## _cr09123

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### Executive Summary
- Stabilization program launched October 2008 for 2008/09–2009/10, supported by an SBA, aiming to restore financial stability while protecting the poor through significant fiscal and monetary tightening and structural measures.
- Initial developments since program approval:
  - Exchange rate broadly stable; State Bank of Pakistan (SBP) able to buy foreign exchange on a net basis.
  - Gross reserves strengthened from $3.5 billion at end-October to $6.7 billion as of February 20.
  - Credit and broad money demand growth lower than projected.
- Program implementation and performance:
  - All quantitative performance criteria and structural benchmarks for the first program review were met.
  - End-December fiscal deficit target achieved through revenue and expenditure measures.
  - Nonobservance: modification of cash margin requirements on LCs for certain imports intensified an exchange restriction, breaching the continuous performance criterion; authorities plan to reverse by end-June and request a waiver.
- Staff recommendation: complete the first program review and approve the waiver of nonobservance.
- Additional assistance: Pakistan needs additional external assistance; upcoming donor meeting important for mobilization.

### Recent macro-financial developments
- Exchange rate and reserves:
  - SBP bought foreign exchange net; gross reserves rose from $3.5 billion (end-October) to $6.7 billion (as of February 20); gross foreign exchange reserves of the SBP amounted to $6.7 billion on March 24.
- Monetary policy and money markets:
  - SBP raised the discount rate by 200 basis points in mid-November; cumulative increase since January 2008 was 500 basis points.
  - T-bill rates fell from a peak of 14 percent (weighted average) in mid-January to just below 13 percent at end-February; weighted average yield declined to 11.8 percent on March 25.
  - T-bill auctions through end-February consistently oversubscribed.
- Activity and inflation:
  - Large-scale manufacturing output declined nearly 6 percent during first half of 2008/09; large-scale manufacturing output declined by 5½ percent in July 2008–January 2009 (y/y).
  - Headline CPI inflation declined to 20.5 percent (y/y) in January; headline inflation increased to 21.1 percent (y/y) in February; core inflation around 19 percent (y/y).
  - Weekly SPI increased at year-on-year rate of 24 percent (late February); SPI declined to 19.1 percent (y/y) in week ending March 19 from 26.1 percent in February.
- Capital markets:
  - KSE 100 Index down nearly 70 percent from April 2008 peak, bottomed late January, rebounded about 20 percent since then but remained volatile; stock market price floor removed mid-December.
  - NITSEF of Rs. 20 billion (0.15 percent of GDP) created to buy shares in eight public enterprises; as of mid-February NITSEF had invested Rs. 7 billion.

### Program implementation and fiscal measures
- Quantitative performance:
  - All quantitative performance criteria through December 2008 were met; SBP built a cushion above program NFA targets.
- End-December fiscal outcome:
  - Fiscal deficit target achieved through additional revenue and expenditure restraint.
  - Additional revenue from the Petroleum Development Levy (PDL) largely compensated for shortfalls in direct taxes, excises, and sales tax on imports collected by FBR.
  - Authorities introduced regulatory duties (10–25 percent) on several imported luxury and nonessential goods.
  - Spending remained below program projections, particularly on development projects.
- Nonobservance and waiver request:
  - Modification of cash margin requirements on LCs for certain imports intensified an exchange restriction, resulting in nonobservance of the continuous performance criterion; authorities will reverse by end-June and request a waiver.

### Monetary aggregates, credit, and liquidity
- Reserve money: grew by 6.5 percent (y/y) through end-December (5.8 percent in the program).
- Broad money: grew by 8.7 percent (9.6 percent in the program).
- Private sector credit growth: just below 13 percent (y/y), compared with 17 percent in the program.
- Interest spreads and rates:
  - Spreads between lending and deposit rates widened from 660 bps in January 2008 to nearly 780 bps in January 2009.
  - Weighted average lending rate: 14.66 percent.
  - Weighted average deposit rate: 6.88 percent.
- Liquidity management and OMOs:
  - MoF and SBP issue quarterly calendar of T-bill auctions with indicative volumes.
  - OMOs mainly to smooth liquidity; overnight repo rates more volatile since September.
  - Banks have accessed SBP discount window with increased frequency; on net OMOs have recently absorbed excess liquidity.

### Banking system stability and stress testing
- Asset quality and profitability:
  - Gross NPLs rose from 7.7 percent of total loans in June 2008 to 9.1 percent in December 2008.
  - Net NPLs to net loans increased from 1.3 to 2.5 percent over same period; provisioning generally adequate.
  - Capital adequacy ratios (CARs) rose from 12.1 to 12.2 percent of risk-weighted assets.
- Concentration and pressures:
  - A few banks representing less than 10 percent of system assets face financial pressures; to be addressed by mergers or equity injections.
- Stress-test results (June 2008 data):
  - Most banks—including all large banks—would remain solvent in a severe crisis scenario; some small and mid-sized banks would face insolvency.
  - Worst case: capital injection needed to restore CAR of the twelve largest banks to minimum regulatory CAR of 8 percent was 2.3 percent of GDP.
- Foreign-currency exposures:
  - Residents’ foreign-currency accounts constitute less than 8 percent of total deposits in commercial banks; lending in foreign currencies restricted to trade-related purposes.

### Structural reforms and fiscal administration
- Structural benchmarks:
  - All structural benchmarks for the first program review have been met.
  - Tax policy and administration action plan envisages integration of income tax and sales tax departments and replacement of general sales tax with broad-based VAT.
  - World Bank technical assistance mission scheduled for April to assist with VAT law design, income tax revisions, and possible introduction of a carbon tax.
- Subsidies and tariffs:
  - Elimination of tariff differential subsidies by end-June 2009 agreed with World Bank.
  - Electricity tariffs increased by 1 percent effective February 1, and cumulative increase of 4 percent by end-June planned.
- SBP contingency and bank resolution:
  - SBP contingency plan prepared setting criteria for liquidity support, assessment, and intervention procedures.
  - Amendments to banking legislation drafted to strengthen SBP enforcement powers; to be submitted to Parliament before end-June 2009.

### Social protection and BISP
- BISP features and rollout:
  - Each eligible family to receive Rs. 1,000 per month.
  - FY 2008/09 budget allocated Rs. 34 billion (0.3 percent of GDP) to BISP.
  - Pilot in at least 16 districts completed by May 2009; roll-out to all 130 districts to be completed between December 2009 and June 2010.
  - Benefiting families targeted: 5 million in 2009/10 and 7 million in 2010/11.
- Coverage and overlap:
  - Bait-ul-Mal beneficiaries increased from about 200,000 in 1998 to about 1.4 million in 2007.
  - World Bank estimates these programs cover only 5 percent of the population; about 32 percent of Zakat benefits and 25 percent of Bait-ul-Mal benefits accrue to non-poor households.
  - Options: merge BISP and Bait-ul-Mal in 2009/10 or increase complementarities to scale up BISP.

### Circular debt and energy sector measures
- Circular debt trajectory:
  - Rose from Rs. 51 billion (0.4 percent of GDP) in mid-October to close to Rs. 189 billion (1.5 percent of GDP) as of March 6.
- Authorities’ plan:
  - Issue Term-Finance Certificates (TFCs) at KIBOR + 175 bps to cover Rs. 98 billion in outstanding liabilities of PEPCO to its suppliers; 5-year maturity with government guarantee.
  - Financial schemes through sale/lease of government property being considered for remainder.
- Wheat procurement program:
  - Authorities envisage procurement of 6.5 million tons of wheat from the 2009 harvest (projected 25 million tons) at support price nearly $300 per ton (Rs. 950 per 40 kg).
  - Recently announced procurement may involve expenditures that exceed Rs. 40 billion (0.3 percent of GDP) included in 2009/10 fiscal framework unless international wheat prices rebound; international wheat prices in February were between $230 and $240 per ton (FOB).

### Near-term economic outlook and macro framework (2008/09–2009/10)
- Growth and inflation revisions:
  - Revised growth projection for 2008/09: 2.5 percent (down from 3.4 percent in original program).
  - Growth projected to pick up to 4 percent in 2009/10.
  - Under conservative assumptions (food and energy prices flat, core inflation 1 percent per month): headline inflation would decline to 10 percent by June 2009 (compared with 20 percent in the program) and to 6.5 percent by June 2010.
  - Average annual inflation projected to drop from 20 percent in 2008/09 to 6 percent in 2009/10.
- Revised macro projections (selected):
  - Real GDP at factor cost (percentage change): Program 3.4; Revised 2.5 (2008/09). Program 5.0; Revised 4.0 (2009/10).
  - Consumer prices (end of period, percentage change): Program 20.0; Revised 10.0 (2008/09). Program 6.0; Revised 6.5 (2009/10).
  - External current account (percent of GDP): Program -6.5; Revised -5.9 (2008/09). Program -5.7; Revised -4.3 (2009/10).
- Risks:
  - Significant downside risks; real GDP growth in 2008/09–09/10 could be 0.5–1.0 percentage points lower.

### External accounts and financing
- Current account and financing:
  - External current account deficit projected to narrow in 2008/09 and 2009/10 driven by lower imports outweighing weaker exports.
  - Financial account surplus expected slightly lower than originally projected due to worsening environment for FDI and privatization inflows.
  - Offsetting inflows: official budget support from China, commodity support loan from Saudi Arabia, higher disbursements under short-term oil import facility from Islamic Development Bank.
  - Net private capital flows better than envisaged as sharp outflow from stock market did not materialize.
  - Overall external balance for 2008/09 projected to be better than programmed by about $500 million; improvement for 2009/10 limited to $700 million.
- Key external indicators (selected from tables):
  - Current account (including official current transfers, percent of GDP): 2007/08: -8.4; 2008/09: -6.5; 2009/10 (proj.): -5.9; medium-term trending to -3.7 by 2013/14.
  - Gross official reserves (end-period, millions of U.S. dollars): 2007/08: 8,591; 2008/09 (act/prog mix): 5,177/6,680; 2009/10 (proj.): 9,091 (Table 1 mem.), Table 6 projects 10,591 by 2009/10 in medium-term tables.
  - Gross external financing requirements (millions of U.S. dollars): 2007/08: 15,367; 2008/09: 12,659; 2009/10 (proj.): 10,340.

### Fiscal outlook, financing, and policy stance
- Fiscal targets and financing:
  - Authorities committed to original nominal fiscal deficit (excluding grants) target for 2008/09: Rs. 562 billion, or 4.3 percent of revised GDP.
  - Fiscal deficit target for 2009/10: 3.4 percent of GDP (effort of 0.9 percentage point of GDP).
  - External budget financing likely to fall short by $1.9 billion or 1.2 percent of GDP due mainly to absence of privatization proceeds; similar shortfall projected for 2009/10.
  - MoF intends to tap nonbank sources of domestic financing; issued Ijara Sukuks and Pakistan Investment Bonds since September.
- Revenue mobilization:
  - FBR target: collection of Rs. 1,300 billion (10.0 percent of revised GDP) in 2008/09, including additional yield of Rs. 65 billion from stepped-up auditing and enforcement.
  - Plans to broaden tax base to increase revenue-to-GDP ratio by 0.6 percentage points in 2009/10 by reducing exemptions and zero-rating; timing dependent on tax administration capacity to process refunds.
  - January revenue data indicate widening shortfall in FBR collections; PDL collection on track; preliminary FBR data for February indicate further increase in revenue shortfall.
- Expenditure constraints:
  - Room for expenditure cuts limited due to high share of interest and security spending, need for operation and maintenance, and increased outlays under strengthened social safety net.
  - Cash transfers to poor projected to increase from 0.4 percent of GDP in 2008/09 to 0.6 percent in 2009/10.
- Policy stance recommendations:
  - Authorities to adhere to program fiscal target for 2008/09 and continue fiscal adjustment in 2009/10.
  - Early identification of contingent revenue and expenditure measures recommended to avoid last-minute expenditure compression.

### Monetary policy, exchange rate, and SBP autonomy
- Monetary stance:
  - SBP used discount rate to defend reserves, bring down inflation, and ensure interest rates encouraged demand for T-bills; OMOs used to stabilize bank liquidity.
  - SBP staff indicated steps to increase operational independence and establish short-term interest rates as operational target, with price stability primary.
  - SBP intends to implement explicit corridor for short-term interbank rates effective August 1, 2009, market permitting.
  - No immediate change in discount rate; SBP considers premature to reduce discount rate given elevated core inflation.
- Conditions for easing:
  - Easing desirable and possible if international reserves remain adequate, inflation continues to decline, and budget can be financed through T-bill placements in commercial banks.
  - Staff cautioned that expected external financing shortfall, wheat procurement program, and TFC placements could hinder decline in interest rates.
- Exchange rate and competitiveness:
  - Rupee remains slightly overvalued in real effective terms; CGER suggests rupee about 5–10 percent above level consistent with current account deficit norm of 3.6 percent of GDP.
  - Staff recommended flexible exchange rate policy and SBP intervention mainly to build official reserves; encouraged accumulation of higher than programmed reserves as safety cushion, while cautioning about creating expectations of exchange rate stability.

