## _cr09265

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### Executive Summary — background and key commitments
- Volatile political and security situation; military operations in the Swat Valley produced nearly three million internally displaced persons (IDPs).
- Tokyo donor pledges: $5.7 billion; about $2 billion (1.1 percent of GDP) expected to be disbursed in 2009/10; additional budgetary grants about 0.3 percent of GDP expected for IDP spending.
- 2009/10 fiscal deficit target (excluding grants) increased from 3.4 percent of GDP to 4.6 percent of GDP; including assumed additional IDP grants, authorities increased the fiscal deficit target (excluding grants) to 4.9 percent of GDP as reflected in the budget.
- Authorities requested augmentation of Fund access by 200 percent of quota; portion equivalent to SDR 951.1 million ($1.4 billion), or 92 percent of quota, could be used to finance priority spending until donor disbursements are received.
- Staff supported waivers, extension of the arrangement through end-2010, rephasing of purchases, completion of second review, and approval of augmentation of access.

### Recent economic developments — growth, inflation, finance, and external sector
- Growth and output:
  - Real GDP growth 2008/09 revised to 2.0 percent (from 2.5 percent).
  - Real GDP growth 2007/08 revised to 4.1 percent (from 5.8 percent).
  - Agriculture rebound (bumper wheat crop) offset manufacturing, exports, and private credit weakness.
- Inflation:
  - Headline inflation declined from 25 percent in October 2008 to 13.1 percent in June.
  - Core inflation fell from 18.9 percent in November 2008 to 15.9 percent in June.
- Money and finance:
  - SBP policy rate cut by 100 bps in April; SBP discount rate lowered to 14 percent on April 21, 2009.
  - Liquidity overhang absorbed by Q1 2009; key short-term interest rates within 200 bps of the policy rate.
  - Banks prefer treasury paper; nonbank budget financing (mostly NSS) higher than programmed.
- External sector and reserves:
  - Gross official reserves rose from $3.5 billion at end-October 2008 to $9.1 billion at end-June 2009 (three months of next year’s imports), exceeding program target by $600 million.
  - Official reserves subsequently dropped to just below $8.4 billion as of July 20 due mainly to temporary official payments.
- Balance of payments (selected):
  - Current account estimated to have declined by $5 billion (3 percentage points of GDP) in 2008/09.
  - July 2008–May 2009: exports down 2 percent; traditional exports like textiles down 5 percent; imports down about 10 percent; workers’ remittances up nearly 20 percent.
  - Financial account weak: net financial flows down nearly $3 billion vs. 2007/08; FDI inflows $3 billion (down $2 billion); net portfolio outflow about $1.1 billion; official lending $4.6 billion ($1.6 billion higher than in 2007/08).
- Public finance:
  - FBR tax collections in 2008/09 fell short of first SBA review projection by 1.2 percent of GDP; PDL revenues partially offset shortfall.
  - End-March fiscal deficit target met; preliminary end-June deficit exceeded by about 0.9 percent of GDP.

### Program implementation — quantitative and structural conditionality
- Quantitative performance:
  - All end-March quantitative performance criteria observed.
  - Preliminary end-June criteria on SBP’s net foreign and domestic assets and SBP credit to the budget met; budget deficit target likely missed by a significant margin.
  - Authorities requested a waiver of nonobservance for related performance criterion and waivers of applicability for other end-June criteria.
- Structural reform:
  - Both end-March structural benchmarks completed; comprehensive plan to eliminate inter-corporate circular debt delayed.
  - Strategy/time-bound plan to strengthen social safety net developed with World Bank; BISP rollout based on poverty scorecard will take longer than expected.
    - Under old BISP, 1.75 million families approved at end-June (below original target of three million).
    - BISP beneficiaries targeted to increase to five million in 2009/10.
  - Agreement reached with World Bank and ADB staffs on July 15, 2009 to assume electricity sector debt and eliminate circular debt with full and timely implementation.

### Structural conditionality for end-June and corrective measures
- Missed structural performance criteria:
  - Submission to parliament of legislative amendments to harmonize income tax and GST laws and reduce exemptions — not observed.
    - Corrective measure: submit amendments to harmonize sales tax, income tax, and federal excise tax laws to parliament by end-September 2009 (structural benchmark).
    - Meaningful reduction in exemptions contingent on introduction of broad-based VAT effective July 1, 2010.
  - Submission of amendments to Banking Companies Ordinance to enhance SBP enforcement powers — delayed.
    - Corrective measure: submit this legislation to parliament by end-August 2009 (structural benchmark).
- Electricity tariff differential subsidy elimination postponed by one year:
  - Revised plan (July 15, 2009) increases electricity tariffs during 2009/10 to attain cost recovery in August 2010.
  - Tariff differential subsidies needed in 2009/10: Rs. 55 billion (0.4 percent of GDP).
  - Government to assume electricity sector debt of Rs. 277 billion (1.9 percent of GDP) and transfer it to a newly created state-owned holding company; Rs. 216 billion reflects bank borrowings (2004/05–2008/09); Rs. 61 billion reflects FATA receivables and past arrears of KESC.
  - Audit of liabilities prior to assumption to be completed.

### Electricity sector — weaknesses, agreed measures, and sequencing
- Underlying weaknesses: insufficient tariff adjustments, nonpayment of tariff differential subsidies, low collection rates (e.g., FATA), governance weaknesses; private investors reluctant.
- Historical subsidy and tariff actions:
  - Electricity subsidies rose to 1.3 percent of GDP in 2007/08.
  - 18 percent average tariff increase occurred in November 2008; intended 4 percent in early 2009 but actual 1 percent in February 2009.
- May 21, 2009 PEPCO revised calculations: required tariff increases between 17.5 and 41.5 percent depending on assumptions.
- July 15, 2009 revised agreement:
  - Postpones elimination of tariff differential subsidies to 2010/11; limits 2009/10 subsidies to Rs. 55 billion.
  - Amend NEPRA Act by presidential ordinance by end-July 2009 to:
    - (i) start monthly tariff adjustments reflecting imported fuel/power price changes in August 2009;
    - (ii) start quarterly adjustments reflecting other costs in August 2010;
    - notification of new tariffs issued within 15 days from NEPRA determination; review requests completed within 15 days.
  - Government to assume electricity sector debt of at least Rs. 277 billion (1.9 percent of GDP).
- Operational measures: debt transferred to state holding company; budget to service debt; audit of liabilities to be completed prior to assumption.

### Fiscal policy, 2009/10 budget design, and priorities
- Budget approved June 25: deficit of 4.9 percent of GDP (compared with 4.6 percent agreed in May) to allow higher IDP support.
  - Authorities intend to limit the deficit to 4.6 percent of GDP if IDP-related grants are not forthcoming.
  - Deficit will be reduced by up to 0.4 percent of GDP if Tokyo-related disbursements shortfall exceeds 0.8 percent of GDP.
- Revenue measures yield: 0.4 percent of GDP (short of original program target of 0.6 percent).
  - Key measures: carbon surcharge (“Petroleum Levy”), excise taxes on services (e.g., banking services and insurance), increased withholding tax on imports, increased excise on cigarettes, capital value tax on real estate.
- Expenditure priorities and measures:
  - Rs. 50 billion (0.3 percent of GDP) for IDP assistance (assumed grant-financed).
  - Increase development spending (partly funded by Tokyo pledges).
  - Support for industries via subsidies, including exports.
  - General civil servants’ salary increase by 20 percent; wages for security forces involved in anti-terrorism campaign doubled.
- Contingencies:
  - If IDP grants not received, contingency measures (cut non-IDP development spending and nonessential outlays) to contain deficit to 4.6 percent of GDP.
  - To offset Rs. 55 billion tariff subsidies, higher interest payments for assumed electricity debt (additional Rs. 10 billion), and lower petroleum levy revenues, authorities will reduce nonpriority development spending while protecting social safety net, education, and health spending.
- VAT and medium-term fiscal strategy:
  - Broad-based VAT introduction scheduled for July 1, 2010 (key pillar).
  - Actions: high-level conference in September; detailed time-bound VAT action plan by end-September 2009; draft VAT law to parliament by end-December 2009 (structural benchmark).
  - Medium-term objective: increase tax revenue-to-GDP ratio by 3½ percentage points over five years.

### Monetary policy, SBP framework reforms, and exchange rate policy
- Monetary stance:
  - Staff: policy rate should remain on hold until core inflation shows further significant decline.
  - Authorities: recent declines in headline and core inflation justify further rate reduction; staff urged caution.
- SBP operational reforms:
  - Introduce explicit corridor for overnight money market rate in mid-August 2009; initial width 300 basis points with view to narrow to 200 bps later.
  - Lengthen reserve maintenance period from one to two weeks; fully-lagged determination of reserve requirement; standardize open market operations.
  - Proposed amendments to SBP Act to create an independent Monetary Policy Committee; present amendments to parliament by end-September 2009 (SSMEFP ¶33).
- Exchange rate policy:
  - Flexible exchange rate policy to reduce external vulnerabilities and foster competitiveness.
  - SBP to phase out provision of foreign exchange for oil imports; cease providing foreign exchange for diesel and other refined petroleum products effective August 1, 2009.
  - SBP interventions geared toward reserve accumulation targets.

### Financial sector soundness, supervision, and safeguards
- Asset quality and provisioning:
  - Risk-weighted capital adequacy ratio rose from 12.2 percent at end-December to 12.9 percent at end-March.
  - NPLs rose from 9.1 to 11.5 percent of gross loans; among public sector commercial banks NPLs rose from 12.5 to 17.5 percent.
  - Of total NPLs Rs. 379 billion at end-March, Rs. 263 billion fully provisioned.
  - SBP enforces accelerated provisioning: 25 percent for loans overdue by 90 days.
- Regulatory measures and legal reforms:
  - Bankruptcy law to be submitted to parliament in August 2009.
  - Draft amendments to Banking Companies Ordinance to enhance SBP enforcement powers to be sent to parliament before end-August 2009.
  - Minimum capital requirement timetable revised: minimum capital at end-2013 reduced from Rs. 23 billion to Rs. 10 billion (progressive achievement; Rs. 6 billion by end-2009); minimum CAR increased to 10 percent by 31st December 2009.
- Operational and liquidity measures:
  - SBP weekly monitoring of liquidity profiles; Problem Bank Management and Contingency Plan adopted; Federal Government guaranteed liquidity scheme for small banks in place.
  - Encourage banks to adopt improved fraud controls and core banking systems.

