and development plan for the next five years as a prelude to bilateral and multilateral support.
- The government seeks assistance of friendly countries and a pledging session of the Friends of Pakistan Group is to be arranged in the next couple of months.
- Pakistan may require additional financing, including from the Fund, given global market turbulence and high sectoral concentration of exports; authorities expect the Fund to keep risks under review and, if needed, augment Pakistan’s access under the program.

*International Monetary Fund — Press Release No. 08/303; November 24, 2008.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08364.pdf_