### Financial sector safeguards, AML/CFT, and supervision
- Safeguards assessment:
  - Update substantially completed; operational environment at SBP strengthened but action needed on operational independence and controls over program data reporting.
  - Inter-agency committee to complete work on SBP independence by end-April 2009; new central bank law to be submitted by December 2009.
  - SBP to change Audit Committee voting structure (April 2009), improve internal controls (end-June 2009), and establish Board committee to centralize risk management (end-December 2009).
- AML/CFT:
  - Anti-Money Laundering Ordinance promulgated; financial intelligence unit established; many terrorism financing activities criminalized.
  - Further work needed to expand preventive measures, strengthen enforcement, complete list of predicate offences, clarify criminalization scope, and broaden asset-freezing powers.
- Prudential relaxation concerns:
  - SECP allowed delayed recognition of losses on securities in income statements until end-December 2009 (losses must be recognized in capital immediately); staff cautioned against loosening prudential regulations that could lead to regulatory forbearance.

### Debt sustainability analysis (external and public)
- External debt:
  - End FY 2007/08 external debt stock around 26½ percent of GDP.
  - Baseline: external debt around 32½ percent of GDP during 2008/09–2010/11, declining to about 27½ percent by 2013/14.
  - Debt service about 15 percent of exports of goods and services; projected to increase to 20 percent under baseline before declining.
  - Stress tests show serious downside risks; combined shocks could raise external debt to around 45 percent of GDP.
  - Table 1 baseline external debt (percent of GDP): 2007/08: 26.5; 2008/09: 31.6; 2009/10: 32.4; 2010/11: 32.2; 2013/14: 27.7.
- Public sector debt:
  - End FY 2007/08 public sector debt 57.4 percent of GDP (domestic 31.2 percent, external 26.2 percent).
  - Baseline projection: total public debt decline to 47.5 percent of GDP by 2013/14.
  - Interest payments: 4.7 percent of GDP, 32.6 percent of total revenue (excluding grants).
  - Gross financing need (percent of GDP): 2007/08: 24.2; 2008/09: 20.8; 2009/10: 19.8; declining to 13.3 by 2013/14.
  - Stress scenarios: primary balance shock, 30 percent devaluation, and contingent liabilities shock would perceptibly raise public debt ratio.

### Program monitoring, TMU, and IMF relations
- Program monitoring:
  - Program subject to quarterly reviews and quarterly performance criteria (Table 1).
  - Addendum to the TMU (November 20, 2008) adds definition of external payment arrears and requires reporting on new liabilities/guarantees incurred in settling circular debt.
- Selected performance criteria and outcomes (December 2008–June 2009 highlights):
  - Ceiling on overall budget deficit (cumulative): Prog. end-Jun-2009: 562; Adjusted target...262; Actual...253 (in billions of Pakistani rupees).
  - Floor on net foreign assets of SBP (millions of U.S. dollars): Outst. end-Sept. 2008: 3,953; Prog. end-Dec. 2008: 1,165; Actual (adjusted items) ...2,355.
  - Ceiling on outstanding short-term public external debt (millions of U.S. dollars): Actual...813.
  - Continuous ceiling on SBP foreign currency swaps and forward sales (millions of U.S. dollars): Prog. end-Jun-2009: 2,750; Actual...1,850.
- Relations with Fund (as of February 28, 2009):
  - Quota: 1,033.70 SDR Million.
  - Stand-By Arrangement approved 11/24/08 for SDR 5,168.50 million; initial purchase 2,067.40 SDR million (200 percent of quota); first review purchase SDR 568.54 (55 percent).
  - Projected Fund payments and outstanding purchases detailed in TMU addendum.

### Staff recommendation and wrap-up
- Staff recommends completion of the first review under the SBA and supports the authorities’ waiver request for the nonobservance on the continuous performance criterion against imposing or intensifying exchange restrictions, conditional on reversal of the LC cash margin intensification by end-June 2009.
- Key policy priorities:
  - Maintain fiscal consolidation and revenue mobilization (VAT replacement, tax administration reforms).
  - Continue monetary discipline while allowing scope for easing if inflation and reserves improve.
  - Strengthen SBP operational independence and financial sector supervision.
  - Secure additional external assistance to reduce risks and increase scope for development and social spending, leveraging upcoming donor meetings.

*Source: IMF staff report excerpts contained in the provided content unit.*

### Executive Summary ......................................................................................................

### _cr09123 - Executive Summary

### Executive Summary
- In October 2008 the authorities launched a stabilization program for 2008/09–2009/10, supported by an SBA arrangement, aiming to restore financial stability while protecting the poor through significant tightening of fiscal and monetary policies and several structural fiscal and financial measures.
- Initial developments since program approval have been generally positive:
  - Exchange rate broadly stable, allowing the State Bank of Pakistan (SBP) to buy foreign exchange on a net basis.
  - Gross reserves strengthened from $3.5 billion at end-October to $6.7 billion as of February 20.
  - Credit and broad money demand growth have been lower than projected.
- Policy implementation has been good and the program remains on track:
  - All quantitative performance criteria and structural benchmarks for the first program review were met.
  - The end-December fiscal deficit target was achieved through a combination of revenue and expenditure measures.
- Nonobservance: a modification of cash margin requirements on letters of credit (LCs) for certain imports resulted in nonobservance of the continuous performance criterion against imposing or intensifying exchange restrictions; authorities plan to reverse this intensification by end-June and request a waiver of nonobservance.
- Banking system: banks have weathered the crisis well thus far but worsening macroeconomic conditions are affecting asset quality and profitability and warrant careful monitoring.
- Global environment: since program start the global economic and financial environment deteriorated significantly—oil import prices lower, exports falling, external financing more difficult, and increasing risks to remittances.
- Staff recommendation: complete the first program review and approve the waiver of nonobservance for the missed performance criterion.
- Additional assistance: Pakistan needs additional external assistance to reduce risks and provide for greater development and social spending; the upcoming donor meeting is an important opportunity for mobilizing assistance.

### Background
- Pakistan experienced relatively robust economic performance following two Fund-supported programs during 2000–04; in 2007 growth was strong but inflation rose and external imbalances emerged.
- At the 2007 Article IV consultation Directors:
  - Encouraged strengthening the fiscal program for 2007/08 to complement monetary tightening, particularly by reducing energy subsidies and capital spending.
  - Stressed further fiscal consolidation to reduce inflation and the external current account deficit and to lessen pressures on real interest rates.
  - Noted low tax revenue-to-GDP ratio by international standards and recommended pressing ahead with revenue-raising tax reforms to create fiscal space for infrastructure and poverty alleviation.
- Implementation of some structural reforms has been slow (Box 1: Effectiveness of Fund Advice).
- The 2008/09–2009/10 program also aims to address long-standing problems:
  - Comprehensive tax reform to raise budgetary revenue.
  - Phase out electricity subsidies.
  - Tackle inter-corporate (circular) debt in the energy sector.
  - Strengthen the social safety net.

### Recent Developments — Overview
- Exchange rate and reserves:
  - SBP bought foreign exchange on a net basis; gross reserves rose from $3.5 billion at end-October to $6.7 billion as of February 20.
- Monetary policy and money markets:
  - SBP raised the discount rate by 200 basis points in mid-November; cumulative increase since January 2008 was 500 basis points.
  - T-bill auctions through end-February were consistently oversubscribed with broad bank participation.
  - T-bill rates fell from a peak of 14 percent (weighted average) in mid-January to just below 13 percent at end-February.
- Activity, inflation, and external current account:
  - Large-scale manufacturing output declined nearly 6 percent during the first half of 2008/09.
  - Agricultural output expected to benefit from a bumper wheat crop in 2008/09; significant increases in rice and cotton crops should more than compensate for the decline in sugar cane production.
  - Headline CPI inflation declined to 20.5 percent (year-on-year) in January, its lowest since May 2008.
  - Core inflation remains around 19 percent (year-on-year); monthly core inflation dropped from a peak of 2.3 percent in July to 1.1 percent in January.
  - Weekly Sensitive Price Index (SPI) increased at a year-on-year rate of 24 per cent (in late February), reflecting large food price increases earlier in 2008.
  - Despite declines in international oil spot prices, the external current account through December did not show decisive improvement because of deferred payments for oil contracted at higher prices; import trends pointed to an underlying improvement in the current account.
  - Remittances inflows have thus far proved resilient; capital outflows have been lower than projected.
- Capital and equity markets:
  - In mid-December authorities removed the stock market price floor that had been in place for 3½ months; feared massive capital outflows did not materialize.
  - Karachi Stock Exchange (KSE) 100 Index experienced a cumulative decline of nearly 70 percent from its April 2008 peak and bottomed out in late January; since then it has rebounded by about 20 percent but remains volatile.
  - National Investment Trust’s State Enterprise Fund (NITSEF) of Rs. 20 billion (0.15 percent of GDP) was created to buy shares in eight public enterprises; funded through borrowing from domestic banks with government guarantee; as of mid-February NITSEF had invested Rs. 7 billion.

### Recent Developments — Program Implementation
- Quantitative and structural performance:
  - All quantitative performance criteria through December 2008 were met.
  - Authorities showed strong program ownership and maintained tight fiscal policy despite downward revenue pressures.
  - SBP built a cushion above program net foreign assets (NFA) targets.
- End-December fiscal deficit target:
  - Achieved through additional revenue and expenditure restraint.
  - Additional revenue from the Petroleum Development Levy (PDL) largely compensated for shortfalls in direct taxes, excises, and the sales tax on imports collected by the Federal Board of Revenue (FBR).
  - Authorities introduced regulatory duties (10–25 percent) on several imported luxury and nonessential goods.
  - Spending remained below program projections, particularly on development projects.
- Nonobservance and waiver request:
  - Modification of cash margin requirements on LCs for certain imports amounted to an intensification of exchange restrictions, resulting in nonobservance of the continuous performance criterion against imposing or intensifying exchange restrictions.
  - Authorities plan to reverse this measure by end-June and will request a waiver of nonobservance for the missed performance criterion.

### Banking and Financial Sector
- Banking sector resilience and risks:
  - Banks have thus far weathered the crisis well, but the worsening macroeconomic environment is affecting asset quality and profitability; careful monitoring is required.
- Market perceptions and access:
  - Global crisis effects on Pakistan mixed: lower fuel and food prices moderated inflation and helped the external current account, but adverse effects include reduced output, exports, fiscal revenues, and current transfers; privatization receipts projected at $1.7 billion in the 2008/09 budget are unlikely to materialize and market access remains constrained (Box 2).

### External Environment and Market Perceptions
- Sovereign risk indicators and market measures:
  - Pakistan’s EMBIG spread moderated from the peak of 2222 bps in December to 1914 bps at end-February; average for February was 1964 bps.
  - Five-year credit-default swaps (CDS) premium moderated from 3886 bps in mid-October to 2850 bps in early February.
  - Pakistan’s sovereign debt rating by Moody’s/S&P is B3/CCC+ (as of end-2008).
    - Moody’s cut Pakistan from B2 to B3 in October and reconfirmed B3 in December with outlook changed to negative.
    - S&P raised Pakistan’s rating to CCC+ in December, noting the first purchase under the SBA as a factor alleviating near-term debt service stress.
  - Eurobond amortization of $500 million in February was widely anticipated; any residual positive impact was offset by political uncertainties that led to a temporary KSE decline.
- Market liquidity and access:
  - Secondary markets are relatively illiquid and primary debt markets remain virtually closed for countries rated below investment grade, making it difficult for Pakistan to reestablish market access.
  - Although implementation risk has been reduced by program adoption and positive developments, underlying risks to the economic and financial outlook remain high and resource constraints are expected to persist; tail risks have increased significantly.

### Policy Decisions and Recommendations
- Macroeconomic framework:
  - Authorities agreed with staff on a revised macroeconomic framework with lower growth and inflation and supporting policies for 2008/09 and beyond.
- Fiscal policy:
  - Authorities will adhere to the program’s fiscal target for 2008/09 and continue with further fiscal adjustment in 2009/10.
- Monetary policy and exchange rate:
  - There should be scope for the SBP to lower its discount rate if inflation abates, external reserve position continues to improve, and the government can sell its T-bills to banks and nonbank private investors.
  - Exchange rate flexibility will continue to facilitate external adjustment.
- External assistance and social spending:
  - Pakistan needs additional external assistance to reduce risks and provide for greater development and social spending; the upcoming donor meeting is an important opportunity to mobilize additional assistance.
- IMF staff recommendation:
  - Complete the first program review and approve the waiver of nonobservance for the missed performance criterion.