### SBA augmentation, use of Fund resources, and capacity to repay
- Authorities requested augmentation of access under the SBA of SDR 2.0674 billion (200 percent of quota); access under SBA would increase from 500 to 700 percent of quota.
- Proposed use and phasing:
  - Some SDR 0.95 billion (92 percent of quota) to be used for budget financing before donor pledges disbursed.
  - About $1.4 billion (0.8 percent of GDP) of Fund resources will be made available, on a temporary basis, for budget financing during 2009/10.
  - Designated Fund resources to be credited to Ministry of Finance dedicated account at SBP in three installments projected for August 2009–March 2010; budget to replenish as Tokyo pledges disbursed (expected by end-2009/10).
- Capacity to repay and exceptional access criteria:
  - With augmentation, Pakistan’s GRA credit outstanding would peak at nearly 72 percent of gross international reserves, equivalent to 5.9 percent of GDP, by 2010/11 (vs. 65 percent in 2009/10 at program approval).
  - Debt service payments would peak at about 35.9 percent of end-period gross reserves and 15.3 percent of exports of goods and services in 2013/14.
  - Pakistan meets the four exceptional access criteria summarized in the source: exceptional BOP pressures; sustainable public debt in medium term; access to private capital markets expected to recover in 2–3 years if adjustment implemented; strong policy reform program.

### Medium-term outlook and debt sustainability risks
- Growth:
  - Staff revised down real GDP growth projection for 2009/10 from 4 percent to 3 percent.
  - Medium-term growth expected to recover gradually to 6 percent a year by 2014/15.
- Inflation:
  - Inflation expected to decline to single digits and drop further over medium term; risks from higher oil prices, electricity tariff increases, higher wages, and fiscal expansion.
- Balance of payments:
  - Current account deficit projected to decline from 5.1 percent of GDP in 2008/09 to 4.7 percent in 2009/10.
  - Official flows projected $3.3 billion higher than in 2008/09 due to Tokyo-related disbursements and increased SDR allocation.
- Debt dynamics:
  - External debt stock projected from 29.9 percent of GDP in 2008/09 to 35.5 percent in 2010/11, then decline to 32.5 percent by 2013/14.
  - Public sector debt (excluding IMF) expected to increase from 56 percent in 2008/09 to 56.8 percent in 2009/10; public debt including IMF obligations projected to peak at 63.5 percent of GDP in 2010/11 and decline to 57.8 percent in 2013/14.
  - Downside scenario: combined shocks could raise end-period debt stock to around 49 percent of GDP.

### Reporting, monitoring, and adjustors (TMU and program conditionality)
- Reporting requirements (selected):
  - Monthly provisional federal tax/nontax revenue within one month.
  - Monthly SBP monetary data on last-Saturday basis within two weeks; end-month and end-quarter tables within one month.
  - Monthly data on SBP forward foreign currency operations within two weeks.
  - Monthly reports on use of Fund resources for budget purposes.
  - Quarterly stock of public and publicly guaranteed external debt within one month.
- Adjustors and projected values (selected exact projections from ¶17–31 and Table references):
  - Net external program financing projections:
    - July 2009–September 2009: $95 million
    - July 2009–December 2009: -$517 million
    - July 2009–March 2010: -$1,067 million
    - July 2009–June 2010: $274 million
  - Tokyo-related disbursements (excluding multilateral):
    - July 2009–September 2009: $342 million
    - July 2009–December 2009: $1,177 million
    - July 2009–March 2010: $1,962 million
    - July 2009–June 2010: $2,220 million
  - Net IMF financing to the budget projections:
    - July 2009–September 2009: $715 million
    - July 2009–December 2009: $1,072 million
    - July 2009–March 2010: $1,430 million
    - July 2009–June 2010: $0 million
  - Fixed accounting exchange rate for adjustors: Rs. 83 per $1.
  - Maximum SBP net exposure under forwards and swaps capped at $2.75 billion as of end-September 2009, end-December 2009, end-March 2010, and end-June 2010; SBP net exposure was $1.69 billion at end-June 2009.
  - Stock of foreign currency deposits with resident banks was $832 million at end-June 2009.

### Staff appraisal, key recommendations, and next steps
- Staff view:
  - Economy has continued to stabilize despite setbacks; inflation and external position improved; social safety net measures advanced.
  - Revenue mobilization insufficient; tax policy and administration reforms delayed.
  - Weak control over provincial spending revealed by Q4 2008/09 overruns.
  - Energy sector delays undermine growth potential and public finances.
- Staff recommendations and priorities:
  - Move decisively with VAT preparations and adhere strictly to timetable for introducing VAT on July 1, 2010; renew commitment to tax administration reform.
  - Proceed swiftly with envisaged tariff increases and implement automatic tariff adjustment mechanism to de-politicize tariff adjustments.
  - Be prepared to take additional fiscal measures given downside risks from shocks to growth, interest rates, and real exchange rate.
  - Strengthen SBP independence and implementation of legislative amendments to increase supervisory powers.
- Staff supported:
  - Waivers of nonobservance for missed structural performance criteria and the end-June fiscal deficit criterion.
  - Rephasing of purchases, extension of arrangement through end-2010, completion of second review, and approval of augmentation of access by 200 percent of quota.

*Source: IMF staff report — content unit _cr09265*

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

### Executive Summary

### Background
- The volatile political and security situation has undermined economic confidence and complicated policy making; military operations in the Swat Valley have resulted in nearly three million internally displaced persons (IDPs).
- Donor pledges mobilized at the Friends of Democratic Pakistan Meeting and Donor Conference in Tokyo in April amounted to $5.7 billion, of which about $2 billion (1.1 percent of GDP)—mostly project loans—is expected to be disbursed in 2009/10. Additional budgetary grants amounting to about 0.3 percent of GDP are expected to support IDP spending.
- Donor support enabled a relaxed fiscal stance for 2009/10: the 2009/10 deficit target (excluding grants) was increased to 4.6 percent of GDP from the original program target of 3.4 percent of GDP to accommodate spending expected to be financed with Tokyo pledges; including assumed additional budgetary grants for IDPs, the authorities increased the fiscal deficit target (excluding grants) to 4.9 percent of GDP as reflected in the budget approved by parliament.
- The authorities requested an augmentation of access by 200 percent of quota; a portion equivalent to SDR 951.1 million ($1.4 billion), or 92 percent of quota, could be used to finance priority spending until donor disbursements are received.

### Recent Economic Developments — Overview
- Growth and output
  - Real GDP growth for 2008/09 was lowered from 2.5 to 2.0 percent.
  - Real GDP growth for 2007/08 was revised down from 5.8 to 4.1 percent.
  - A rebound in agriculture due to a bumper wheat crop helped keep growth positive, but large-scale manufacturing weakness, exports, and private sector credit remain weak.
- Inflation
  - Headline inflation (year-on-year) declined from a peak of 25 percent in October 2008 to 13.1 percent in June.
  - Core inflation fell from 18.9 percent in November 2008 to 15.9 percent in June.
  - Disinflation slowed in late 2008/09 due to a surge in food price inflation in February–April and a higher government procurement price for wheat.
- Money and finance
  - Monetary growth has been low reflecting weak private demand for credit; public sector borrowing has been high.
  - The SBP cut the policy rate (SBP discount rate) by 100 bps in April.
  - Liquidity overhang emerging in Q4 2008 was absorbed in Q1 2009; key short-term interest rates are within 200 bps of the policy rate.
  - Banks prefer treasury paper; government placed T-bills, investment bonds, and Term-Finance Certificates used to clear a portion of the “circular” debt.
  - Nonbank budget financing (mostly through the National Saving Scheme) has been higher than programmed.
- External sector and reserves
  - The SBP allowed greater exchange rate flexibility; gross official reserves rose from $3.5 billion at end-October 2008 to $9.1 billion at end-June 2009 (three months of next year’s imports), exceeding the program target by $600 million despite lower-than-anticipated balance-of-payments support and a $300 million reduction in the net forward position.
  - Official reserves subsequently dropped to just below $8.4 billion as of July 20 due mainly to a temporary pick-up in official payments.
- Financial soundness and markets
  - Risk-weighted capital adequacy ratio rose from 12.2 percent at end-December to 12.9 percent at end-March due to higher eligible capital and lower risk-weighted assets.
  - NPLs rose from 9.1 to 11.5 percent of gross loans; among public sector commercial banks NPLs rose from 12.5 to 17.5 percent of gross loans.
  - Sovereign spreads declined but remain high at about 1,050 bps.
  - The KSE index has fluctuated around 7,200 points since mid-April, about 20 percent above its 12-month low in January 2009 and about 70 percent below its 12-month high in July 2008.
  - The National Investment Trust State Enterprise Fund (NITSEF) had invested just over half of its Rs. 20 billion resources as of June 30.
- Balance of payments
  - Current account estimated to have declined by $5 billion (3 percentage points of GDP) in 2008/09 due to a significant decline in imports, higher workers’ remittances, and increased U.S. support for military expenses.
  - For July 2008–May 2009: exports declined by 2 percent relative to same period a year earlier (traditional exports like textiles fell by 5 percent); imports dropped by about 10 percent; workers’ remittances rose by nearly 20 percent.
  - Financial account weak: net financial flows declined by nearly $3 billion compared to 2007/08; FDI inflows were $3 billion (down $2 billion); net portfolio outflow of about $1.1 billion (vs. small inflow in 2007/08); official lending reached $4.6 billion ($1.6 billion higher than in 2007/08).
- Public finance
  - FBR tax collections in 2008/09 fell short of the first SBA review projection by 1.2 percent of GDP owing to declining imports, slowing domestic demand, and delays in tax policy and tax administration reforms; strengthening of taxpayer audits has not commenced.
  - Higher-than-programmed revenues from the petroleum development levy (PDL) partially offset FBR shortfall despite a PDL reduction in May.
  - End-March fiscal deficit target was met due to expenditure restraint and re-prioritization of development expenditures while protecting social safety net spending.
  - Partial data suggest the end-June fiscal deficit target was exceeded by about 0.9 percent of GDP due to continuing revenue weakness, a surge in provincial spending, and pressures to step up security- and IDP-related expenditures.

### Recent Economic Developments — Program Implementation
- Quantitative performance
  - All quantitative performance criteria for end-March were observed; the net foreign assets target was met with a sizeable margin, fiscal deficit target met with difficulty.
  - Preliminary information indicates end-June performance criteria on SBP’s net foreign and domestic assets and SBP credit to the budget were met, but the budget deficit target was likely missed by a significant margin.
  - Authorities requested a waiver of nonobservance for the related performance criterion and waivers of applicability for other end-June quantitative performance criteria.
- Structural reform
  - Both end-March structural benchmarks were completed, with a delay for the comprehensive plan to eliminate inter-corporate circular debt.
  - In collaboration with the World Bank, the government developed by end-March a strategy and time-bound plan to strengthen the social safety net; rollout of the reformed Benazir Income Support Program (BISP) based on a poverty scorecard will take longer than expected due to limited administrative capacity.
    - Under the old BISP, 1.75 million families were approved at end-June (below original target of three million); BISP disbursements in 2008/09 were lower than budgeted.
    - BISP disbursements in 2009/10 are expected to increase substantially as beneficiary families are targeted to increase to five million and eligible families will receive benefits for the entire year irrespective of approval timing.
  - Agreement reached with World Bank and ADB staffs on July 15, 2009, providing for, among other things, the assumption of electricity sector debt by the government; full and timely implementation should eliminate the “circular” debt and prevent re-occurrence.

### Policy Directions and Authorities’ Commitments
- Fiscal policy and taxation
  - Authorities renewed commitment to press ahead with the program, notably the introduction of a broad-based VAT in mid-2010 to correct structural shortcomings of Pakistan’s tax system which relies on a very narrow tax base.
- Electricity sector
  - A plan has been prepared to eliminate the stock of “circular” debt in the energy sector; government agreed with World Bank and ADB staffs on a plan to increase electricity tariffs in 2009/10 and eliminate tariff differential subsidies in 2010/11.
- Use of augmented Fund access
  - A portion of augmented access would be used to finance much-needed social spending in 2009/10 before donor support is disbursed, recognizing difficulty for Pakistan to fund this spending domestically without increasing risks to the external position.
- Staff recommendation
  - Given the authorities’ renewed commitment under difficult security and political conditions, IMF staff supported the authorities’ requests for waivers, extension of the arrangement through end-2010 and rephasing of purchases, and recommended completion of the second review and approval of augmentation of access.

*Source: IMF staff report — Executive Summary*

### 17.      Structural conditionality for end-June was not met, but corrective measures have

### 17.      Structural conditionality for end-June was not met, but corrective measures have been agreed.

### Structural conditionality: status and corrective measures
- The structural performance criterion on the submission to parliament of legislative amendments to harmonize the income tax and GST laws, for tax administration purposes, and reduce exemptions for both taxes was not observed.
- Corrective measure: the authorities will submit to parliament by end-September 2009 legislative amendments to harmonize the sales tax, income tax, and federal excise tax laws with a view to facilitating tax administration (structural benchmark).
- Meaningful progress in reducing tax exemptions will be achieved only with the introduction of the new broad-based VAT regime, which is scheduled to become effective on July 1, 2010.
- The submission to parliament of amendments to the banking companies’ ordinance (structural performance criterion) to enhance the SBP’s enforcement powers in banking supervision has been delayed.
  - Corrective measure: the authorities will submit this legislation to parliament by end-August 2009 (structural benchmark).
- The elimination of electricity tariff differential subsidies, originally scheduled for end-June 2009, has been postponed by one year.
  - In the revised agreement reached on July 15, 2009, the plan increases electricity tariffs in the course of 2009/10 to attain cost recovery in August 2010.
  - The revised plan implies the need for tariff differential subsidies in 2009/10 in the amount of Rs. 55 billion (0.4 percent of GDP).
  - The agreement provides for a de-politicized regular tariff adjustment mechanism and the assumption of electricity sector debt (1.9 percent of GDP) by the government.

### Electricity sector: financial viability and agreed measures (Box 1)
- Underlying weaknesses:
  - Insufficient tariff adjustments, nonpayment by the government of tariff differential subsidies, low collection rates in some regions (e.g., FATA), and governance weaknesses.
  - Result: substantial new investment required; private investors reluctant due to unsustainable sector financing.
- Historical actions and shortfalls:
  - Electricity subsidies rose to 1.3 percent of GDP in 2007/08.
  - In the 2008/09 budget, intention stated to phase out electricity tariff differential subsidies by end-June 2009; an 18 percent average tariff increase occurred in November 2008.
  - In January 2009 intended tariff raise of 4 percent in the first half of 2009; actual increase was 1 percent in February.
- May 21, 2009 understandings with World Bank and ADB staffs:
  - Revised PEPCO calculations suggested required tariff increases between 17.5 and 41.5 percent, depending on load shedding, fuel switching, and debt assumptions.
  - Agreement to raise tariffs to eliminate tariff differential subsidies in 2009/10 and increase gas use in generation.
- Political reversal and July 15, 2009 revised agreement:
  - Schedule postpones elimination of tariff differential subsidies to 2010/11; limits tariff differential subsidies to Rs. 55 billion in 2009/10.
  - Regularize and de-politicize tariff adjustments by amending the NEPRA Act through a presidential ordinance by end-July 2009 to ensure:
    - (i) monthly tariff adjustments reflecting imported fuel/power price changes (monthly adjustments start in August 2009);
    - (ii) quarterly adjustments reflecting other cost components (quarterly adjustments start in August 2010);
    - Notification of new tariffs issued within 15 days from NEPRA determination; review requests completed within 15 days.
  - Government will assume electricity sector debt of at least Rs. 277 billion (1.9 percent of GDP):
    - About Rs. 216 billion reflects bank borrowings by power companies from 2004/05–2008/09;
    - Another Rs. 61 billion reflects FATA receivables and past arrears of KESC.
  - Debt will be transferred to a newly created state-owned holding company and its service assumed by the budget.
  - Government committed to completing an audit of these liabilities prior to their assumption.

### Public financial management: Treasury Single Account (TSA)
- Transition to the TSA, a structural benchmark, is not yet complete.
- Progress made in October 2008: system preventing accumulation of unspent balances in accounts outside the Federal Consolidated Fund.
- Significant unspent balances remain in accounts at commercial banks; transition not yet complete.
- Following World Bank technical assistance in July 2009, remaining balances with commercial banks will be surveyed.
- Identified government balances with commercial banks will be transferred to the TSA by end-June 2010, subject to an assessment of the impact on the banking sector’s liquidity.

### Tax administration reform
- Understandings reached with World Bank staff on organization of a functionally structured tax administration:
  - Responsibilities for sales, income, and excise taxes to be consolidated in one domestic revenue department.
  - A new occupational group encompassing staff of the new department will be created within the FBR to reduce legal challenge risk.
- Implementation milestones:
  - New FBR management structure put in place as of June 30, 2009 (by Executive Order of the FBR Chairman).
  - Functional reorganization of the FBR, including revision of RTOs and LTUs, to be completed by end-September 2009.
  - Government expected to approve required regulations by September 15, 2009 (structural benchmark).

### Macroeconomic framework for 2009/10
- Output:
  - Staff revised down real GDP growth projection for 2009/10 from 4 percent to 3 percent.
  - Over the medium term, growth expected to recover gradually, reaching 6 percent a year by 2014/15.
- Inflation:
  - Inflation still expected to decline to single-digits and drop further over the medium term.
  - Risks to disinflation: higher oil prices, electricity tariff increases, higher wages, and the fiscal expansion.
  - A more active monetary policy may be needed to manage inflationary pressures.
- Balance of payments:
  - Current account deficit projected to decline from 5.1 percent of GDP in 2008/09 to 4.7 percent in 2009/10.
    - Higher oil bill projected to be more than offset by a further slowdown in non-oil imports (reflecting weak GDP growth).
    - Exports, workers’ remittances and other current account transfers likely to decline.
  - Capital and financial account surplus likely insufficient to finance the current account deficit.
    - Official flows projected to be $3.3 billion higher than in 2008/09, boosted by Tokyo-related disbursements and increased SDR allocation.
    - Private capital inflows broadly unchanged but subject to large risks.
  - Overall balance of payments expected to post a deficit; gross reserves expected to increase due mainly to Fund disbursements.

### Budget for 2009/10: approval, targets, and priorities
- Budget approval and deficit target:
  - Parliament approved the budget on June 25.
  - The budget features a deficit of 4.9 percent of GDP, compared with 4.6 percent agreed in May, to allow for higher support for IDPs.
  - Authorities expect increased financing needs to be met by additional IDP-related external grants and intend to limit the deficit to 4.6 percent of GDP if IDP-related grants are not forthcoming.
  - The deficit will be reduced by up to 0.4 percent of GDP if the shortfall in Tokyo-related disbursements exceeds 0.8 percent of GDP.
- Budget priorities:
  - Bolster revenue through more than a dozen tax policy measures; yield of many is modest.
    - Key measures: introduction of (i) a carbon surcharge (later renamed “Petroleum Levy”) on petroleum products (to replace the PDL); and (ii) excise taxes on a number of services (e.g., banking services and insurance).
    - Increases provided for: (i) withholding tax on imports; (ii) excise tax on cigarettes; (iii) capital value tax on real estate.
    - Yield of these measures: 0.4 percent of GDP (falls short of the original program target of 0.6 percent).
  - Expenditure priorities:
    - Provide adequate resources for IDPs.
    - Increase development spending (partially funded by donor support pledged at Tokyo).
    - Support several key industries through subsidies, including for exports.
    - General increase in civil servants’ salaries by 20 percent; wages for security forces involved in anti-terrorism campaign to be doubled.
- Discussion on revenue policies:
  - Authorities view additional near-term revenue measures as politically infeasible; need to preserve political capital for VAT introduction.
  - Staff emphasized strong revenue effort is needed to reduce vulnerability and finance needed outlays given limited duration of donor support.
  - Given parliamentary resistance, authorities may submit additional revenue measures only in a supplementary budget later in the year if necessary.
- VAT and medium-term fiscal strategy:
  - Authorities renewed commitment to introduce a broad-based VAT in 2010/11; mid-2010 introduction is a key pillar of medium-term fiscal strategy.
  - Actions:
    - Organize a high-level conference in September with federal and provincial participation to build consensus and discuss VAT options.
    - Prepare by end-September 2009 a detailed time-bound action plan for VAT implementation.
    - A draft VAT law will be submitted to parliament by end-December 2009 (structural benchmark).
- Expenditure contingencies and IDP spending:
  - Budget provides Rs. 50 billion (0.3 percent of GDP) for IDP assistance; authorities assume this expenditure will be grant-financed.
  - If IDP-related grants are not forthcoming, contingency measures will be implemented to contain the deficit to 4.6 percent of GDP (may involve cutting non-IDP development spending and other nonessential outlays).
- Fiscal impact of delayed electricity tariff increases:
  - Tariff differential subsidies of Rs. 55 billion (0.4 percent of GDP) are required in the current fiscal year and are not included in the approved budget.
  - Amount of electricity sector debt to be assumed by the government will be somewhat higher than budgeted: Rs. 277 billion as compared to Rs. 216 billion, resulting in additional interest payments of Rs. 10 billion.
  - An internationally-renowned firm is being hired to audit the debt to be assumed; audit to be finalized by end-September.
  - To compensate for higher-than-budgeted subsidies, higher-than-budgeted interest payments, and lower petroleum levy revenues, authorities decided to reduce nonpriority development spending while protecting social safety net, education, and health spending.