*Executive Summary — IMF staff report (pages excerpted).*

### 11.      Despite the somewhat improved confidence, credit and broad money demand

### _cr09123 - 11.      Despite the somewhat improved confidence, credit and broad money demand

### Monetary aggregates, credit, and liquidity management
- Reserve money grew by 6.5 percent (year-on year) through end-December (5.8 percent in the program).
- Broad money grew by 8.7 percent (9.6 percent in the program).
- Private sector credit growth was just below 13 percent (year-on-year), compared with 17 percent in the program.
- Drivers of weaker private credit growth: slowdown in economic activity, increased risk aversion by banks, and a flight to quality (shift in lending to government and public enterprises).
- Spreads between lending rates and deposit rates widened from 660 bps in January 2008 to nearly 780 bps in January 2009.
  - Weighted average lending rate: 14.66 percent.
  - Weighted average deposit rate: 6.88 percent.
- Measures to improve liquidity management and monetary policy implementation:
  - MoF and SBP issue a calendar of T-bill auctions with indicative volumes on a quarterly basis.
  - Despite large oversubscription, volumes sold in primary auctions do not exceed announced volumes significantly.
  - Cut-off rates and allocation among 3-month, 6-month, and 12-month maturities are decided solely by the MoF, geared toward managing cost, minimizing rollover risk, and building a yield curve.
  - Open-market operations (OMOs) have been conducted mainly to smooth liquidity conditions; overnight repo rates have been markedly more volatile since September.
  - Banks have accessed the SBP discount window with increased frequency recently; on net, OMOs have recently been conducted to absorb excess liquidity.
  - Bank liquidity has been comfortable since October on aggregate.

### Banking system stability (Box 3)
- Aggregate financial soundness indicators improved since the 2004 FSAP, but 2008 saw adverse effects on profitability and asset quality.
- Gross nonperforming loans (NPLs) rose from 7.7 percent of total loans in June 2008 to 9.1 percent in December 2008.
- Ratio of net NPLs to net loans increased from 1.3 to 2.5 percent over the same period; provisioning has remained generally adequate.
- Capital adequacy ratios (CARs) rose from 12.1 to 12.2 percent of risk-weighted assets.
- A few banks representing less than 10 percent of system assets face financial pressures to be addressed through mergers or fresh equity injections.
- Stress-test results (June 2008 data):
  - Most banks—including all large banks—would remain solvent in a severe crisis scenario; some small and mid-sized banks would face insolvency under simulated crisis conditions.
  - In the worst case scenario, the capital injection needed to restore the CAR of the twelve largest banks to the minimum regulatory CAR of 8 percent was 2.3 percent of GDP.
- Direct exposure to currency depreciation is generally small; residents’ foreign-currency accounts constitute less than 8 percent of total deposits in commercial banks.
- Lending in foreign currencies is restricted to trade-related purposes by SBP regulation.

### Structural reforms under the program
- All structural benchmarks for the first program review have been met (SMEFP, Table 2).
- Authorities observed the World Bank’s upfront conditionality for the proposed Poverty Reduction and Economic Support Operation (PRESO) loan.
- Tax policy and administration action plan:
  - Envisages integration of income tax and sales tax departments.
  - Replacement of the current general sales tax with a broad-based Value-Added Tax (VAT).
  - Fund technical assistance mission (scheduled for April) to assist with VAT law design, income tax revisions, and possible introduction of a carbon tax (SMEFP, ¶13–14).
- Subsidies and tariffs:
  - Authorities and World Bank staff agreed on elimination of tariff differential subsidies by end-June 2009.
  - Electricity tariffs were increased by 1 percent effective February 1, and will be raised further by a cumulative 4 percent by end-June (SMEFP, ¶17).
- SBP contingency plan for handling problem banks prepared, setting criteria for liquidity support, assessment, and intervention procedures (SMEFP, ¶22–24).
- Provision of foreign exchange by SBP for imports of furnace oil ceased on February 1; these transactions moved back to the interbank market.

### Social protection reforms and BISP (Box 4)
- Benazir Income Support Program (BISP) features:
  - Under BISP, each eligible family is to receive Rs. 1,000 per month.
  - FY 2008/09 budget allocated Rs. 34 billion (0.3 percent of GDP) to BISP.
  - Authorities agreed with the World Bank on introducing a scorecard as an objective targeting mechanism.
  - Roll-out: pilot in at least 16 districts completed by May 2009; roll-out to all 130 districts to be completed between December 2009 and June 2010.
  - Number of benefiting families targeted to reach 5 million in 2009/10 and 7 million in 2010/11.
- Other nationwide cash transfer programs:
  - Bait-ul-Mal: beneficiaries increased from about 200,000 in 1998 to about 1.4 million in 2007.
  - Zakat: financed by private contributions, which have declined substantially.
- Coverage and leakage concerns:
  - World Bank estimates these programs cover only 5 percent of the population.
  - About 32 percent of Zakat benefits and 25 percent of Bait-ul-Mal benefits accrue to non-poor households.
- Options discussed: merge BISP and Bait-ul-Mal in 2009/10 or increase complementarities; use resources to scale up BISP.

### Circular debt and energy sector measures
- Circular debt (inter-corporate debt in the energy sector) rose from Rs. 51 billion (0.4 percent of GDP) in mid-October to close to Rs. 189 billion (1.5 percent of GDP) as of March 6.
- Authorities’ plan to address circular debt:
  - Issuance of Term-Finance Certificates (TFCs) at KIBOR + 175 bps to cover Rs. 98 billion in outstanding liabilities of Pakistan Electric Power Company (PEPCO) to its suppliers.
  - TFCs will have a 5-year maturity with government guarantee.
  - Financial schemes to raise funds through sale/lease of government property are being considered to cover the remainder.

### Near-term economic outlook and macroeconomic framework (2008/09–2009/10)
- Revised growth projection for 2008/09: 2.5 percent (down from 3.4 percent in the original program).
- Growth projected to pick up to 4 percent in 2009/10 with continued strong agricultural performance and electricity sector reforms.
- Risks: significant downside risks; real GDP growth in 2008/09–09/10 could be by 0.5–1.0 percentage points lower.
- Inflation outlook (under conservative assumptions: food and energy prices flat, and core inflation of one percent per month):
  - Year-on-year headline inflation would decline to 10 percent by June 2009 (compared with 20 percent in the program).
  - Headline inflation projected to be 6.5 percent by June 2010.
  - Average annual inflation projected to drop from 20 percent in 2008/09 to 6 percent in 2009/10.
- Revised macroeconomic program table (Fund staff projections):
  - Real GDP at factor cost (percentage change): Program 3.4; Revised 2.5 (2008/09). Program 5.0; Revised 4.0 (2009/10).
  - Consumer prices (end of period, percentage change): Program 20.0; Revised 10.0 (2008/09). Program 6.0; Revised 6.5 (2009/10).
  - External current account (in percent of GDP): Program -6.5; Revised -5.9 (2008/09). Program -5.7; Revised -4.3 (2009/10).

### External accounts and financing
- External current account deficit projected to narrow in 2008/09 and 2009/10; improvement driven by lower imports outweighing weaker exports.
- Financial account surplus expected slightly lower than originally projected due to worsening environment for FDI and privatization-related inflows.
- Offsetting inflows: disbursements of official budget support from China, commodity support loan from Saudi Arabia, higher disbursements under short-term oil import facility from Islamic Development Bank.
- Net private capital flows better than envisaged as sharp outflow from stock market did not materialize.
- Overall external balance for 2008/09 projected to be better than programmed by about $500 million; balance-of-payments improvement for 2009/10 limited to $700 million due to downward revision in official and private capital inflows.

### Policy discussions and near-term policy stance
- Priority: consolidate gains in macroeconomic stabilization.
- Key policy considerations:
  - Availability of external financing: securing programmed amount (mostly privatization proceeds) will be challenging; donor conference tentatively scheduled for April 17 in Tokyo.
  - Fiscal stance: authorities saw no scope for relaxing fiscal stance and opted for an unchanged fiscal deficit target.
  - Interest rate policy: premature to reduce interest rates now; need to reassess down the road to stimulate activity while balancing inflation and non-SBP budget financing.
  - Banking sector risks: SBP monitoring asset quality due to high interest rates and slowdown that could increase nonperforming corporate loans.

### Fiscal policy near term
- Fiscal challenges: revenue shortfalls and external financing shortfalls due to slowdown affecting revenue base.
- Authorities’ measures to limit revenue shortfall:
  - Administrative measures including tax audits.
  - Additional revenues from the PDL.
  - Possible introduction of a carbon tax.
  - Plans to broaden the tax base to increase the revenue-to-GDP ratio by 0.6 percentage points in 2009/10 by reducing tax exemptions and zero-rating; timing dependent on tax administration capacity to process refunds.
- January revenue data indicate the shortfall in revenue collected by FBR has increased, while PDL collection has been on track; preliminary FBR data for February indicate a further increase in the revenue shortfall.

*Source: IMF staff report excerpt contained in the provided content unit.*

### introduction of a carbon tax or a gross asset tax, are under discussion, but are yet to be

### _cr09123 - introduction of a carbon tax or a gross asset tax, are under discussion, but are yet to be

### Fiscal outlook and financing
- External budget financing (including project financing) will likely fall short of the original program projections by $1.9 billion or 1.2 percent of GDP, due mainly to the absence of external privatization proceeds.
- A similar shortfall is projected for 2009/10 given the global environment; authorities will seek external bilateral support.
- The MoF intends to tap nonbank sources of domestic financing, following several successful placements of Pakistan Investment Bonds (PIBs) and Ijara Sukuks since September (SMEFP, ¶10).
- Authorities committed to achieving the program’s original nominal fiscal deficit (excluding grants) target for 2008/09: Rs. 562 billion, or 4.3 percent of the revised GDP.
- Fiscal deficit target for 2009/10: 3.4 percent of GDP, consistent with the fiscal effort of 0.9 percentage point of GDP envisaged in the original program.
- Authorities prepared to restrain spending to offset revenue shortfalls and have begun to prioritize and rationalize development spending; further contingency measures may be needed to avoid last-minute expenditure compression.
- Development spending for 2009/10 will be reviewed in the context of the Medium-Term Budget Framework (MTBF), under preparation (SMEFP, ¶16). The MTBF is expected to take into account recommendations of the ongoing public expenditure review (expected to be completed in March).
- Room for expenditure cuts is limited because of:
  - high share of interest and security spending;
  - need for adequate operation and maintenance;
  - increased outlays under the strengthened social safety net.
- Cash transfers to the poor projected to increase from 0.4 percent of GDP in 2008/09 to 0.6 percent in 2009/10.
- Recently announced wheat procurement program for 2009–10 may involve expenditures that exceed Rs. 40 billion (0.3 percent of GDP) already included in the fiscal framework for 2009/10, unless international wheat prices rebound to the current price support level.
- Authorities envisage procurement of 6.5 million tons of wheat from the 2009 harvest (projected at 25 million tons) at the current support price of nearly $300 per ton (Rs. 950 per 40 kg). In February, international wheat prices in official bulk transactions were between $230 and $240 per ton (FOB).

### Monetary policy
- Under crisis conditions, SBP used the policy discount rate to defend international reserves, bring down inflation, and ensure interest rates encouraged demand for T-bills; OMOs were used to stabilize bank liquidity.
- Program measures helped re-focus monetary policy; adoption of pre-announced T-bill auction calendar has de-linked government debt management from monetary policy operations.
- SBP staff indicated steps to increase operational independence and establish short-term interest rates as the operational target, with price stability as the primary objective.
- SBP intends to implement an explicit corridor for short-term interbank rates effective August 1, 2009, market conditions permitting.
- No clear-cut case for immediate change in interest rates:
  - November 2008 MEFP committed to considering a further increase in the discount rate in January 2009; SBP did not see the need at that point.
  - SBP considers it premature to reduce the discount rate given elevated core inflation.
  - Authorities signaled desirability of interest rate cuts only after further progress in reducing inflation.
- Staff view: easing monetary conditions might be desirable and possible if:
  - international reserves remain adequate;
  - inflation continues to decline;
  - budget could be financed through T-bill placements in commercial banks.
- Staff caution: expected external financing shortfall may require raising more funds domestically; large financing needs from the wheat procurement program and placements of TFCs to address circular debt could hinder decline in interest rates.
- An interagency committee established in January to review proposed amendments to the SBP Act of 1956 with a view to strengthening operational autonomy of the SBP.

### Exchange rate and external competitiveness
- Despite sizable nominal depreciation in 2008, the rupee remains slightly overvalued in real effective terms.
- REER depreciated over first three quarters of 2008, appreciated since September, stabilizing recently at end-2007 levels; appreciation reflected inflation differentials and cross-currency movements of the U.S. dollar.
- Macroeconomic balance approach suggests rupee is presently about 5–10 percent above the level consistent with Pakistan’s current account deficit norm of 3.6 percent of GDP.
- Other approaches give similar results; preliminary equilibrium real exchange rate approach suggests rupee around 2 percent above equilibrium; external sustainability approach estimates rupee about 7 percent above value needed for current account to decline to level that stabilizes net foreign liabilities/GDP at 2007 level.
- Staff recommended SBP pursue flexible exchange rate policy and intervene mainly to build up official reserves; as program NFA targets for remainder of 2008/09 appear within reach, SBP encouraged to accumulate higher than programmed international reserves as a safety cushion.
- Authorities cautioned that over-ambitious reserve targets may adversely affect market expectations; staff cautioned against creating firm expectations of exchange rate stability and noted potential clash with introduction of explicit interest rate corridor.