*Source: _cr09265 - 17.      Structural conditionality for end-June was not met, but corrective measures have been agreed.*

### 31.      Staff questioned the prominence of sectoral subsidies in the budget. The authorities

### _cr09265 - 31.      Staff questioned the prominence of sectoral subsidies in the budget. The authorities

### Fiscal policy and sectoral subsidies
- Staff questioned the prominence of sectoral subsidies in the budget and noted continued use of budgetary resources for poorly targeted subsidy schemes, including for wheat and sugar, which undermined a level playing field for investors.
- Authorities emphasized supporting socially-sensitive sectors and export promotion in the current global economic environment.
- Fertilizer subsidies were reduced from 0.3 percent of GDP in 2008/09 to 0.1 percent in 2009/10; staff welcomed this reduction.
- Staff raised concerns about the budgetary contribution for the envisaged Export Investment Development Fund.

### Central government control over provincial spending
- Authorities agreed to limit the use of the SBP overdraft by provinces to six weeks of their wage bills.
- A binding Ways and Means ceiling will be introduced effective August 1, 2009, in consultation with provincial governments.
- Provinces will reach an agreement with the Ministry of Finance and the SBP by end-September 2009 on a schedule for reduction of the outstanding debt stock resulting from provincial overdrafts (SSMEFP ¶13).

### Monetary policy stance and framework reform
- Staff argued that the policy interest rate should remain on hold until core inflation shows a further significant decline; an appropriately tight monetary stance would help contain price pressures from the more expansionary fiscal policy.
- Authorities argued recent declines in headline and core inflation justified a further reduction in the policy rate; staff urged caution due to:
  - core inflation not declining as rapidly as anticipated,
  - fiscal revenue still under pressure,
  - timing of external disbursements highly uncertain.
- Staff emphasized the need to combat inflationary pressures from higher fuel and energy prices and increased public sector wages.
- Authorities agreed to keep factors influencing interest rate policy under review, expecting developments would allow easing interest rates soon.
- SBP actions to reform the monetary policy framework:
  - introduce an explicit corridor for the overnight money market rate in mid-August 2009;
  - initial width of the interest rate corridor: 300 basis points, with a view to narrowing to 200 basis points later;
  - lengthen reserve maintenance period from one to two weeks;
  - fully-lagged determination of the reserve requirement;
  - greater standardization of open market operations.
- Authorities prefer quarterly policy rate reviews but recognize the corridor may require more frequent adjustments.
- Proposed amendments to the SBP Act (to be presented to parliament by end-September 2009—SSMEFP ¶33) envisage significant enhancements including creation of an independent Monetary Policy Committee.

### Exchange rate policy
- With increased reliance on interest rates, exchange rate policy will be geared toward reserve accumulation targets.
- Authorities recognized exchange rate flexibility is needed to reduce external vulnerabilities, ensure external sustainability, and foster competitiveness.
- SBP will pursue a flexible exchange rate policy and continue to phase out provision of foreign exchange for oil imports.
- SBP circular: cease providing foreign exchange for import of diesel and other refined petroleum products effective August 1, 2009.

### Public sector borrowing and debt-related operations
- Public sector domestic borrowing requirements will remain high despite Tokyo-related disbursements covering increased budget financing needs.
- Overall public sector borrowing requirement expected to increase due to:
  - higher projected credit to public sector enterprises for resolution of the “circular” debt;
  - an increase in credit for commodity operations (e.g., wheat procurement underwritten by the government).
- To prevent crowding out private lending, SBP and Ministry of Finance are working on increasing attractiveness of government bonds for individuals and nonbank institutional investors.

### Financial sector conditions and regulatory actions
- NPLs have increased but bank capital and liquidity remain adequate.
- Of the total NPLs, which reached Rs. 379 billion at end-March, Rs. 263 billion has been fully provisioned.
- SBP enforces accelerated provisioning requirements: 25 percent for all loans overdue by 90 days.
- SBP expects NPLs to continue increasing for another quarter but expects gradual improvement later in 2009/10, especially if credit to private sector recovers.
- Several banks will need to restructure large exposures.
- A bankruptcy law will be submitted to parliament in August 2009 to rehabilitate weak but viable companies and liquidate insolvent ones.
- SBP preparations of legislative amendments to strengthen enforcement in banking supervision are under way; draft amendments to be sent to parliament before end-August (SSMEFP ¶31).
- SBP revised downward targeted increases in minimum capital requirements (to be met gradually) while maintaining unchanged minimum capital adequacy ratios.

### Augmentation of SBA access and use of Fund resources
- Authorities requested augmentation of access under the SBA of SDR 2.0674 billion (200 percent of quota).
- If approved, access under the SBA would increase from 500 to 700 percent of quota.
- Augmentation justified as insurance against increased risks from a deeper and more sustained global downturn and to strengthen buffer against downside risks including:
  - (i) a further and possibly sharper slowdown in exports;
  - (ii) a drop in remittances;
  - (iii) continued constraints on private external financing.
- Augmentation proposed to be phased in within the duration of the SBA as extended through end-2010 and must be combined with a rephasing of purchases and extension of the arrangement due to delay in the second review.
- Given Tokyo-related donor disbursements likely back-loaded, a portion of Fund resources will be used for budget financing to meet urgent spending needs early in 2009/10 and to avoid additional domestic financing that could undermine stabilization.
- About $1.4 billion (0.8 percent of GDP) of Fund resources will be made available, on a temporary basis, for budget financing during 2009/10; this amount broadly corresponds to social sector and IDP-related priority spending financed from additional donor funds pledged in Tokyo.
- Terms for use of designated Fund resources:
  - The designated part will be credited directly to the Ministry of Finance’s dedicated account at the SBP in three installments at the time of Fund disbursements projected for August 2009–March 2010; the budget will draw on this account to finance priority needs until Tokyo-related pledges are disbursed; the budget is responsible for servicing any outstanding Fund credit used for budgetary purposes through the SBP, which remains the fiscal agent.
  - The budget will replenish the dedicated account to the amount borrowed from the Fund as Tokyo-related pledges are disbursed (expected by end-2009/10), at which time the SBP will assume the related liability to the Fund and debt servicing.
  - If Tokyo-related disbursements fall short of the projected $2 billion in 2009/10, part of this shortfall (up to $1.4 billion) at year’s end would be covered by Fund resources; the budget will replenish the dedicated account as soon as delayed disbursements are received. Fund resources would not be used to cover shortfalls in disbursement of pledges from multilateral donors.

### Capacity to repay the Fund and exceptional access criteria
- With augmentation, Pakistan’s GRA credit outstanding would peak at nearly 72 percent of gross international reserves, equivalent to 5.9 percent of GDP, by 2010/11 (compared with 65 percent of gross international reserves in 2009/10 at the time the SBA was approved).
- Debt service payments would peak at about 35.9 percent of end-period gross reserves and 15.3 percent of exports of goods and services in 2013/14.
- These metrics are high relative to other exceptional cases and indicate substantial risks to capacity to repay the Fund; however, authorities’ past record of servicing Fund obligations has been very good.
- Pakistan continues to meet the four criteria for exceptional access (Box 3), summarized in the source:
  - Criterion 1: Experiencing or potential to experience exceptional balance of payments pressures.
  - Criterion 2: Sustainable public debt in the medium term; public debt (domestic and external, excluding IMF obligations) projected to remain around 57 percent of GDP over the medium term; public debt including IMF obligations projected to peak at 63.5 percent of GDP in 2010/11 and decline to 57.8 percent of GDP in 2013/14; external debt would increase from 29.9 percent of GDP in 2008/09 to 35.5 percent in 2010/11, then decline to 32.5 percent by 2013/14.
  - Criterion 3: Access to private capital markets expected to recover within two to three years if adjustment is implemented and market conditions normalize.
  - Criterion 4: Strong policy reform program; program implementation broadly satisfactory though risks remain high.

### Medium-term outlook and debt sustainability risks
- The medium-term outlook is fragile due to a slower global recovery, higher commodity prices, political instability, and existing constraints on energy and infrastructure.
- Growth likely to be lower than originally envisaged and private capital inflows will take longer to recover; stronger policies needed to support competitiveness and medium-term fiscal adjustment.
- External debt sustainability analysis:
  - External debt stock projected to increase from 29.9 percent of GDP in 2008/09 to 35.5 percent in 2010/11, before declining to 32.5 percent of GDP by 2013/14.
  - Debt service as a ratio of exports of goods and receipts projected to increase from below 15 percent to 20 percent during the same period.
  - Combined shocks to growth, current account, and depreciation could raise the end-period debt stock to around 49 percent of GDP in a downside scenario.
- Public sector debt dynamics since April 2009:
  - Total public sector debt (excluding IMF obligations) relative to GDP expected to increase from 56 percent in 2008/09 to 56.8 percent in 2009/10.
  - Increase reflects upward revision of the 2009/10 fiscal deficit target to 4.6 percent of GDP to allow spending of additional donor financing pledged in Tokyo and assumption by the budget of electricity sector debt of 1.9 percent of GDP.
  - Public sector debt projected to stay virtually constant around 57 percent through 2012/13 with marginal decline to 56.3 percent starting in 2013/14.
  - Public debt including IMF obligations projected to peak at 63.5 percent of GDP in 2010/11 and decline to 57.8 percent in 2013/14.
  - Standard bound tests show all shocks (primary balance, interest rate, growth, real exchange rate) lead to increases in the debt-to-GDP ratio; real exchange rate shock effect particularly pronounced.

### Staff appraisal and policy recommendations
- Despite implementation shortcomings, Pakistan’s economy has continued to stabilize; reforms in financial sector and foreign exchange market have progressed and steps taken to strengthen social safety nets.
- Revenue mobilization efforts have been inadequate; tax policy and tax administration reforms delayed.
- Major expenditure overruns in Q4 2008/09 revealed weak control over provincial spending.
- Authorities have not been decisive in addressing long-standing energy sector problems; energy sector delays hurt growth potential and public finances.
- Specific staff recommendations and priorities:
  - Move decisively with VAT preparations and adhere strictly to timetable for introducing VAT on July 1, 2010; renew commitment to tax administration reform.
  - Proceed swiftly with envisaged tariff increases and implement the new automatic tariff adjustment mechanism to de-politicize tariff adjustments.
  - Be ready to take additional fiscal measures as needed given downside risks from shocks to growth, interest rates, and exchange rate.

*Source: Excerpt from IMF staff report content unit _cr09265*

### 51.      The macroeconomic outlook for 2009/10 remains difficult, and the external

### The macroeconomic outlook for 2009/10

### Key macroeconomic challenges and priorities
- Main challenges in 2009/10:
  - (i) consolidating macroeconomic stability and maintaining the momentum of supporting reforms, including in the energy sector;
  - (ii) dealing with the impact of the global crisis on exports and economic activity;
  - (iii) mobilizing political support for tax policy and administration reforms.
- To achieve program objectives, authorities need to focus on: mobilizing donor support, pressing ahead with fiscal consolidation, and tax, electricity sector, and financial sector reforms.

### Donor support, SBA augmentation, and revenue mobilization
- Additional donor support pledged in the Tokyo conference and the augmentation of access under the SBA will help meet near-term challenges.
- Such financing should be regarded as temporary and used as a bridge until a much stronger medium-term revenue effort bears fruit.
- Mobilizing higher revenue to reduce the public debt-to-GDP ratio should be a key policy objective.
- A credible tax reform is needed to ensure fiscal sustainability and to create fiscal space for:
  - expanding the social safety net; and
  - increasing investment in human and physical capital.

### 2009/10 budget design and implementation
- The 2009/10 budget has been constructed to provide adequate space for priority spending, but implementation should be monitored closely.
- Authorities should ensure the redistributive function of the budget is consistent with the government’s social policy objectives.
- Spending priorities to take precedence:
  - spending on IDPs;
  - support for poor households; and
  - other well-targeted social spending.
- These should take precedence over transfers to politically connected groups.
- Development spending must be properly timed to ensure adequate resources for IDPs, regardless of the availability of external grants.

### Monetary policy and inflationary risks
- Monetary policy needs to be vigilant to prevent a resurgence of inflation.
- Factors adding to inflationary pressures include:
  - the relaxation of the fiscal policy stance;
  - electricity tariff increases; and
  - the rebound in oil prices.
- The present round of wage increases in the public sector, if not managed properly, may trigger an economy-wide realignment of wages, with attendant effects on inflation and competitiveness.

### Exchange rate policy and external position
- Exchange rate policy should aim at strengthening competitiveness and further strengthening the international reserves position.
- Accelerated phasing out of the foreign exchange provision for oil imports payments is identified as a key step in the right direction.

### Financial sector governance and SBP independence
- Accelerating reforms to strengthen the independence of the SBP and pressing forward with the legislative amendments to increase SBP’s supervisory powers is of great importance.
- These reforms are critical for:
  - enhancing the monetary policy framework; and
  - maintaining the stability of the banking system in the present difficult environment.

*Source: IMF staff report excerpt on Pakistan’s macroeconomic outlook for 2009/10.*

### 57.      Despite the difficulties in implementing program commitments, the authorities have

### _cr09265 - 57.      Despite the difficulties in implementing program commitments, the authorities have

### Program progress and staff assessment
- Authorities made significant efforts to keep the program on track despite security developments, the global economic recession, and a difficult domestic political environment.
- Appreciable achievements cited:
  - Progress toward reducing inflation and strengthening the external position.
  - Measures to improve the social safety net.
  - Adoption of a budget for 2009/10 that "provides adequate basis for further macroeconomic stabilization and much needed social spending."
- Staff recommendation and actions supported:
  - Support for requested waivers of nonobservance for the two missed structural performance criteria.
  - Support for waiver of nonobservance for the end-June quantitative performance criterion on the fiscal deficit.
  - Support for waivers of applicability for other end-June quantitative performance criteria.
  - Support for the rephasing of purchases and the extension of the arrangement through end-2010.
  - Recommendation to complete the second review and approve the augmentation of access by 200 percent of quota.

### Waiver justification and corrective measures
- The nonobservance of the end-June performance criterion on the fiscal deficit is attributed largely to:
  - Temporary pressures from unforeseen security- and IDP-related expenditure needs in the last quarter of 2008/09.
  - Excessive provincial spending and unexpected provincial borrowing.
- A waiver is considered justified because:
  - The expenditures are temporary in nature.
  - Measures are in place to control the use of overdrafts by provinces.
- Structural reform follow-up:
  - Updated commitments in the attached SSMEFP include corrective actions to enhance implementation of structural reforms under the program.
  - Recent agreement with World Bank and ADB staffs on electricity sector reform signals intent to address deep-seated sector problems.

### Specific requests, timelines, and numeric commitments from authorities (as stated)
- Financial support request:
  - Authorities request that the Executive Board consider an augmentation of the SBA in an amount of SDR 2,067.4 billion (200 percent of Pakistan’s quota).
  - Request to complete the second review and approve the third purchase under the SBA of SDR 766.7 million.
- Waiver and legislative timelines requested:
  - Waivers of nonobservance requested for two end-June 2009 structural performance criteria (submission to parliament of legislative amendments to (i) enhance SBP enforcement powers in banking supervision; and (ii) harmonize the income tax and sales tax laws and reduce exemptions).
  - Planned submission dates:
    - Amendments to Banking Companies Ordinance to enhance SBP’s enforcement powers by end-August, 2009 (to be a structural benchmark for the third SBA review).
    - Amendments to harmonize income and sales tax laws by end-September 2009 (to be a structural benchmark for the third SBA review).
  - Tax exemptions to be reduced with the introduction of VAT, scheduled to become effective on July 1, 2010.
- Fiscal performance miss:
  - Preliminary information indicates missing the end-June 2009 quantitative performance criterion on the fiscal deficit by 0.9 percent of GDP.
- Program timing adjustments requested:
  - Extension of the present SBA through end-2010.
  - Rephasing of purchases with an additional test date for end-September 2010.
- Transparency consent:
  - Authorities consented to publication of the letter, the attached SSMEFP, the revised Technical Memorandum of Understanding, and the related staff report.

### Key policy implications and next steps (from text)
- Conditionality and monitoring:
  - Updated SSMEFP includes corrective actions aimed at enhancing implementation of structural reforms.
  - The authorities will consult with the Fund on any additional measures and will provide requested information to monitor progress.
- Sector reform focus:
  - Electricity sector reform agreement with World Bank and ADB staffs highlighted as a priority signaling commitment to address systemic problems.
- Program phasing and support:
  - Staff supports waivers, rephasing, extension through end-2010, completion of second review, and approval of augmentation of access by 200 percent of quota.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09265.pdf*

### 1.      This memorandum supplements our Memorandum on Economic and Financial

### _cr09265 - 1.      This memorandum supplements our Memorandum on Economic and Financial

### III. RECENT ECONOMIC DEVELOPMENTS
- Program outcomes and macro indicators:
  - Headline inflation declined from 25 percent in October 2008 to 13.1 percent in June 2009.
  - The rupee has remained stable at around Rs. 80 per U.S. dollar.
  - Gross foreign exchange reserves reached $9.1 billion as of June 30, 2009.
  - All quantitative performance criteria through end-March 2009 were observed.
  - Preliminary data for end-June 2009 indicate the quantitative performance criteria for the net foreign and domestic assets of the State Bank of Pakistan (SBP) and net government borrowing from the SBP were met; the budget deficit target was exceeded by about 0.9 percent of GDP.
- Growth and external environment:
  - Real GDP growth in 2008/09 is now estimated at 2 percent.
  - The real GDP of Pakistan’s main trading partners is projected to contract by almost 3 percent on average in 2009.
  - Private capital inflows have declined; there are significant downside risks for workers’ remittances.
- Fiscal pressures and revenues:
  - FBR revenues in 2008/09 fell short of the projection prepared at the time of the first review by 1.2 percentage points of GDP.
  - Shortfall partially offset by receipts from the Petroleum Development Levy (PDL), higher-than-expected nontax revenues, and expenditure restraint.
  - Disbursements of multilateral program financing have been lower than projected.
- Monetary stance and donor support:
  - SBP policy interest rate lowered by 100 basis points on April 21, 2009, to 14 percent.
  - Tokyo donor conference (April) resulted in $5.7 billion in new pledges over three years; most for project financing and a small portion for balance-of-payments assistance. Details of donor assistance likely to be finalized by end-September 2009.

### III. POLICIES FOR 2009/10 (Overview and Targets)
- Main policy challenges for 2009/10:
  - Consolidating macroeconomic stability.
  - Mitigating effects of the global economic crisis, particularly on exports and manufacturing.
  - Implementing tax policy and administration reforms.
  - Managing the budget impact of security outlays.
- Fund access augmentation:
  - Requesting an augmentation of access under the Fund SBA to meet larger-than-expected balance of payments needs; about 45 percent of the higher access will be used for budget financing if disbursements of foreign assistance fall short.
- Revised economic parameters for 2009/10:
  - Real GDP growth of 3 percent.
  - Consumer price inflation (year-on-year) of 9 percent at year’s end.
  - Current account deficit of 4¾ percent of GDP.