### Financial sector stability and policy measures
- Authorities recognize risks from deteriorating economic outlook and need to monitor banking system closely; credit concentration among a few borrowers is a concern.
- Stress tests identified deterioration in credit quality as an important risk.
- Legislative changes aimed at strengthening SBP’s enforcement powers and new bankruptcy law under preparation will contribute to financial sector stability (SMEFP, ¶26).
- SBP announced relief package for industrial sector (mainly textiles) allowing banks and DFIs to defer for one year repayment of principal outstanding under Export-Oriented Projects schemes, including Debt Swap Facility and LTFF; similar relief offered for refinancing of loans under SBP Export Finance Scheme (EFS).
- Staff cautioned against expanding SBP quasi-fiscal operations by relaxing rules governing these schemes and stressed need for increased transparency.
- Authorities eased some regulatory provisions to help banks amortize losses from the KSE closure (SMEFP, ¶27–28); staff expressed concern about loosening prudential regulations amid an economic downturn.

### Exchange restrictions and trade policy
- Cash margins on letters of credit (LCs) give rise to an exchange restriction; measure introduced in May 2008 and recently modified to apply to LCs for imports of goods not previously subject to such requirements.
- Staff concluded imposition of cash margin requirements on LCs gives rise to an exchange restriction subject to Fund approval under Article VIII, Section 2(a), and that the recent modification intensifies this restriction, breaching the continuous performance criterion.
- Authorities working with staff to address the matter and will issue a regulation to reverse the intensification by end-June 2009; on this basis authorities request a waiver for nonobservance of the continuous performance criterion.
- Trade policy geared toward export diversification in nontraditional sector by reducing cost of doing business and enhancing productivity and competitiveness; initiatives include duty free access to U.S. market for goods from Reconstruction Opportunity Zones and more preferential access to EU market.

### Safeguards assessment and AML/CFT issues
- Safeguards Assessment update substantially completed: operational environment at SBP strengthened since last assessment, but action needed to address absence of operational independence and enhance controls over program data reporting and financial control systems.
- Inter-agency committee to complete work on strengthening operational independence of SBP by end-April 2009; new central bank law to be submitted to Parliament by December 2009.
- SBP planning changes in Audit Committee voting structure, steps to enhance internal controls, and establishment of Board committee to centralize risk management.
- SBP staff concerned that IFRS mark-to-market features not yet adopted in Pakistan could expose SBP to pressures for transferring unrealized profits to the budget; mechanisms to preclude such distribution proposed in forthcoming amendment of the SBP Act.
- Pakistan faces significant risks of money laundering and terrorism financing:
  - An Anti-Money Laundering Ordinance promulgated, a financial intelligence unit established, and a wide range of terrorism financing activities criminalized.
  - SBP and Securities and Exchange Commission regulations provide a good basis to improve protection and transparency.
  - Further work needed to expand preventive measures, strengthen enforcement, establish autonomy of money laundering offenses, complete the list of predicate offences, clarify criminalization of financing of terrorism organizations (other than prohibited ones), and broaden scope for freezing assets.
  - Available legal powers to prosecute money laundering and terrorism financing are not being properly used.

### Medium-term outlook and debt sustainability
- Real GDP growth projections:
  - recover to 4 percent next year;
  - reach 7 percent a year by 2013/14.
- Headline inflation expected to decline rapidly to 6 percent by 2009/10.
- Current account deficit envisaged to narrow to more sustainable levels as fiscal consolidation continues and the REER adjusts gradually to equilibrium.
- SBP expected to maintain reserve cover of about three months of imports over the medium term, supported by improved market access, recovery in FDI, and increased official financing.
- Growth to be sustained by structural reforms, increased public investment (especially in energy), and improved access to water for agriculture; with current account adjustment, much investment will be financed from domestic sources.
- Assumptions: mobilization of private savings and a considerable increase in the revenue-to-GDP ratio will permit significant increase in domestic investment, facilitated by well-targeted public investment, public-private partnerships, and improved financial intermediation.
- Revenue strategy:
  - Introduction of a broad-based VAT scheduled for 2010/11, constituting the most important tax policy reform.
  - Increase in revenue-to-GDP ratio to above 14 percent of GDP by 2013/14, coupled with sharp reduction in subsidies and ill-targeted development spending, needed to create fiscal space for high quality public investment and increased poverty-reduction outlays.
- MTBF: authorities working on first fully-fledged MTBF to strengthen predictability of funding and credibility of budget plans; MTBF to determine development budget envelope in context of well-specified and fully-costed programs, including poverty alleviation programs in Pakistan’s second Poverty Reduction Strategy Paper (SMEFP, ¶16).
- Debt dynamics:
  - Pakistan’s debt dynamics did not change substantially compared with assessment at approval of SBA.
  - Under baseline, external debt outlook improved slightly due to lower current account deficits but debt trajectory remains unchanged.
  - Domestic public debt expected to rise somewhat owing to lower privatization proceeds.
- Downside risks to debt sustainability significant:
  - External debt ratios sensitive to higher current account deficits, lower FDI inflows, large exchange rate depreciation.
  - Domestic debt ratios sensitive to shocks to primary fiscal balance, growth, interest rates, and contingent fiscal liabilities that could arise during the projection period.

*Source: IMF staff report (excerpts provided).*

### 37.      Pakistan’s stabilization program is on track. Fiscal consolidation and improved

### Pakistan’s stabilization program is on track. Fiscal consolidation and improved

### Program status and immediate outcomes
- Fiscal consolidation and improved coherence between fiscal and monetary policies are bringing under control the factors that led to large imbalances in recent years.
- Headline inflation has declined.
- The exchange rate has been broadly stable.
- The international reserve position has strengthened.
- The demand for treasury bills has rebounded.
- Performance under the program has been satisfactory, and all the quantitative performance criteria through December 2008 were met.

### Structural reforms and energy sector measures
- A contingency plan for handling problem banks has been prepared and is being strengthened.
- An action plan to reform tax policy and administration has been adopted and will be implemented with technical assistance from the IMF and the World Bank.
- Tariff differential electricity subsidies will be fully eliminated by the end of June 2009.
- Authorities have designed a plan to address the stock of circular debt, which should ease constraints on economic growth originating in the energy sector.
- Stronger incentives are needed to arrest the accrual of circular debt.

### Risks to outlook
- The weaker global outlook and slower domestic activity have notably increased risks to Pakistan’s economic and financial prospects.
- Benefits from the decline in petroleum prices and a narrowing external current account deficit are offset by:
  - Decline in the demand for exports.
  - Uncertainty about workers’ remittances.
  - Weakening bank credit to the private sector.
  - Dimmer prospects for external private finance.
  - Higher political risk.

### Fiscal policy assessment and near-term concerns
- Staff recognizes that the fiscal targets for December 2008/09 were met with great effort under difficult circumstances.
- Staff commends the authorities for adhering to the program’s fiscal target for 2008/09 and the fiscal adjustment for 2009/10.
- The fiscal program for these two years contains ambitious revenue targets in the context of slowing economic activity.
- The widening revenue shortfall in the third quarter of 2008/09 suggests meeting the revised revenue target for 2008/09 will be challenging.
- Recommendation: Early identification of additional contingent revenue and expenditure measures to avoid sharp last-minute expenditure compression.

### Social safety net
- Social protection is a key element of the authorities’ program.
- The roll-out of the scorecard system under the BISP has started.
- The number of families benefiting from BISP cash transfers should increase considerably in the coming two fiscal years.
- Recommendation: Review other components of the social safety net to identify overlaps and gaps.
- Consideration: Merge the cash transfer component of the Bait-ul-Mal system with the BISP and eliminate gaps and overlaps between federal and provincial programs to free resources for scaling up BISP.

### Revenue mobilization and medium-term fiscal space
- Government revenue are low by international standards, constraining capital accumulation, spending on maintenance, and social outlays.
- Vigorous implementation of the government’s ambitious tax reform agenda is essential.
- Specific key reform: Replacement of the General Sales Tax with a broad-based VAT in 2010/11.
- The establishment of the MTBF will be an important step for strengthening the public finances.

### Monetary policy stance and SBP
- The SBP’s monetary policy stance is appropriate and needs to remain flexible to address risks.
- Staff agrees with the authorities’ intention to keep interest rates on hold for the time being to lock in gains in lowering inflation and avoid financial pressures.
- Looking ahead, there should be scope for lowering interest rates, provided that:
  - inflation continues to decline,
  - international reserves are further strengthened, and
  - the government avoids recourse to SBP financing.

### SBP framework strengthening
- The envisaged strengthening of the SBP’s policy framework is welcome.
- The SBP must ensure that the introduction of the explicit interest rate corridor does not constrain the objective of strengthening its external international reserve position.
- The operational independence of the SBP needs to be enhanced.
- The SBP’s quasi-fiscal operations should be transparently accounted for and eventually eliminated.

### AML/CFT
- The AML/CFT regime is not yet effective.
- To ensure effectiveness, Pakistan should:
  - prepare a ML/FT risk analysis,
  - adopt a national AML/CFT strategy,
  - consolidate the institutional framework.

### Exchange rate policy
- Exchange rate flexibility should continue to facilitate external adjustment.
- The CGER estimates suggest that the Pakistani rupee is slightly overvalued.
- The exchange rate has arguably been too stable recently, and more flexibility may be needed in the future to deal with uncertain inflows.
- Intervention should remain largely geared to achieving the program’s NFA targets.
- Conditions permitting, any excess NFA accumulation will constitute a useful self-insurance against balance-of-payments risks.

### Financial system stability
- Pakistan’s financial system has weathered the crisis thus far but needs careful monitoring.
- FSAP stress tests and the authorities’ updates are encouraging.
- Risks are rising with slowing economic activity and rising NPLs.
- The recent formulation of plans for dealing with problem banks is welcome.
- Caution: Changes to the regulatory framework and the extension of the refinancing period under the SBP’s discount credit schemes should not prevent timely assessment of potential problems or result in unintended regulatory forbearance.

### External assistance and fiscal space
- Pakistan needs additional external assistance to reduce risks and provide scope for countercyclical policies by allowing greater development and social spending.
- The program is financed for 2008/09 and 2009/10, but financing constraints leave little room for countercyclical spending.
- The upcoming donor meeting is an important opportunity for mobilizing additional assistance.

### Staff recommendation and waiver support
- In light of performance to date and policy intentions in the attached LOI and SMEFP, staff recommends the completion of the first review under the SBA.
- Staff supports the authorities’ request for a waiver of nonobservance of the continuous performance criterion against imposing or intensifying exchange restrictions, noting the authorities’ commitment to reverse by end-June 2009 the intensification of the exchange restriction related to cash margin requirements on LCs for certain imports, and that the measure giving rise to the restriction is minor and temporary.

*Source: IMF staff report (excerpts provided).*

### 50.      It is proposed that the next Article IV consultation for Pakistan take place within

### _cr09123 - 50.      It is proposed that the next Article IV consultation for Pakistan take place within

### Consultation timing
- It is proposed that the next Article IV consultation for Pakistan take place within 24 months subject to the provisions of the decision on consultation cycles in program countries.

### Financial market indicators (high-level)
- Figures cover August 2008–February 2009 (sources: Pakistani authorities; Bloomberg).
- Key market series reported include: Reserves (U.S.$ billions, RHS); Placement Volumes, All Maturities (in Rs. billions, LHS); Discount rate (weighted average, RHS); Interbank rate (Rs./U.S.$, LHS); Daily Intervention (Excluding Oil Payments) in the Interbank Market (In millions of U.S. dollars); KSE Index; EMBIG Spread (In basis points); Five Year Credit Default Swap Premium (In basis points); Treasury Bill Auctions (June 18, 2008–February 25, 2009).

### Monthly macroeconomic indicators (selected)
- Headline Inflation, Core Inflation, SPI (January 2008–January 2009; headline and core series shown).
- Money growth (January 2008–January 2009) and credit to private sector, broad money, reserve money (series shown).
- Quantum Index of Large Scale Manufacturing (December 2007–December 2008).

### Monetary and credit indicators (selected)
- Growth in monetary aggregates (July 2005–December 2008; twelve-month percent change) shown for Reserve money, Broad money, Credit to private sector.
- Interest rates (January 2006–January 2009): KIBOR (3-month), Treasury Bills (3-month), Lending Rate, Deposit Rate (nominal and real; preliminary for Feb. 2009).
- Banks' Net Claims on Government (June 2007–June 2009; end-period stocks in billions of rupees).
- Treasury Bills Rates—Nominal and Real (February 2006–February 2009; annual percentage).

### Output, inflation, and sectoral contributions
- Sectoral contribution to real GDP (annual growth; in percent) shown for 2004/05–2008/09: Services, Industry, Agriculture (with staff projections).
- CPI Inflation and Core Inflation (year-on-year change; in percent) with projections through Jun-09.

### External sector and balance of payments (selected)
- Current account deficit: series 2004/05–2008/09 (in billions of U.S. dollars and in percent of GDP).
- Financial flows by type (other investment net, portfolio investment net, direct investment net) for 2004/05–2008/09.
- FDI regional comparison (in percent of GDP) for China, India, Malaysia, Pakistan, Indonesia (2004/05–2008/09).

### Key macro projections and indicators (from Table 1 and Table 5)
- Real GDP at factor cost:
  - 2007/08: 5.8
  - 2008/09: 3.4
  - 2009/10 (proj.): 2.5
- Consumer prices (period average):
  - 2007/08: 12.0
  - 2008/09: 20.0
  - 2009/10 (proj.): 13.0
- Consumer prices (end of period):
  - 2007/08: 21.5
  - 2008/09: 20.0
  - 2009/10 (proj.): 10.0
- Current account (including official current transfers, in percent of GDP):
  - 2007/08: -8.4
  - 2008/09: -6.5
  - 2009/10 (proj.): -5.9
  - Medium-term projection (Table 5): -4.3 (2010/11, 2011/12), trending to -3.7 by 2013/14.
- Gross national saving (percent of GDP):
  - 2007/08: 13.2
  - 2008/09: 14.2
  - 2009/10 (proj.): 15.6
- Gross capital formation (percent of GDP):
  - 2007/08: 21.6
  - 2008/09: 20.0
  - 2009/10 (proj.): 20.1

### Public finances and debt (selected from Tables 1, 3b, 7)
- Revenue and grants (percent of GDP):
  - 2007/08: 14.6
  - 2008/09: 15.4
  - 2009/10 (proj.): 16.0
- Expenditure (including statistical discrepancy) (percent of GDP):
  - 2007/08: 21.7
  - 2008/09: 19.1
  - 2009/10 (proj.): 19.6
- Budget balance (including grants) (percent of GDP):
  - 2007/08: -7.1
  - 2008/09: -4.0
  - 2009/10 (proj.): -4.2
- Budget balance (excluding grants) (percent of GDP):
  - 2007/08: -7.4
  - 2008/09: -4.2
  - 2009/10 (proj.): -4.3
- Primary balance (percent of GDP):
  - 2007/08: -2.5
  - 2008/09: 0.6
  - 2009/10 (proj.): 0.6
- Total government debt (percent of GDP):
  - 2007/08: 57.4
  - 2008/09: 54.6
  - 2009/10 (proj.): 56.9
  - Medium-term (Table 5): declining toward 47.5 by 2013/14 under the staff scenario.

### Balance of payments and external financing (selected from Tables 2, 6, 9)
- Merchandise exports (U.S. dollars, percentage change):
  - 2007/08: 16.5
  - 2008/09: 12.0
  - 2009/10 (proj.): -5.5
- Merchandise imports (U.S. dollars, percentage change):
  - 2007/08: 31.2
  - 2008/09: 1.1
  - 2009/10 (proj.): -14.5
- Workers' remittances (selected):
  - 2007/08: 6,451 (current transfers: credit, series in Table 2)
  - 2008/09 (Jul–Jun year): 7,692 (current transfers credit total in Table 2)
- Gross official reserves (end-period, in millions of U.S. dollars; Table 2 and Table 6):
  - 2007/08: 8,591
  - 2008/09 (end-period historical/proj mix): 5,177 (Act.), 6,680 (Prog./Proj. entries shown)
  - 2009/10 (proj.): 9,091 (Table 1 memorandum) and Table 6 projects 10,591 by 2009/10 in medium-term tables.
- Gross external financing requirements (in millions of U.S. dollars; Table 9):
  - 2007/08: 15,367
  - 2008/09: 12,659
  - 2009/10 (proj.): 10,340
- Available financing in 2008/09 included use of Fund resources (Table 9): "Use of Fund resources...4,752" (mem. item).

### Fund arrangements and access (selected)
- Proposed Stand-By Arrangement access and phasing (Table 11):
  - Board approval of SBA: November 24, 2008; Purchase 2,067.40 (in millions), 200 percent of quota.
  - First Review (March 30, 2009): Purchase 568.54, 55 percent of quota.
  - Second Review (June 15, 2009): Purchase 568.54, 55 percent of quota.
  - Subsequent reviews through Seventh Review with scheduled purchases and percent of quota culminating in Total 5,168.50 (in millions), 500 percent of quota.
- Indicators of Fund credit and projected debt service (Table 10):
  - Projected level of total credit outstanding based on existing and prospective drawings (selected): 3,885.0 (2008/09), 5,466.5 (2009/10), 5,521.7 (2010/11), later years declining per table.
  - Projected debt service to the Fund (total 1/): 184.6 (2008/09), 286.4 (2009/10), 360.8 (2010/11), 942.8 (2011/12), 2,189.1 (2012/13).

### Monetary survey and analytical balance sheet (selected)
- Broad money (end-period levels and annual percent change; Table 4):
  - Broad money (levels, in billions of rupees): 4,689 (Sep 2007?), series continuing to projections (e.g., 6,024, 5,623 in neighboring rows).
  - Broad money growth (annual percent): 15.3, 13.4, 9.6, 8.7, 10.4, 8.5, 10.8, 8.4, 15.9, 10.6 (series shown).
- Net foreign assets (NFA) and net domestic assets (NDA) with percent of broad money and reserve money indicators presented.

### Medium-term framework and projections (Tables 5–7)
- Real GDP projections (Table 5):
  - 2009/10: 4.0 (projected in medium-term table)
  - 2010/11: 5.0
  - 2011/12: 6.0
  - 2012/13: 6.5
  - 2013/14: 7.0
- Consumer prices (period average) medium-term:
  - 2009/10: 6.0
  - 2010/11: 5.5
  - 2011/12: 5.5
  - 2012/13: 5.5
  - 2013/14: 6.0
- Fiscal medium-term (Table 7 highlights):
  - Revenue and grants rising from 14.6 (2007/08) to 17.9 (2013/14) as percent of GDP under projections.
  - Expenditure trending from 21.8 (2007/08) to 19.7 (2013/14) percent of GDP under staff scenario.
  - Overall balance (including grants) improving from -7.1 (2007/08) to -1.7 (2013/14) percent of GDP in projections.

### Vulnerability indicators (selected from Table 12)
- Real GDP growth (market prices, in percent):
  - 2007/08: 6.0
  - 2008/09: 2.5
  - 2009/10 (proj.): 4.0
  - Medium-term projections: 5.0 (2010/11), 6.0 (2011/12), 6.5 (2012/13), 7.0 (2013/14)
- CPI inflation (period average):
  - 2007/08: 12.0
  - 2008/09: 20.0
  - 2009/10 (proj.): 6.0
- Gross international reserves (GIR, billions of U.S. dollars):
  - 2007/08: 8.6
  - 2008/09: 9.1
  - 2009/10 (proj.): 10.6
  - Medium-term: 11.1 (2010/11), 11.9 (2011/12), 11.9 (2012/13), 12.9 (2013/14)
- Public sector gross debt (percent of GDP): 57.4 (2007/08), 56.9 (2008/09), 55.4 (2009/10), trending to 47.5 by 2013/14 in projections.
- Gross external financing requirement (in billions of U.S. dollars): 15.4 (2007/08), 12.7 (2008/09), 10.3 (2009/10), medium-term roughly 9.9–13.4.

### Selected social and structural indicators (from Table 14)
- Population (total, millions): 108.0 (1990), 122.4 (1995), 138.1 (2000), 155.8 (2005) (series reported).
- Poverty headcount, national (in percent of population): 26.1 (1990), 28.6 (1995), 23.6 (2000), 23.9 (2004/05).
- Net primary enrollment ratio (percent of relevant age group): 33.0 (1990), 57.2 (2000), 65.6 (2005).
- Immunization, measles (percent of children ages 12–23 months): 50.0 (1990), 47.0 (1995), 56.0 (2000), 77.0 (2005), 80.0 (2007).

*Sources: Pakistani authorities; Bloomberg; and Fund staff projections and tables included in the content unit.*

### APPENDIX I. PAKISTAN: DEBT SUSTAINABILITY ANALYSIS

### APPENDIX I. PAKISTAN: DEBT SUSTAINABILITY ANALYSIS

### A. External Debt Sustainability Analysis — findings and projections
- At end FY 2007/08, external debt stock stood at around 26½ percent of GDP.
- Debt service was about 15 percent of exports of goods and services.
- Most external debt were public sector debt—owed largely to official creditors; private sector debt was limited.
- Baseline projection: external debt stock around 32½ percent of GDP during 2008/09–2010/11, then gradually declining to about 27½ percent of GDP by 2013/14.
- Debt service as a ratio of exports of goods and receipts is projected to increase to 20 percent under the baseline scenario.
- Debt service burden projected to decline markedly following repurchase of outstanding Fund credits.
- Standard bound tests identify serious downside risks:
  - Shocks include higher non-interest current account deficits, lower growth, higher depreciation, higher interest rates, and lower FDI flows.
  - If non-interest current account deficits are higher by half of the ten-year standard deviation, the debt-to-GDP ratio would be over 10 percentage points higher than baseline.
  - Combined shocks to growth, current account, and depreciation could raise the end-period external debt stock to around 45 percent of GDP.
- Table 1 baseline series (external debt in percent of GDP): 2004/05: 31.1; 2005/06: 28.0; 2006/07: 26.9; 2007/08: 26.5; 2008/09: 31.6; 2009/10: 32.4; 2010/11: 32.2; 2011/12: 31.3; 2012/13: 29.5; 2013/14: 27.7.
- Change in external debt (percent of GDP): 2007/08: -0.3; 2008/09: 5.1; 2009/10: 0.8; 2010/11: -0.2; 2011/12: -0.9; 2012/13: -1.8; 2013/14: -1.9.
- External debt-to-exports ratio (in percent): 2004/05: 191.2; 2005/06: 175.5; 2006/07: 180.7; 2007/08: 187.5; 2008/09: 225.5; 2009/10: 239.0; 2010/11: 236.2; 2011/12: 227.5; 2012/13: 213.2; 2013/14: 198.8.
- Gross external financing need (in billions of US dollars): 2004/05: 3.5; 2005/06: 6.6; 2006/07: 8.3; 2007/08: 15.4; 2008/09: 12.7; 2009/10: 10.3; 2010/11: 9.9; 2011/12: 11.0; 2012/13: 13.4; 2013/14: 13.0.
- Gross external financing need (in percent of GDP): 2004/05: 3.2; 2005/06: 5.2; 2006/07: 5.8; 2007/08: 9.2; 2008/09: 7.8; 2009/10: 6.0; 2010/11: 5.5; 2011/12: 5.7; 2012/13: 6.5; 2013/14: 5.8.

### Key macroeconomic assumptions underlying external baseline
- Real GDP growth (in percent): 2004/05: 7.7; 2005/06: 6.2; 2006/07: 6.0; 2007/08: 6.0; 2008/09: 2.5; 2009/10: 4.0; 2010/11: 5.0; 2011/12: 6.0; 2012/13: 6.5; 2013/14: 7.0.
- GDP deflator in US dollars (change in percent): 2004/05: 3.8; 2005/06: 9.6; 2006/07: 6.6; 2007/08: 9.9; 2008/09: -5.4; 2009/10: 1.1; 2010/11: 0.7; 2011/12: 0.8; 2012/13: 0.9; 2013/14: 0.9.
- Nominal external interest rate (in percent): 2004/05: 3.1; 2005/06: 3.7; 2006/07: 4.0; 2007/08: 5.6; 2008/09: 4.9; 2009/10: 3.6; 2010/11: 3.3; 2011/12: 3.4; 2012/13: 3.4; 2013/14: 3.2.
- Growth of exports of goods and services (U.S. dollar terms, in percent): 2004/05: 17.9; 2005/06: 14.2; 2006/07: 5.4; 2007/08: 10.7; 2008/09: -3.8; 2009/10: 1.6; 2010/11: 6.2; 2011/12: 8.0; 2012/13: 8.0; 2013/14: 8.5.
- Growth of imports of goods and services (U.S. dollar terms, in percent): 2004/05: 44.7; 2005/06: 29.6; 2006/07: 6.3; 2007/08: 28.4; 2008/09: -16.2; 2009/10: -5.1; 2010/11: 6.9; 2011/12: 7.4; 2012/13: 7.7; 2013/14: 7.0.
- Current account balance, excluding interest payments (in percent of GDP): 2004/05: -0.5; 2005/06: -2.9; 2006/07: -3.8; 2007/08: -7.1; 2008/09: -4.6; 2009/10: -3.2; 2010/11: -3.3; 2011/12: -3.3; 2012/13: -3.2; 2013/14: -2.8.
- Net non-debt-creating capital inflows (in percent of GDP): 2004/05: 1.5; 2005/06: 3.1; 2006/07: 5.2; 2007/08: 3.1; 2008/09: 2.1; 2009/10: 2.6; 2010/11: 2.7; 2011/12: 3.2; 2012/13: 3.5; 2013/14: 3.5.