### A. Fiscal Policy — key measures, targets, and safeguards
- Fiscal stance and Tokyo pledges:
  - Assuming about 1.1 percent of GDP in additional disbursements from the Tokyo pledges in 2009/10, the deficit target will be raised to 4.6 percent of GDP (original program target: 3.4 percent of GDP).
  - Budget deficit of 4.9 percent of GDP approved by Parliament is consistent with program deficit target of 4.6 percent of GDP.
  - Budget deficit target (excluding grants) would only be increased above 4.6 percent of GDP if additional IDP-related grants become available and are disbursed through the budget.
- Provincial borrowing and Ways and Means limits:
  - Borrowing by the provinces strictly limited to agreed Ways and Means advances.
  - Effective August 1, 2009, a binding Ways and Means ceiling of six weeks of the provincial wage bill.
  - Agreements by end-September 2009 between provinces, the Ministry of Finance, and the SBP on a schedule of reduction of the overdraft stock.
- Medium-term revenue objective:
  - Increase in the tax revenue-to-GDP ratio of 3½ percentage points over five years remains a key pillar of the medium-term fiscal strategy.
- Tax policy measures in the budget expected to yield 0.4 percentage points of GDP in 2009/10:
  - Introduction of a specific federal petroleum levy with automatic pass-through to retail prices of changes in world oil prices.
  - Introduction of a federal excise tax in VAT mode on selected services (e.g., banking services, insurance).
  - Enhancement of the capital value tax (a transaction tax) on real estate transactions.
  - Increase in the rate for the withholding tax on imports from 2 percent to 3 percent for imports used by industry and to 4 percent for other imports.
  - Increase in the excise tax on cigarettes.
  - Changes in the computation of the formula for the advance tax payable by the corporate sector.
- VAT introduction and timeline:
  - Main pillar: introduction of a broad-based VAT on July 1, 2010, covering all goods and services.
  - Project team established and project leader appointed on July 2, 2009.
  - Stakeholder consultation seminar in September 2009 with federal and provincial government participation, supported by the IMF, the World Bank, and the ADB.
  - Detailed time-bound action plan for the VAT to be prepared by end-September 2009.
  - Submission of VAT law to Parliament by end-December 2009 (structural benchmark).
- Tax administration reforms and structural benchmarks:
  - FBR Chairman issued an Executive Order on June 30, 2009, to put in place the new FBR management structure.
  - Complete the functional reorganization of tax administration by end-September, 2009.
  - By September 15, 2009, the government will approve regulations (structural benchmark) to (i) form new occupational groups within the FBR; and (ii) revise the structures of Regional Taxpayer Offices (RTOs) and Large Taxpayer Units (LTUs). All relevant laws and rules will be amended.
  - Submit to Parliament by end-September 2009 legislative amendments to harmonize the sales tax, income tax, and the federal excise tax laws (structural benchmark), including elimination of the option for retailers with a turnover over Rs. 10 million to choose the presumptive tax regime.
  - FBR action plan on tax administration reform (July–December 2009) includes:
    - Audit targets: audit 15 percent of the LTU taxpayers and 2 percent of existing medium-size business taxpayers by end-December 2009.
    - Nonfiler reduction targets by end-September 2009: reduce sales tax and corporate tax nonfilers to less than 1 percent for existing LTU taxpayers, and to less than 7 percent for medium-size business taxpayer nonfilers.
    - Introduce a 1 percent withholding mechanism on sales taxes administered by the FBR on purchases made by large taxpayers.
  - Sales tax refund system and staffing:
    - Ensure the new expedited sales tax refund system is operational in all LTUs and RTOs by end-December 2009, and ready for full implementation by July 1, 2010.
    - Plan to staff fully the Revenue Division of the Ministry of Finance and complete the shift of tax policy functions from the FBR to this division by end-December 2009.
- Social safety nets and BISP rollout:
  - Roll-out of the poverty scorecard system for BISP in 16 pilot districts may take longer than expected; full roll-out to all 130 districts expected between December 2009 and June 2010.
  - Using original selection method, 1.75 million families have been approved at end-June 2009 (original target: 3 million).
  - BISP disbursements in 2008/09 were lower than budgeted; delays not expected to impact 2009/10 disbursements for beneficiaries identified during 2009/10.
- Expenditure controls and public financial management:
  - Implement medium-term budget framework at federal level and extend Project for Improving Financial Reporting and Auditing (PIFRA) to monthly federal and provincial fiscal reporting.
  - Review of PIFRA to improve coverage and quality of fiscal reporting, with IMF technical assistance to be requested.
  - Transition to a Treasury Single Account (Federal Consolidated Fund) to be completed gradually; zero balance assignment account introduced for all disbursements.
  - Survey, reduce, and transfer remaining balances with commercial banks to the Federal Consolidated Fund by end-June 2010, ensuring no adverse impact on banking sector liquidity.
- Electricity sector reforms, tariff adjustments, and circular debt:
  - Plan, agreed with World Bank and ADB staffs, to eliminate electricity tariff differential subsidies by August 2010; average electricity tariffs to be increased in stages to reach cost recovery in August 2010.
  - Additional need for tariff differential subsidy of Rs. 55 billion in 2009/10 will be absorbed by the budget.
  - NEPRA Act to be amended by July 31, 2009 (prior action) and implemented immediately to ensure:
    - Monthly determination by NEPRA of fuel/power purchase price adjustments in line with international fuel prices and automatic implementation upon determination (first adjustment in August 2009 relative to prices prevailing in July 2009).
    - Quarterly determination of overall electricity tariffs by NEPRA and notification of adjusted tariffs within 15 days by the government beginning in August 2010 (during 2009/10 NEPRA will perform quarterly determinations, but tariffs will be notified according to the agreed tariff adjustment schedule).
    - Any review requests of tariffs will be completed within 15 days; if not, results will be taken into account in the subsequent determination.
  - Government decision to assume debt of Rs. 277 billion (equivalent of 1.9 percent of GDP) contracted by electricity companies; all debt from 2008/09 and earlier years slated to be assumed by the budget will be audited by an internationally-renowned auditing firm by end-September 2009.
- Contingency and prioritization measures:
  - To accommodate Rs. 55 billion tariff differential subsidies, higher-than-budgeted interest payments for assumed electricity sector debt (Rs. 10 billion), and lower-than-budgeted petroleum levy revenues (Rs. 10 billion), the government will reduce nonpriority development spending to achieve the agreed deficit target.
  - Social safety net spending and other priority spending for IDPs, infrastructure, and the social sectors will not be subject to cuts if further expenditure cuts become necessary.
- Use of IMF resources for budget execution:
  - Up to $1.4 billion (0.8 percent of GDP) of Fund resources to be disbursed during July 2009–April 2010 could be used to finance the budget to avoid delays in priority outlays owing to timing of donor disbursements.
  - Fund resources would not be used to cover delays or shortfalls in disbursements from multilateral donors.
  - If delays in nonmultilateral foreign assistance exceed amounts covered by Fund resources, the budget deficit target will be adjusted as described in ¶25 of the revised Technical Memorandum of Understanding (TMU).
- Government guarantees and transparency:
  - Plan to review limits on issuance of guarantees.
  - Monthly publication on the Ministry of Finance website of the total outstanding stock of government guarantees, in line with the Fiscal Responsibility and Debt Limitation Act.

### B. Monetary and Exchange Rate Policy
- SBP objectives and operations:
  - SBP’s primary monetary policy objective is to reduce inflation while continuing to strengthen the international reserve position.
  - SBP liquidity management to ensure smooth functioning of the domestic market; government to issue T-bills and other market-based instruments to avoid SBP financing of the budget.
  - Monetary policy stance will be calibrated to balance slowdown concerns and the need to lower inflation; any further reduction in the SBP policy rate will await a significant and sustained decline in core inflation.
- Exchange rate stance:
  - Emphasis on strengthening international reserves and managing downside risks to the external position.

*Source: _cr09265 - 1.      This memorandum supplements our Memorandum on Economic and Financial*

### 25.      The SBP will further improve its monetary operations framework by introducing an

### _cr09265 - 25.      The SBP will further improve its monetary operations framework by introducing an

### Monetary operations and liquidity management
- Introduce an explicit corridor for the overnight money market rate by mid-August, 2009, market conditions permitting, to:
  - enhance market signaling;
  - strengthen the effectiveness of liquidity management;
  - reduce volatility in short-term market interest rates;
  - improve transmission of monetary policy signals and their role in supporting price stability.
- Introduction of the corridor should not constrain SBP’s ability to respond to external and fiscal shocks, but will likely require:
  - increasing the frequency of reviews of the SBP’s policy rate;
  - enhancing coordination between the SBP and the government to improve projections of financial flows and communication to the SBP to strengthen liquidity forecasting.

### Exchange-rate policy and foreign-exchange operations
- SBP to continue pursuing a flexible exchange rate policy to strengthen the external position and competitiveness.
- Interventions in the foreign exchange market will be largely aimed at achieving the program’s net foreign asset targets.
- SBP actions and timelines:
  - Cease to provide foreign exchange for imports of diesel and other refined products effective August 1, 2009.
  - Market conditions permitting, accelerate plan to phase-out provision of foreign exchange for oil imports by end-December 2009.
  - Circular issued June 12, 2009 eliminates exchange restrictions related to imposition of cash margin requirements on letters of credit, including those introduced since the inception of the IMF program.

### Refinancing schemes and interest-rate normalization
- SBP will rationalize refinancing schemes and eliminate subsidies resulting from below-market interest rates.
- Specific timetable for EFS and LTFF:
  - Process of increasing interest rates begins in September 2009;
  - By end-September 2010 they will reach levels 2 percentage points below the weighted average yield on six-month T-bills and PIBs of the same tenor for the EFS and LTFF, respectively;
  - By end-September 2011 they will equal the weighted average yield on six-month T-bills for the EFS and yields of the same tenor for PIBs for the LTFF.

### Financial sector stability, supervision, and safeguards
- Current financial sector assessment:
  - Financial sector remains sound but pressures increasing due to economic slowdown.
  - Main risk: banks’ credit exposure to vulnerable sectors like textiles.
- Nonperforming loans (NPLs):
  - Gross NPLs increased from 9.1 percent of total loans in December 2008 to 11.5 percent in March 2009.
  - Net NPLs to net loans rose from 2.5 percent to 3.9 percent over the same period.
- Capital and risk management:
  - Risk-weighted capital adequacy ratio around 12.9 percent.
  - SBP strengthening coverage of credit risk during onsite examinations, weekly monitoring of liquidity profiles, and asking banks with high NPLs to adopt corrective measures.
- Stress-test findings and operational risk:
  - Stress tests indicate general resilience but increased vulnerability to default from large exposures.
  - Increase in maturity mismatches in the 0–3 months and over one-year categories (liquidity risk) beyond the 10 percent limit — being addressed by weekly monitoring of individual banks’ liquidity profiles.
  - Increased incidence of fraud; SBP encouraging improvements in fraud control systems and implementation of sophisticated core banking systems by large and mid-size banks.
- Supervisory and legal measures:
  - Amendments to the Banking Companies Ordinance prepared, reviewed and approved by SBP Board, submitted to government, to be presented to parliament by end-August, 2009.
  - New Problem Bank Management and Contingency Plan adopted by SBP; Federal Government guaranteed scheme for providing liquidity to small banks in place.
  - SBP reduced quantum of gradual increments in minimum capital requirements but maintained enhancements in capital adequacy requirements (CARs):
    - Minimum capital required for banking institutions at end-2013 reduced from Rs. 23 billion to Rs. 10 billion (to be achieved progressively, starting with Rs. 6 billion by end-2009).
    - Minimum CAR increased to 10 percent, to be achieved by 31st December 2009.