### B. Public Sector Debt Sustainability Analysis — findings and projections
- At end FY 2007/08, public sector debt stock stood at 57.4 percent of GDP.
- Domestic public debt: 31.2 percent of GDP; external public debt: 26.2 percent of GDP.
- Interest payments: 4.7 percent of GDP; accounting for 32.6 percent of total revenue (excluding grants) and 26.3 percent of current expenditures.
- Interest payments on domestic debt accounted for only 12 percent of total interest expenditure.
- Baseline projection: total public debt projected to decline gradually to 47½ percent of GDP by 2013/14.
- Public debt ratio decline driven by fiscal consolidation and lower interest rates in line with macro stabilization.
- The ratio of interest payments to total revenue (excluding grants) would decline from 31 percent in 2008/09 to 14 percent in 2013/14, despite an increase in interest expenditure on external public debt by about 65 percent in U.S. dollar terms.
- Standard bound tests for public debt show:
  - Shocks from higher interest rates or lower growth are moderate—they would slow rather than reverse the medium-term decline in public debt ratio.
  - A primary balance shock, a 30 percent devaluation, and a contingent liabilities shock would lead to a perceptible increase in the public debt ratio.
- Table 2 baseline series (public sector debt in percent of GDP): 2004/05: 61.2; 2005/06: 55.8; 2006/07: 54.1; 2007/08: 57.4; 2008/09: 56.9; 2009/10: 55.4; 2010/11: 54.1; 2011/12: 52.1; 2012/13: 49.9; 2013/14: 47.5.
- Change in public sector debt (percent of GDP): 2007/08: 3.3; 2008/09: -0.4; 2009/10: -1.6; 2010/11: -1.2; 2011/12: -2.1; 2012/13: -2.2; 2013/14: -2.4.
- Public sector debt-to-revenue ratio (in percent): 2004/05: 432.7; 2005/06: 379.8; 2006/07: 355.4; 2007/08: 392.8; 2008/09: 369.9; 2009/10: 346.3; 2010/11: 322.7; 2011/12: 300.2; 2012/13: 283.0; 2013/14: 264.8.
- Gross financing need (in percent of GDP): 2004/05: 19.0; 2005/06: 20.7; 2006/07: 21.9; 2007/08: 24.2; 2008/09: 20.8; 2009/10: 19.8; 2010/11: 17.9; 2011/12: 16.3; 2012/13: 14.7; 2013/14: 13.3.
- Gross financing need (in billions of U.S. dollars): 2004/05: 20.8; 2005/06: 26.4; 2006/07: 31.5; 2007/08: 40.6; 2008/09: 33.8; 2009/10: 33.8; 2010/11: 32.3; 2011/12: 31.4; 2012/13: 30.5; 2013/14: 29.8.

### Key macroeconomic and fiscal assumptions underlying public baseline
- Real GDP growth at market prices (in percent): 2004/05: 7.7; 2005/06: 6.2; 2006/07: 6.0; 2007/08: 6.0; 2008/09: 2.5; 2009/10: 4.0; 2010/11: 5.0; 2011/12: 6.0; 2012/13: 6.5; 2013/14: 7.0.
- Average nominal interest rate on public debt (in percent): 2004/05: 5.5; 2005/06: 6.0; 2006/07: 8.7; 2007/08: 10.4; 2008/09: 10.3; 2009/10: 9.2; 2010/11: 7.1; 2011/12: 6.5; 2012/13: 6.1; 2013/14: 5.6.
- Average real interest rate (nominal rate minus change in GDP deflator, in percent): 2004/05: -1.5; 2005/06: -4.5; 2006/07: 0.7; 2007/08: -3.0; 2008/09: -10.5; 2009/10: 3.2; 2010/11: 1.6; 2011/12: 1.0; 2012/13: 0.6; 2013/14: -0.4.
- Inflation rate (GDP deflator, in percent): 2004/05: 7.0; 2005/06: 10.5; 2006/07: 7.9; 2007/08: 13.4; 2008/09: 20.8; 2009/10: 6.0; 2010/11: 5.5; 2011/12: 5.5; 2012/13: 5.5; 2013/14: 6.0.
- Growth of real primary spending (deflated by GDP deflator, in percent): 2004/05: 16.5; 2005/06: 16.3; 2006/07: 3.9; 2007/08: 20.7; 2008/09: -11.3; 2009/10: 1.7; 2010/11: 15.3; 2011/12: 10.5; 2012/13: 7.6; 2013/14: 10.0.
- Primary deficit (in percent of GDP): 2004/05: -0.2; 2005/06: 0.6; 2006/07: -0.2; 2007/08: 2.5; 2008/09: -0.6; 2009/10: -1.5; 2010/11: -0.9; 2011/12: -0.8; 2012/13: -0.9; 2013/14: -0.7.
- Share of foreign-currency denominated public debt (in percent of GDP): 2004/05: 28.1; 2005/06: 25.4; 2006/07: 24.3; 2007/08: 26.2; 2008/09: 27.9; 2009/10: 26.2; 2010/11: 26.2; 2011/12: 26.3; 2012/13: 26.3; 2013/14: 26.0.

### Stress scenarios and sensitivities (summary)
- External debt bound tests highlight vulnerability to:
  - Noninterest current account shock (permanent one-half standard deviation), FDI shock (net flows 50 percent lower), one-time real depreciation of 30 percent in 2009/10, and growth shock (growth lower by half of ten-year standard deviation).
  - Combined impact of shocks to growth, current account, FDI, and real depreciation can raise external debt substantially (example cited: around 45 percent of GDP).
- Public debt bound tests include:
  - Permanent 1/4 standard deviation shocks to real interest rate, growth rate, and primary balance.
  - One-time real depreciation of 30 percent and a 10 percent of GDP shock to contingent liabilities in 2009/10.
  - Primary balance shock and contingent liabilities shock would lead to perceptible increases in public debt ratio.
- Scenario comparisons provided:
  - Scenario with key variables at their historical averages shows lower public debt path (Table 2 scenario values summarized in charts).
  - No policy change scenario (constant primary balance) in 2009/10–2013/14 results in higher public debt trajectory than baseline.

### Program context and policy notes (from attachments)
- Pakistani authorities requested Executive Board completion of first review and approval of second purchase under the SBA of SDR 568.54 million (Letter of Intent dated March 16, 2009).
- Authorities noted recent modification of cash margin requirements on letters of credit for certain imports resulted in nonobservance of the continuous performance criterion against imposing or intensifying exchange restrictions; they will issue a regulation to eliminate this restriction by end-June, 2009 and request a waiver of nonobservance for the missed performance criterion.
- Supplementary Memorandum on Economic and Financial Policies (SMEFP) dated March 16, 2009 updates the program for remainder of 2008/09 and 2009/10.
- Recent macro developments (excerpt):
  - Headline inflation decreased from 25 to 20½ percent.
  - Exchange rate broadly stable; international reserves strengthened.
  - All quantitative performance criteria through end-December 2008 were met.
  - Budget pressures: slowdown in imports and domestic demand reduced budget revenues in first half of 2008/09; offset largely by Petroleum Development Levy (PDL) receipts; disbursement of multilateral program financing slow; projected privatization receipts for 2008/09 are unlikely to materialize.

*Source: APPENDIX I. PAKISTAN: DEBT SUSTAINABILITY ANALYSIS (excerpts), _cr09123 — IMF staff report materials.*

### 5.      The State Bank of Pakistan (SBP) has tightened the monetary stance to reduce

### _cr09123 - 5.      The State Bank of Pakistan (SBP) has tightened the monetary stance to reduce

### Overview of revised economic parameters
- Real GDP growth of 2½ percent in 2008/09 and 4 percent in the following year.
- Annual average consumer price inflation of 20 percent in 2008/09 and 6 percent in 2009/10.
- A current account deficit of 6 percent of GDP in 2008/09 and 4½ percent in 2009/10.

### Fiscal policy: objectives and measures
- Maintain path of fiscal adjustment in 2008/09–09/10; budget deficit target for 2008/09 unchanged at Rs. 562 billion (4.3 percent of revised GDP).
- Reduce budget deficit by 0.9 percentage points to 3.4 percent of GDP in 2009/10.
- Elimination of fuel and electricity subsidies in 2008/09 to facilitate consolidation.
- Revenue measures and tax administration reform to increase revenue and create fiscal space for social safety net.

Key revenue targets and measures:
- Federal Board of Revenue target: collection of Rs. 1,300 billion (10.0 percent of revised GDP) in 2008/09, including an additional yield of Rs. 65 billion from stepped-up auditing and enforcement.
- Considering levy of a carbon tax; any shortfall to be compensated by revenues from the PDL, tax administration measures, and expenditure control.

Financing and market measures:
- Use non-SBP domestic sources for financing based on quarterly borrowing planning.
- Issued three Ijara Sukuks, 3 to 30 year tenor Pakistan Investment Bond; interest rates on National Savings Scheme instruments increased.
- T-bill auctions successful with significant reductions in cut-off yields.
- Treasury-bill auction management: quarterly auction calendars; volume-based auction approach with pre-announced auction volume targets.

Social safety net expansion:
- Poverty scorecard adopted for Benazir Income Support Program (BISP).
  - Pilot roll-out: completion in 16 districts by end-May 2009.
  - Roll-out to all 130 districts planned between December 2009 and June 2010.
  - Approved 1.5 million beneficiary families using pre-scorecard targeting; expected disbursement Rs. 34 billion.
  - Continued implementation of Bait-ul-Mal with budget Rs. 6.7 billion.
  - Province of Punjab cash transfer program envelope Rs. 17 billion in FY 2008/09.
  - Small Public Works Programs of Rs. 28 billion provide small-scale employment.
  - Target: increase BISP beneficiaries to 5 million in 2009/10 (budgetary expenditure Rs. 65 billion); envisaged 7 million households in 2010/11.
  - Considering merger of cash transfer component of Bait-ul-Mal with BISP.

Tax administration and reform:
- Action plan adopted in January to strengthen tax administration.
  - Integration of sales tax and income tax administrations at HQ level; full field-level integration to be completed by end-December 2009.
  - Introduction of unique taxpayer identification number, strengthening Large Taxpayer Unit, improved tax audits.
  - World Bank technical assistance for refunds system for GST.
- Major tax reform agenda: replacement of GST with broad-based VAT starting in 2010/11.
  - Review of sales, excise, and income tax laws to minimize exemptions and zero-rating.
  - Timing hinges on tax administration capacity to process refunds; requested Fund and World Bank technical assistance.

Public financial management:
- Strengthened payment control and progress toward Single Treasury Account (STA).
  - System preventing accumulation of unspent balances outside the Federal Consolidated Fund (FCF).
  - All new budget releases through assignment accounts part of the FCF.
  - Gradual reduction and elimination of remaining unspent balances outside FCF; process will not be completed by June 30, 2009.
- Medium-Term Budget Framework (MTBF) preparation timeline:
  - Calendar established; initiating document submitted to line Ministries.
  - MTBF to be submitted to Cabinet in March/April 2009 with draft strategy paper.

Energy sector and circular debt:
- Schedule for electricity tariff adjustments finalized with World Bank to eliminate tariff differential subsidies by end-June, 2009.
  - Tariffs increased by 1 percent effective February 1, 2009.
  - Cumulative tariff increase of 4 percent by end-June.
  - Fuel adjustment surcharge reviewed monthly and adjusted as needed.
- Plan to resolve inter-corporate circular debt:
  - Prepared issue of government-guaranteed Term Financing Certificates by PEPCO to settle amounts owed to banks and suppliers.
  - Preparing plan to address ongoing operational and collection losses of distribution companies, PEPCO, and an independent power producer.

### Monetary and exchange rate policy
- Monetary policy aims at lowering inflation while balancing slowdown in economic activity.
  - SBP will calibrate policy; scope for more accommodative stance if inflation decline materializes and market confidence remains positive.
  - SBP stands ready to adjust policies if inflation resurges or if international reserves come under pressure.
  - Continue to avoid SBP financing of the budget.
- Monetary policy framework improvements:
  - Commitment to introduce in July 2009 an explicit corridor for overnight money market rate to enhance market signaling, liquidity management, and reduce short-term interest rate volatility.
  - Use of explicit interest rate corridor to improve transmission of changes in SBP discount rate to the economy and support price stability.
- Exchange rate policy:
  - Continue flexible exchange rate policy reflecting market conditions to achieve sustainable external balance and macroeconomic stability.
  - Interventions aimed at achieving program's net foreign asset targets.
  - Phase out SBP provision of foreign exchange for oil imports per program schedule.
    - SBP ceased providing foreign exchange for import of furnace oil as of February 1, 2009.