### Structural reforms, bankruptcy law, and SBP independence
- New draft SBP law to enhance SBP operational independence reviewed by SBP Board; includes creation of an independent Monetary Policy Committee composed of members with strong professional credentials. Draft submitted to inter-agency committee; government to present legislative proposals to parliament as amendments to the SBP law by end-September 2009.
- New bankruptcy law to be presented to government and submitted to parliament by end-August 2009 to facilitate rehabilitation of weak but viable corporate entities and expeditious liquidation of insolvent companies.
- Updated safeguards assessment of the SBP to be conducted, focusing on developments since the recent assessment, including actions to enhance SBP independence, internal controls, and establishment of a Board Committee to centralize risk management activities.

### Program risks, conditionality, and monitoring
- Key program risks:
  - Deterioration in trading partners’ economies reducing export demand, workers’ remittances, and private capital flows;
  - Delays in donor support disbursements limiting countercyclical fiscal policy scope;
  - Adverse security developments undermining confidence and revenue targets;
  - Weakening economic activity increasing risks to the financial sector.
- Program monitoring:
  - Program subject to quarterly program reviews and quarterly performance criteria for 2009/10.
  - TMU updated definitions for adjustors related to external financing and effective July 1, 2009 replaces the TMU dated November 20, 2008.
  - Prior action for second review: presidential ordinance to amend NEPRA Act to provide for:
    - (i) monthly determination by NEPRA of fuel/power purchase price adjustments in line with international fuel prices and automatic implementation upon determination;
    - (ii) quarterly determination of overall electricity tariffs by NEPRA to reflect all other cost components;
    - (iii) automatic notification of new tariffs within 15 days from NEPRA determination starting in August 2010.
- Structural conditionality adjustments:
  - Proposal to convert two missed end-June structural performance criteria into structural benchmarks:
    - Amendments to banking legislation into a structural benchmark for end-August 2009.
    - Legislative amendments to harmonize administration of the income tax and GST laws into a structural benchmark for end-September 2009.

### Program financing and key quantitative targets (selected figures)
- Additional financing, including higher access under the SBA, needed to strengthen international reserves and reduce program risks.
- Selected items from Table 1 (Pakistan: Quantitative Targets, December 2008–June 2010):
  - Continuous ceiling on SBP's foreign currency swaps and forward sales (in millions of U.S. dollars): 1,900 2,750 2,750 2,500 2,500 2,500 2,500
    - Actual...1,8351,690
  - Ceiling on outstanding stock of short-term public and publicly guaranteed external debt (in millions of U.S. dollars): 5151,5001,5001,5001,5001,5001,500
    - Actual...728652
  - Cumulative ceiling on contracting of nonconcessional medium- and long-term public and publicly guaranteed external debt (in millions of U.S. dollars) 1/: 9,5009,5009,5009,5009,5009,5009,500
    - Actual...1,2991,649
  - Ceiling on net domestic assets of the SBP* (stock, in billions of Pakistani rupees): 1,2501,4121,3141,3001,3401,3651,410
    - Adjusted target...1,416N/A
    - Actual...1,2011,183
  - Ceiling on net government borrowing from SBP* (stock, in billions of Pakistani rupees): 1,2271,2741,1811,1301,1301,1301,130
    - Adjusted target...1,274N/A
    - Actual...1,0711,130
  - Ceiling on overall budget deficit* (cumulative flow, in billions of Pakistani rupees): 142405562194384573721
    - Adjusted target...405N/A
    - Actual...405683
- Memorandum items (selected):
  - Net external program financing (cumulative, in millions of U.S. dollars): -16629661695-517-1,067274
  - Tokyo pledges, excl. multilateral disbursements (cumulative, in millions of U.S. dollars): .........3421,1771,9622,220
  - Foreign Exchange cash reserve requirement (CRR, incl. special CRR) deposits in SBP (in millions of U.S. dollars): 832745728750770790800
  - Weekly cash reserve requirement ratios (in percentage points): Rupee deposits (less than one year maturity)9555555; Rupee deposits (more than one year maturity)0000000; Foreign currency deposits CRR5555555; Foreign currency deposits special CRR15151515151515
- Important TMU and timing references:
  - TMU dated July 29, 2009; definitions effective with effect from July 1, 2009.
  - Note on valuation: gold valued at $20.27 per troy ounce per fine troy ounce for SBP foreign assets valuation.

### Other notable data points
- National Investment Trust’s State Enterprise Fund (NITSEF):
  - As of June 30, NITSEF had invested in the stock market Rs. 10.3 billion of its resources, which total to Rs. 20 billion.
  - NITSEF discloses investment strategy, financial statements, and quantity and average acquisition price of security purchases at the end of each quarter on its website.

*Source: _cr09265 - 25.      The SBP will further improve its monetary operations framework by introducing an*

### 7.      Net borrowing from the SBP by the government is defined as SBP claims on

### 7.      Net borrowing from the SBP by the government is defined as SBP claims on

### Definitions: net borrowing, SBP claims, government deposits
- Net borrowing from the SBP by the government = SBP claims on the government minus government deposits with the SBP.
- SBP claims on the government include: government securities, treasury bills, ways and means advances, treasury currency, and debtor balances.
- SBP claims on the government exclude: accrued profits on government securities.
- Government deposits with the SBP exclude: the Zakat Fund and Privatization accounts.

### Definition: overall budget deficit (excluding grants) under the program
- The overall budget deficit (excluding grants) = consolidated budget deficit (excluding grants), including operations of district governments financed from local funds.
- Measured as the sum of:
  - (a) total net financing to the federal, provincial, and local governments; and
  - (b) total external grants to the federal and provincial governments.
- Total net financing is defined as the sum of:
  - (i) net external budget financing (see ¶11);
  - (ii) net borrowing from the banking system (as defined above); and
  - (iii) net domestic nonbank financing (see ¶12).
- Total external grants = project grants + cash external grants for budgetary support + capital grants reflecting principal amounts of external debt cancellation or swaps + other grants.

### Net external program financing (¶9–11)
- Net external program financing includes:
  - external privatization receipts;
  - budget support grants;
  - budget support loans from multilateral (other than the IMF, but including World Bank and ADB budget support and structural adjustment loans), official bilateral budget support loans, and private sector sources (e.g., bonds);
  - rescheduled government debt service and change in stock of external debt service arrears net of government debt amortization due on foreign loans (including any accelerated amortization related to debt swaps or debt cancellation recorded as capital grants);
  - foreign loans onlent to financial institutions and companies (public or private);
  - emergency relief lending.
- Excludes all external financing counted as reserve liabilities of the SBP.
- Net IMF financing to the budget (¶10) = Fund disbursements credited to the budget minus repayments from the budget through the Ministry of Finance’s dedicated account for Fund financing at the SBP.
- Net external budget financing (¶11) = net external program financing minus privatization receipts, minus budget support grants, plus other external loans for public projects or budget expenditures, plus transfers of external privatization receipts from the privatization account to the budget, plus net IMF financing to the budget.

### Net domestic nonbank financing (¶12)
- Net domestic nonbank financing = domestic privatization receipts transferred from privatization accounts to the budget, plus the change during each reporting period in the stock of:
  - (i) permanent debt (nonbank holdings of prize bonds, all federal bonds, and securities);
  - (ii) floating debt held by nonbanks;
  - (iii) unfunded debt (National Savings Scheme (NSS) debt, Postal Life Insurance, General Provident Fund (GPF));
  - (iv) net deposits and reserves received by the government (public accounts deposits);
  - (v) any other government borrowing from domestic nonbank sources net of repayments;
  - minus (vi) government deposits with NBFIs.
- Nonbank holdings of permanent and floating debt = total debt outstanding (reported by the SBP) minus holdings of banks as per the monetary survey.
- Total T-bill and other relevant government debt are valued at discount value and exclude accrued interest.

### External debt definitions and limits (¶13–16)
- Performance criterion on contracting/guaranteeing medium-term and long-term nonconcessional external debt applies to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (adopted August 24, 2000), and to commitments contracted/guaranteed for which value has not been received.
- Exclusions from this performance criterion:
  - (i) foreign currency deposit liabilities of the SBP;
  - (ii) outstanding stock of FEBCs, DBCs, and FCBCs.
- Short-term external debt limit refers to debt with original maturity up to and including one year. Medium- and long-term external debt = initial maturity of over one year.
- Nonconcessional borrowing = borrowing with a grant element of less than 35 percent.
- Discount rates for grant element calculation = six-month and ten-year Commercial Interest Reference Rates (CIRRs) averages as computed by the Strategy and Policy Review Department of the IMF:
  - Six-month CIRRs updated mid-February and mid-August (covering the six-month period preceding update).
  - Ten-year CIRRs averages updated mid-December (covering 10 years preceding update).
  - Use six-month CIRRs averages for loans with maturity < 15 years.
  - Use ten-year CIRRs averages for loans with maturity ≥ 15 years.
- External payment arrears = unpaid debt service by the government beyond the due date under the contract and any grace period.
- Tokyo-related disbursements = donor support (loans and grants) pledged at the donor conference held in Tokyo on April 17, 2009.

### Adjustors: overview and projections (¶17–31)
- Net external program financing projections (excluded from net external program financing for paragraphs 18–23: budget grants related to IDPs, program portion of Tokyo-related disbursements, and Fund financing to the budget):
  - July 2009–September 2009: $95 million
  - July 2009–December 2009: -$517 million
  - July 2009–March 2010: -$1,067 million
  - July 2009–June 2010: $274 million
- Threshold for excess net external program financing (¶18):
  - If actual cumulative net external program financing in U.S. dollar terms exceeds projected by more than $500 million, then:
    - excess net external program financing (U.S. dollar terms) = actual minus projected minus $500 million.
    - Convert to rupee terms by multiplying by fixed accounting exchange rate of Rs. 83 per $1.
- Ceiling adjustments on consolidated overall budget deficit for cumulative excess net external program financing (¶19):
  - Adjusted upward for cumulative excess in rupee terms up to:
    - Rs. 73.5 billion at end-September 2009,
    - Rs. 73.5 billion at end-December 2009,
    - Rs. 73.5 billion at end-March 2010,
    - Rs. 73.5 billion at end-June 2010.
- Definition of surplus net external program financing in U.S. dollar terms (¶20):
  - If cumulative excess (converted at Rs. 83 per $1) exceeds the cumulative maximum limits specified in ¶17, then:
    - surplus net external program financing (U.S. dollar terms) = cumulative excess in U.S. dollar terms minus the maximum cumulative amounts specified for each date (converted at Rs. 83 per $1).
    - Surplus in rupee terms = surplus (U.S. dollar terms) × Rs. 83 per $1.
- Effects of surplus net external program financing (¶21–22):
  - Floor on the NFA of the SBP will be adjusted upward by the cumulative surplus net external program financing in U.S. dollar terms.
  - Ceilings on the NDA of the SBP and net borrowing from the SBP by the government will be adjusted downward by the cumulative surplus net external program financing in rupee terms.
- Shortfall in net external program financing (¶23):
  - If actual cumulative net external program financing is lower than projected, shortfall (U.S. dollar terms) = projected minus actual.
  - Adjustments:
    - a. Floor on the NFA of the SBP adjusted downward by cumulative shortfall in U.S. dollar terms.
    - b. Ceiling on the NDA of the SBP adjusted upward by cumulative shortfall converted into rupees at Rs. 83 per $1.
    - c. Ceiling on net borrowing from the SBP by the government is not subject to adjustment.