### Financial sector and safeguards
- Stress tests and resilience:
  - Financial Sector Assessment Program Update mission stress tests using June 2008 data (updated by SBP with September data) indicated banking system generally resilient.
  - Capital injection needed to restore capital adequacy ratio of the twelve largest banks to 8 percent in the worst case scenario: 2.3 percent of GDP.
  - Main risks: major deterioration in credit quality (notably textile industry) and equity market exposure; large concentration of exposures in some banks.
  - A few banks representing less than 10 percent of system assets face financial pressures being addressed via mergers or fresh equity injections.
- Non-performing loans and capital:
  - Gross NPLs increased from 7.7 percent of total loans in June 2008 to 9.1 percent in December 2008.
  - Net NPLs to net loans increased from 1.3 to 2.5 percent in same period.
  - Capital adequacy increased from 12.1 to 12.2 percent of risk-weighted assets.
- Banking resolution and supervision:
  - December 2008: SBP adopted problem bank management and contingency plan including criteria for liquidity support, assessment of bank problems, and intervention procedures.
  - Amendments to banking legislation drafted to strengthen SBP enforcement powers; to be submitted to Parliament before end-June 2009.
- Central bank independence and legal framework:
  - Draft revision of SBP law prepared to strengthen operational independence.
  - Inter-agency committee (including MoF) to propose measures by end-April 2009.
  - New central bank law to be submitted to Parliament by December 2009.
- Bankruptcy law:
  - New bankruptcy law under preparation to rehabilitate viable companies and resolve highly indebted companies.
  - Review committee finalizing draft law to submit to MoF by end-July 2009.
- Collateral, valuation, and accounting rules:
  - 2007: SBP withdrew benefit of Forced Sale Value (FSV) for provisioning; in 2009 SBP allowed partial FSV benefit (up to 30 percent) for pledged stock and residential and commercial properties.
  - August 2008 floor on stock prices impeded price discovery for 3½ months; SECP allowed companies to delay recognition of losses on securities (available for sale) in income statements until end-December 2009.
    - Losses must be recognized immediately in capital positions; gains or delayed loss recognition cannot be used to pay cash or stock dividends.
    - Companies required to gradually realize losses in income statement on quarterly basis and ensure full realization of impairment by end-2009.
  - SBP allowed banks option to follow SECP instructions regarding recognition of impairment on capital position but encouraged early recognition in income statements.
- Market intervention vehicle:
  - National Investment Trust’s State Enterprise Fund (NITSEF) operations begun with initial capital Rs. 20 billion.
    - Participating institutions: banks, State Life Insurance Company, Employees Old Age Benefits Institution, lending funds to NITSEF against a government guarantee.
    - As of mid-February, NITSEF had invested Rs. 7 billion.
    - NITSEF purchases through Stock Exchange at best available price; will disclose financial statements, investment strategy, and purchases quarterly on a dedicated website.
- SBP safeguards assessment recommendations and timetable:
  - Improve SBP internal controls; change voting structure of Audit Committee; establish Board committee to centralize risk management.
  - Implementation timeline:
    - Change voting structure of Audit Committee in April 2009.
    - Improve internal controls by end-June 2009.
    - Establish Board Committee to centralize risk management by end-December 2009.

### Program risks and monitoring
- Main risks:
  - Deterioration in trading partner economies could reduce demand for exports, workers’ remittances, and private capital flows.
  - Slower recovery of domestic and external demand could undermine revenue targets.
  - Weaker economic activity increases risks to domestic financial sector.
- Monitoring:
  - Program subject to quarterly reviews and quarterly performance criteria as specified in Table 1 for remainder of 2008/09.
  - Addendum to Technical Memorandum of Understanding adds a definition of external payments arrears and requires reporting on new liabilities incurred or guaranteed by government in settling circular debt.
  - Adjustors in TMU dated November 20, 2008 remain applicable.

### Program financing and donor support
- Program requires additional financing to reduce risks and enhance growth prospects.
- While financed for 2008/09, financing constraints limit countercyclical policy and additional financing needed for social safety expenditure, development spending, and enhanced security needs.
- Upcoming donor meeting in late March/April pivotal for mobilizing additional financing and supporting adjustment efforts.

### Selected quantitative targets and outcomes (December 2008–June 2009) — Table 1 highlights
- 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
  - Adjusted target...882
  - Actual...2,355
- 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
  - Adjusted target...1,356
  - Actual...1,270
- 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
  - Adjusted target...1,274
  - Actual...1,222
- 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
  - Adjusted target...262
  - Actual...253
- 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
  - Actual...813
- Cumulative ceiling on contracting of nonconcessional medium- and long-term public and publicly guaranteed external debt* (in millions of U.S. dollars) 1/
  - Prog. (all dates): 9,500
  - Actual...1,000
- Accumulation of external payments arrears (continuous performance criterion during the program period)* (in millions of U.S. dollars)
  - Prog. (all dates): 0 0 0 0
  - Actual...0
- Continuous ceiling on SBP's foreign currency swaps and forward sales* (in millions of U.S. dollars)
  - Prog. end-Sept. 2008: 1,900
  - Prog. end-Dec. 2008: 2,750
  - Prog. end-Mar. 2009: 2,750
  - Prog. end-Jun. 2009: 2,750
  - Actual...1,850

Memorandum items (selected):
- Net external program financing (cumulative, in millions of U.S. dollars): -166 (end-Dec. 2008), -120 (end-Mar. 2009), 406 (end-Jun. 2009), 779 (later)
- External project grants (in millions of U.S. dollars): 244, 71, 131, 92
- Foreign Exchange cash reserve requirement (CRR, incl. special CRR) deposits in SBP (in millions of U.S. dollars): 832, 727, 850, 850
- 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.

### Structural performance criteria and benchmarks (Table 2 highlights)
I. Structural Performance Criteria (Deadline / Status)
- Amendments to the banking legislation will be submitted to Parliament to enhance the effectiveness of SBP enforcement powers in the area of banking supervision. — end-June 2009
- The government will submit 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. — end-June 2009

II. Structural Benchmarks
- A contingency plan for handling problem private banks will be finalized. — end-Dec. 2008 — Met
- A full description of required reforms in the area of tax administration, including an action plan for harmonizing the GST and income tax administration will be finalized. — end-Dec. 2008 — Met 1/
- In close collaboration with the World Bank, the government will finalize the schedule for further electricity tariff adjustments during 2008/09, with a view to eliminating tariff differential subsidies. — end-Dec. 2008 — Met; end-June 2009
- The SBP’s provision of foreign exchange for furnace oil will be eliminated. — Feb. 1, 2009 — Met
- In close collaboration with the World Bank, the government will develop a strategy and a time-bound action plan for the adoption of specific measures to strengthen the social safety net and improve targeting to the poor. — end-March 2009 — Underway
- The government will prepare a plan for eliminating the inter-corporate circular debt. — end-March 2009 — Underway
- The transition to a single treasury account will be completed. — end-June 2009

1/ The action plan was adopted in January 2009.

*Source: Pakistan—IMF program documents as presented in the provided content unit (Attachment III. PAKISTAN: ADDENDUM TO THE TECHNICAL MEMORANDUM OF UNDERSTANDING, March 16, 2009).*

### 1.      The Technical Memorandum of Understanding (TMU) of November 20, 2008 will

### The Technical Memorandum of Understanding (TMU) of November 20, 2008 will

### TMU: scope and change
- The TMU of November 20, 2008 will remain in effect except for the changes described below.

### Definitions added
- Section I:  
  - External payment arrears are defined as unpaid debt service by the government beyond the due date under the contract and any grace period.

### Program reporting requirement added
- Section III:  
  - Information on new liabilities incurred or guaranteed by the government in settling the circular-debt, including government guarantees of Term Financing Certificates (TFCs) issued by Pakistan Electric Power Company (PEPCO). The information will include the size of the government exposure, the duration of the guarantee or claim, and any other provisions relevant for the government’s exposure.

### External Program Financing for Budget for 2008/09 (Table 1) — key figures (In millions of U.S. dollars)
- Program Loans, Total: 3,595
- World Bank, Total: 800
- ADB, Total: 1,334
- IDB, Total: 761
- Bilateral support, Total: 500
- Short-term commercial, Total: 200
- Budgetary Grants, Total: 191
- Amortization, Total: 2,907
- Medium and Long-term, Total: 2,003
- Other, Total: 1,281
- Short-term, Total: 904
- Net program financing (Budget): -16646526373779
- Amortization of government guaranteed debt, Total: 756
- Net program financing (BoP): -17627516356723
- Sources: Pakistani authorities; and Fund staff projections.

### Relations with the Fund — notable institutional and financial facts (as of February 28, 2009)
- Membership: Joined: 07/11/1950; Article VIII.
- Quota: Quota 1,033.70 SDR Million (100.00 percent)
- Fund Holdings of Currency: 3,104.14 SDR Million (300.29 percent)
- Reserve position in Fund: 0.12 SDR Million (0.01 percent)
- SDR Department: Net cumulative allocation 169.99 SDR Million (100.00 percent); Holdings 111.33 SDR Million (65.49 percent)
- Outstanding Purchases and Loans: Stand-by Arrangements 2,067.40 SDR Million (200.00 percent); PRGF arrangements 740.82 SDR Million (71.67 percent); Extended arrangements 3.16 SDR Million (0.31 percent)
- Latest financial arrangements (type, approval date, expiration date, amount approved, amount drawn):  
  - Stand-By: 11/24/08 — 10/23/2010 — 5,168.50 SDR Million — 2,067.40 SDR Million  
  - PRGF: 12/06/2001 — 12/05/2004 — 1,033.70 SDR Million — 861.42 SDR Million  
  - Stand-By: 11/29/2000 — 09/30/2001 — 465.00 SDR Million — 465.00 SDR Million
- Projected payments to the Fund (SDR Million; based on existing use of resources and present holdings of SDRs):  
  - 2009 Principal: 132.37; Charges/Interest: 28.38; Total: 160.75  
  - 2010 Principal: 172.28; Charges/Interest: 35.86; Total: 208.14  
  - 2011 Principal: 1,205.98; Charges/Interest: 29.65; Total: 1,235.63  
  - 2012 Principal: 1,180.14; Charges/Interest: 12.62; Total: 1,192.76  
  - 2013 Principal: 86.14; Charges/Interest: 0.98; Total: 87.12

### Safeguards and technical assessments
- State Bank of Pakistan (SBP) was subject to a full safeguards assessment under the Stand-By Arrangement approved in November 2008, including a safeguard mission in late January 2009.
- Assessment findings: improved transparency of audited financial statements; stronger governance oversight by the Central Board and the Audit Committee; implementation of new organization structure, IT systems, and recruitment of qualified professional staff.
- Recommended actions: safeguard central bank independence via amending the SBP Act and expedite its transition to the inter-agency group formed by the authorities; strengthen controls over program data reporting to the Fund through an independent review mechanism.

### FSAP/ROSC and technical assistance highlights
- Fiscal Transparency Module: 11/28/2000; Update 11/22/2004.
- Financial System Stability Assessment / FSAP: 6/23/2004; Update 9/22/2008 (In progress).
- Recent technical assistance (selected):  
  - FAD: Fiscal data management and transparency (January 2002); Tax administration (January 2003); Customs administration (February/March 2003); Fiscal reporting (April 2004); Public financial management (April 2007).  
  - MCM: Public debt reform and capacity building (November/December 2004); Insurance sector (March/April 2005); Monetary policy framework (December 2006; April 2007).  
  - STA: External sector statistics/SDDS subscription (February 2002); National accounts and CPI (April/May 2005); International investment position statistics (May 2007).  
  - LEG: Deposit Protection Fund and Central Bank Law (July 2008); Banking Law (August 2008).

### Relations with the World Bank — programmatic priorities and financing
- FY2007 World Bank support to Pakistan: US$985 million.
- CAS endorsed June 1, 2006 covering FY2006–2009; CAS pillars:  
  - Sustained Growth and Improved Competitiveness.  
  - Strengthened Governance and Service Delivery.  
  - Improved Lives and Protection of the Vulnerable.
- CAS lending program up to US$6.5 billion through FY2009, about half (US$3.1 billion) in IDA credits; policy-based lending up to half of planned support.
- IFC target investments for FY2006–09: US$500–600 million, focused on financial, SME, and infrastructure sectors.
- IBRD/IDA financial operations since FY2002 (In millions of U.S. dollars): Commitments and disbursements data summarized in the source document.

### Statistical issues — assessment and needed improvements
- Overall: Data provision has some shortcomings but is broadly adequate for surveillance.
- GDDS participation since 2003; for SDDS subscription Pakistan needs to disseminate:  
  - (a) monthly central government operations data with a timeliness of one month;  
  - (b) quarterly data on national accounts, employment and unemployment, wages/earnings, and external debt with a timeliness of one quarter;  
  - (c) more detailed breakdowns of central government debt and external debt;  
  - (d) updated and expanded metadata on compilation and dissemination practices.
- National accounts: 2004 revision to 1993 SNA concepts; work ongoing to produce quarterly national accounts (QNA) and rebase to 2005/06.
- Prices: CPI and WPI compiled monthly; SPI weekly (46 essential commodities). Plans to introduce COICOP and develop a PPI with base year 1999/2000.
- Government finance statistics: broadly based on GFSM 1986; privatization proceeds included below the line; scope limited by exclusion of extrabudgetary funds; authorities intend to adopt GFSM 2001 over the medium term and are improving GFS via PIFRA.
- Monetary statistics: scope comprehensive; classification and sectorization broadly in line with MFSM; authorities intend to adopt MFSM fully; progress needed to resolve interbank position discrepancies between SBP and scheduled banks.
- Balance of payments: prepared on BPM5 since Q3 2003; 2007 TA recommended closer alignment in residency, sectorization, and consistency; differences between customs records (FBS) and exchange records (SBP) for trade have been widening and are being worked on for reconciliation.

*Source: Staff Report for the 2009 Article IV Consultation and First Review Under the Stand-By Arrangement — Informational Annex (Prepared by Middle East and Central Asia Department, March 16, 2009).*

### 8.      Annual international investment position data are compiled and published on the SBP

### Annual international investment position data are compiled and published on the SBP website

### Data availability and metadata
- Annual international investment position data are compiled and published on the SBP website. Data are available back to 2003.
- International Investment Position 6 — Date of latest observation: 2007; Date received: Jun. 2008; Frequency of Data: A; Frequency of Reporting: A; Frequency of publication: A.

### Key economic developments (IMF staff statement, March 30, 2009)
- Political:
  - A Supreme Court ruling in late-February barred former prime minister Nawaz Sharif and his brother Shahbaz Sharif from holding public office, triggering public protests and calls for reinstating Iftikhar Chaudhry as Chief Justice.  
  - To end unrest, the government announced on March 16 measures including the reinstatement of Mr. Chaudhry and a review of the Supreme Court decision; these measures were successful in lowering political tensions.
- Real activity:
  - Large-scale manufacturing output declined by 5½ percent in July 2008-January 2009 compared with the same period 12 months earlier.
- Inflation:
  - Headline inflation increased to 21.1 percent (y/y) in February from 20.5 percent in January.
  - Core inflation remained at 18.9 percent (y/y).
  - The weekly Sensitive Price Index shows a decline to 19.1 percent (y/y) in the week ending March 19 from 26.1 percent in February (y/y).
- External sector and reserves:
  - Exports were down by 5.4 percent in February 2009 (y/y).
  - Imports contracted by 36.8 percent in February 2009 (y/y).
  - Remittances increased by 27.6 percent (y/y), though the data may also include some capital transactions.
  - Repayment of the $500 million Eurobond in February resulted in a deficit in the financial account.
  - Gross foreign exchange reserves of the SBP amounted to $6.7 billion on March 24.
  - Gross international reserves increased from US$3.5 billion at end-October to US$6.7 billion as of February 20.
- Financial markets and monetary conditions:
  - Demand for T-bills has been strong; the weighted average yield declined to 11.8 percent on March 25 (from just below 13 percent at end-February).
  - Stock prices were 37 percent above the level registered in late January as of March 24.
  - On March 24, MSCI Barra announced that Pakistan’s equity market will be included in the MSCI Frontier Markets Index at the next semi-annual index review on May 29, 2009.
  - The exchange rate has remained stable since end-February 2009; the SBP has intervened mainly on the buying side.
- Fiscal and fiscal-related developments:
  - Tax revenue collections by the Federal Bureau of Revenue slowed in January–February; the revenue shortfall was largely offset by collections of the Petroleum Development Levy.
  - Efforts to reduce circular debt continued; Pakistan Electric Power Company arranged a Rs. 81 billion loan from a consortium of commercial banks to help settle its liabilities to other energy companies.
  - On March 26, 2009, the World Bank Board approved a Poverty Reduction and Economic Support Operation for Pakistan in the amount of $500 million.

### Program implementation and policy measures
- Program status:
  - The stabilization program for 2008/09–09/10 (July-June), supported by a Stand-By Arrangement (SBA), aims to restore financial stability while protecting the poor through fiscal and monetary tightening and structural measures in fiscal and financial sectors.
  - Policy implementation has been good and the program remains on track; all quantitative performance criteria and the structural benchmarks for the first program review were met.
  - The end-December fiscal deficit target was achieved through a combination of revenue and expenditure measures.
- Social protection:
  - The Benazir Income Support Program (BISP) strengthening is a key element of the program.
  - Expansion of BISP will increase spending on social transfers from 0.4 percent of GDP in 2008/09 to 0.6 percent of GDP in 2009/10.
- Financial sector resilience:
  - Based on the FSAP update, the banking system appears generally well-capitalized and liquid.
  - Aggregate financial soundness indicators improved since the 2004 FSAP, although the worsening macroeconomic environment adversely affected bank profitability and asset quality in 2008; gross nonperforming loans rose (value not specified in source excerpt).

*Source: IMF staff statement on Pakistan (March 30, 2009) and accompanying table of common indicators as of February 27, 2009.*

### 7.7 percent of total loans in June 2008 to 9.1 percent in December 2008 but capital adequacy

### _cr09123 - 7.7 percent of total loans in June 2008 to 9.1 percent in December 2008 but capital adequacy

### Macroeconomic outlook and program revision
- The global economic and financial environment has deteriorated significantly since the start of the program; authorities and mission agreed on a revised macroeconomic framework with lower growth and inflation for 2008/09 and beyond.
- Authorities chose to adhere to the program’s fiscal target for 2008/09 and to continue with further fiscal adjustment in 2009/10.
- There should be scope for the State Bank of Pakistan (SBP) to lower its discount rate if: inflation abates, the external reserve position continues to improve, and the government can sell T-bills to banks and nonbank private investors.

### Fiscal policy and revenue strategy
- Directors commended adherence to the program’s fiscal deficit target for 2008/09 and supported the envisaged fiscal adjustment for 2009/10.
- Directors noted the revenue target is ambitious and encouraged identification of additional contingency fiscal measures to avoid last-minute expenditure compression.
- Over the medium term, higher revenues are critical to create fiscal space for development and social spending.
- Directors welcomed the action plan to reform tax policy and administration and emphasized the need to replace the general sales tax with a broad-based value added tax.
- Planned establishment of a medium-term budget framework was commended.

### Monetary policy, exchange rate, and reserves
- Directors indicated the monetary policy stance was appropriate and agreed interest rates should be kept on hold for the time being to avoid financial pressures and consolidate disinflation.
- There is scope to lower interest rates in the future provided inflation further declines and international reserves continue to strengthen.
- Need to continue to avoid central bank financing of the government.
- Directors welcomed strengthening of SBP’s policy framework, emphasized enhancing SBP operational independence, and transparently accounting for and eliminating quasi-fiscal operations.
- Staff assessment: the rupee may be slightly overvalued; Directors observed the exchange rate had remained broadly stable and recommended maintaining exchange rate flexibility.
- Exchange rate volatility reduced from 8.4 percent (twelve months to date) to 4.8 percent since program inception.

### Financial sector and banking system
- Pakistan’s financial system has weathered the crisis well; contingency plans for dealing with problem banks were recently formulated.
- Directors encouraged close monitoring of developments and timely assessment of potential problems.
- Banking sector appears generally well-capitalized and liquid; stress tests indicate most banks, including all large banks, would remain solvent under a severe crisis scenario; a few banks representing less than 10 percent of the system face financial pressures and are being addressed by SBP and owners via mergers or fresh equity injections.
- Non-performing loans rose from 7.7 percent of total loans in June 2008 to 9.1 percent in December 2008 but capital adequacy ratios stayed around 12 percent of risk-weighted assets over the same period.

### Social protection, structural reforms, and energy sector
- Directors welcomed focus on social protection and progress under the Benazir Income Support Program (BISP), which envisages a considerable increase in social transfers in coming years.
- Importance of reviewing other social safety net components to possibly merge existing cash transfer plans with BISP and eliminate gaps and overlaps between federal and provincial programs was emphasized.
- Directors welcomed the intention to address circular debt in the energy sector and to eliminate electricity subsidies, while noting further steps are needed to arrest new accrual.

### Anti–money laundering / countering financing of terrorism
- Directors encouraged further strengthening of the regime for addressing money laundering and the financing of terrorism and noted the need for effective implementation and consolidation of the institutional framework.
- Authorities reiterated steps being taken, including the Anti Money Laundering Ordinance, establishment of the FMU, strengthening Prudential Regulations, and capacity building in SBP and banks.

### External assistance and donor engagement
- Pakistan needs additional external assistance to reduce risks and provide scope for greater development and social spending.
- The upcoming donor meeting planned for April (Friends of Pakistan Meeting in Tokyo) was highlighted as an important opportunity for mobilizing additional assistance.

### Executive Board actions and Press Release highlights (Press Release No. 09/100, March 30, 2009)
- IMF completed first review under a 23-month Stand-By Arrangement (SBA) and approved disbursement equivalent to SDR 568.5 million (about US$ 847.1 million), bringing total disbursements under the program to SDR 2.64 billion (about US$3.93 billion).
- The SBA was approved on November 24, 2008, for an amount equivalent to SDR 5.169 billion (about US$7.7 billion); the arrangement entails exceptional access amounting to 500 percent of Pakistan's quota.
- Executive Board approved Pakistan’s request for a waiver for non-observance of the continuous performance criterion on non-imposition or intensification of exchange restrictions, on the basis of the authorities’ plan to reverse the intensification by end-June.

### Selected economic indicators (highlights from "Pakistan: Selected Economic Indicators, 2007/08–2009/10")
- Population: 160.9 million (2007/08)
- Per capita GDP: US$1,042 (2007/08)
- Poverty rate: 23.9 percent (2004/05)
- Real GDP at factor cost: 2007/08 = 5.8; 2008/09 Prog. = 3.4; 2008/09 Proj. = 2.5; 2009/10 Prog. = 5.0; 2009/10 Proj. = 4.0
- Consumer prices (period average): 2007/08 = 12.0; 2008/09 Prog. = 23.0; 2008/09 Proj. = 20.0; 2009/10 Prog. = 13.0; 2009/10 Proj. = 6.0
- Consumer prices (end of period): 2007/08 = 21.5; 2008/09 Prog. = 20.0; 2008/09 Proj. = 10.0; 2009/10 Prog. = 6.0; 2009/10 Proj. = 6.5
- Gross saving (percent of GDP): 2007/08 = 13.2; 2008/09 Prog. = 13.5; 2008/09 Proj. = 14.2; 2009/10 Prog. = 15.6; 2009/10 Proj. = 15.6
- Gross capital formation (percent of GDP): 2007/08 = 21.6; 2008/09 Prog. = 20.0; 2008/09 Proj. = 20.1; 2009/10 Prog. = 21.3; 2009/10 Proj. = 19.9
- Revenue and grants (percent of GDP): 2007/08 = 14.6; 2008/09 Prog. = 15.1; 2008/09 Proj. = 15.4; 2009/10 Prog. = 16.1; 2009/10 Proj. = 16.0
- Expenditure (including statistical discrepancy, percent of GDP): 2007/08 = 21.7; 2008/09 Prog. = 19.1; 2008/09 Proj. = 19.6; 2009/10 Prog. = 19.2; 2009/10 Proj. = 19.2
- Budget balance (including grants, percent of GDP): 2007/08 = -7.1; 2008/09 Prog. = -4.0; 2008/09 Proj. = -4.2; 2009/10 Prog. = -3.1; 2009/10 Proj. = -3.2
- Primary balance (percent of GDP): 2007/08 = -2.5; 2008/09 Prog. = 0.6; 2008/09 Proj. = 0.6; 2009/10 Prog. = 1.6; 2009/10 Proj. = 1.5
- Total government debt (percent of GDP): 2007/08 = 57.4; 2008/09 Prog. = 54.6; 2008/09 Proj. = 56.9; 2009/10 Prog. = 52.4; 2009/10 Proj. = 55.4
- Net foreign assets (annual change in percent of initial stock of broad money): 2007/08 = -7.8; 2008/09 Prog. = -4.9; 2008/09 Proj. = -3.4; 2009/10 Prog. = 1.8; 2009/10 Proj. = -1.4
- Broad money (annual change): 2007/08 = 15.3; 2008/09 Prog. = 10.8; 2008/09 Proj. = 8.4; 2009/10 Prog. = 15.9; 2009/10 Proj. = 10.6
- Private credit (percentage change): 2007/08 = 16.4; 2008/09 Prog. = 25.2; 2008/09 Proj. = 8.3; 2009/10 Prog. = 19.6; 2009/10 Proj. = 14.1
- Six-month treasury bill rate (period average, in percent): 2007/08 = 9.6; 2008/09 Prog. = 12.7 (2008/09: average for June–December 2008)
- Merchandise exports (U.S. dollars, percentage change): 2007/08 = 16.5; 2008/09 Prog. = 12.0; 2008/09 Proj. = -5.5; 2009/10 Prog. = 11.0; 2009/10 Proj. = 1.6
- Merchandise imports (U.S. dollars, percentage change): 2007/08 = 31.2; 2008/09 Prog. = 1.1; 2008/09 Proj. = -14.5; 2009/10 Prog. = 5.7; 2009/10 Proj. = -5.5
- Current account including official current transfers (percent of GDP): 2007/08 = -8.4; 2008/09 Prog. = -6.5; 2008/09 Proj. = -5.9; 2009/10 Prog. = -5.7; 2009/10 Proj. = -4.3
- External public and publicly guaranteed debt (percent of exports of goods and services): 2007/08 = 169.7; 2008/09 Prog. = 160.0; 2008/09 Proj. = 186.3; 2009/10 Prog. = 154.2; 2009/10 Proj. = 189.0
- Debt service (percent of exports of goods and services): 2007/08 = 15.2; 2008/09 Prog. = 16.9; 2008/09 Proj. = 23.1; 2009/10 Prog. = 15.4; 2009/10 Proj. = 20.2
- Gross reserves (in millions of U.S. dollars): 2007/08 = 8,591; 2008/09 Prog. = 8,591; 2008/09 Proj. = 9,091; 2009/10 Prog. = 11,291; 2009/10 Proj. = 10,591
- Reserves in months of next year's imports of goods and services: 2007/08 = 2.7; 2008/09 Prog. = 2.1; 2008/09 Proj. = 3.0; 2009/10 Prog. = 2.6; 2009/10 Proj. = 3.3

*Source: IMF staff report and Press Release No. 09/100 (March 30, 2009).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09123.pdf_