### Tokyo-related disbursements adjustors (excluding multilateral sources) (¶24–25)
- Projections (excluding multilateral sources):
  - July 2009–September 2009: $342 million
  - July 2009–December 2009: $1,177 million
  - July 2009–March 2010: $1,962 million
  - July 2009–June 2010: $2,220 million
- Shortfall rule (¶25):
  - If actual cumulative gross Tokyo-related disbursements (excluding multilateral sources) is lower than projected by more than $1.421 billion, shortfall (U.S. dollar terms) = projected minus actual.
  - Convert to rupee terms using Rs. 83 per $1.
  - In such a case:
    - a. Ceiling on consolidated overall budget deficit (excluding grants) adjusted downward up to:
      - Rs. 29.49 billion at end-September 2009,
      - Rs. 58.97 billion at end-December 2009,
      - Rs. 58.97 billion at end-March 2010,
      - Rs. 58.97 billion at end-June 2010,
      - (equivalent to $0.71 billion valued at Rs. 83 per $1) for shortfall in rupee terms in excess of Rs. 117.94 billion.
    - b. Floor on the NFA of the SBP adjusted downward by the shortfall in U.S. dollar terms.
    - c. Ceiling on the NDA of the SBP adjusted upward by the shortfall.

### Tokyo-related disbursements adjustors (multilateral sources) (¶26–27)
- Projections (multilateral sources):
  - July 2009–September 2009: $0 million
  - July 2009–December 2009: $0 million
  - July 2009–March 2010: $100 million
  - July 2009–June 2010: $270 million
- Shortfall rule:
  - If actual cumulative gross Tokyo-related disbursements from multilateral sources is lower than projected, shortfall (U.S. dollar terms) = projected minus actual.
  - Convert to rupee terms using Rs. 83 per $1.
  - In such a case:
    - a. Ceiling on consolidated overall budget deficit (excluding grants) adjusted downward by the shortfall in rupee terms.
    - b. Floor on the NFA of the SBP adjusted downward by the shortfall in U.S. dollar terms.
    - c. Ceiling on the NDA of the SBP adjusted upward by the shortfall.
    - d. Ceiling on net borrowing from the SBP by the government will not be adjusted.

### Adjustor: net IMF financing to the budget (¶28–29)
- Projections for net IMF financing to the budget:
  - July 2009–September 2009: $715 million
  - July 2009–December 2009: $1,072 million
  - July 2009–March 2010: $1,430 million
  - July 2009–June 2010: $0 million
- If actual net Fund financing differs from projected (U.S. dollar terms, using actual SDR/U.S. dollar exchange rates):
  - a. Floor on the NFA of the SBP adjusted by the difference in Fund financing to the budget in U.S. dollar terms (upward if positive, downward if negative).
  - b. Ceiling on the NDA of the SBP adjusted by subtracting the difference in Fund financing in U.S. dollar terms converted into rupees at Rs. 83 per $1 (downward if difference is positive, upward if negative).

### Adjustor: SDR allocations (¶30)
- If actual SDR allocation (U.S. dollar terms) differs from projected:
  - a. Floor on the NFA of the SBP adjusted by the difference in SDR allocations in U.S. dollar terms (upward if positive, downward if negative).
  - b. Ceiling on the NDA of the SBP adjusted by subtracting the difference in SDR allocations in U.S. dollar terms converted into rupees at Rs. 83 per $1 (downward if positive, upward if negative).

### Adjustor: project grants and budget grants related to IDP (¶31)
- If project grants or budget grants related to IDP differ from program assumptions (see Table 2), the ceiling on the consolidated overall budget deficit (excluding grants) will be adjusted upward or downward for the cumulative excess or shortfall respectively.
- This adjustor will not be applied in addition to adjustments made under ¶19 and ¶23 where applicable.

### Adjustor: changes in regulations on required reserves (¶32)
- Ceilings on the NDA of the SBP will be adjusted downward/upward by the amount of:
  - (i) banks’ Pakistani rupee reserves freed/seized by any reduction/increase of the daily CRR relative to the baseline assumption; and
  - (ii) any reduction/increase in the reservable deposit base related to definitional changes.
- Formula provided:
  - ∆NDA = ∆rB0 + r0∆B + ∆r∆B, where:
    - r0 denotes the reserve requirement ratio prior to any change;
    - B0 denotes the level of the reservable deposits in the initial definition;
    - ∆r is the change in the reserve requirement ratio;
    - ∆B denotes the change in the reservable deposits as a result of definitional changes.
- In case of significant liquidity and other financial sector pressures, the SBP will engage in consultations with IMF staff on appropriate monetary policy response.

### Adjustor: SBP’s net position under foreign exchange forwards and swaps (¶33)
- NFA target of the SBP will be adjusted upward/downward by the increase/decrease in the net SBP’s position under foreign exchange forwards and swaps.
- Maximum SBP net exposure under foreign exchange forwards and swaps is capped at $2.75 billion as of end-September 2009, end-December 2009, end-March 2010, and end-June 2010.
- The SBP’s net exposure under foreign exchange forwards and swaps was $1.69 billion at end-June 2009.

### Adjustor: foreign currency deposits of resident banks with the SBP (¶34)
- NFA target of the SBP will be adjusted upward/downward by the increase/decrease in foreign currency deposits of resident banks with the SBP.
- The stock of foreign currency deposits with resident banks was $832 million at end-June 2009.

*Source: _cr09265 - 7.      Net borrowing from the SBP by the government is defined as SBP claims on*

### 35.      The following information, including any revisions to historical data, will be provided

### _cr09265 - 35.      The following information, including any revisions to historical data, will be provided

### Reporting requirements to IMF (Middle East and Central Asia Department) — timetables and items
- Monthly provisional statements on federal tax and nontax revenue, within one month.
- Deposits into and withdrawals from the privatization accounts for each quarter, within one month. Withdrawals reported with breakdown: (i) those which constitute budgetary use of privatization proceeds; (ii) those which constitute costs of privatization; and (iii) other (with explanation of the purpose of other withdrawals), and breakdown between domestic and external privatization receipts.
- Quarterly statements on budgetary capital receipts and disbursements, including repayments of bonds, recovery of loans from provinces and “others,” within two months.
- Monthly (unreconciled) provisional data on federal expenditure and net lending (with separate data on disbursements and repayments), within one month.
- Quarterly statement on consolidated budgetary expenditure, with federal data approved by the Accountant General Pakistan Revenue (AGPR), within two months.
- Quarterly numbers on expenditure on social programs.
- Quarterly data on the stock of domestic government debt, broken down by instrument, within one month (Table 3).
- Quarterly data on WAPDA receivables within one month.
- Monthly data on Outstanding Audited Price Differential Claims.
- Monthly data on external budget financing, including:
  - (i) loan-by-loan program disbursements in U.S. dollar terms and rupee terms converted at exchange rates prevailing at the time of each transaction;
  - (ii) cumulative amortization in U.S. dollar terms and rupee terms converted at exchange rates prevailing at the time of each transaction;
  - (iii) cumulative project loan disbursements in U.S. dollar terms and in rupees converted at exchange rates prevailing at the time of each transaction.
  - Tokyo and IDP related disbursement should be indicated separately.
- Monthly data on Banks’ Budgetary Support (Table 1) within one month.
- Copies of new or revised ordinances/circulars regarding changes in tax policy, tax administration, foreign exchange market regulations, and banking regulations no later than three days after official issuance, or notification that ordinances have been posted on the Federal Board or Revenue (FBR) and SBP websites.
- Copies of official notification of changes in gas and electricity tariffs and any surcharges (automatic or structural) and in ex-refinery petroleum product prices as well as of gas and petroleum surcharges/levies.
- Monthly data on the import parity prices as well as central depot prices of the six major oil products, within one month.
- Quarterly data on KESC and WAPDA loans and debt outstanding, within one month.
- Upon adoption of the plan for elimination of inter-corporate circular debt, monthly reports on inter-corporate circular debt will be reported within one month.
- 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): include size of government exposure, duration of the guarantee or claim, and any other provisions relevant for the government’s exposure.
- Information on the transactions between the Ministry of Finance and the SBP with regard to the use of Fund resources for budget purposes on monthly basis.

### Monetary, banking, and foreign-exchange data — frequency and content
- Monthly monetary data on a last-Saturday basis within two weeks:
  - (i) monetary survey;
  - (ii) accounts of the SBP;
  - (iii) consolidated accounts of the scheduled banks;
  - (iv) banks’ lending to the government;
  - (v) detailed table on net foreign assets (both for the SBP and scheduled banks);
  - (vi) detailed table of scheduled banks’ reserves with the SBP.
- Same tables as preceding item but on an end-month and end-quarter basis (last business day), both at current and program exchange rates, within one month.
- SBP Table on outstanding stock of foreign currency deposits amended to include classification of new FCA according to the residency of the holder.
- Daily data on exchange rates (interbank, retail market, and Telegraphic Transfers for SBP purchases in the retail market), SBP’s sales and purchases in the foreign exchange markets, swaps and forward outright sales, within two business days.
- Monthly data on the outstanding stock of the SBP’s forward foreign currency operations, including swaps and outright forward sales and purchases, within two weeks. The terms of any new transactions (including rollover/renewal of existing ones) will also be provided.
- Monthly data on the SBP’s foreign exchange reserves, with details on the currencies, instruments, and institutions in which the reserves are held, within one month.
- Monthly data on SBP direct or bridge loans to nationalized banks in the context of the restructuring and privatization operation, within four weeks.
- Monthly data on any other quasi-fiscal operations undertaken by the SBP, on behalf of the government.
- Monthly data on SBP holding of discounted export finance credit under the export finance scheme, within one month.
- Monthly data on outstanding credit to agriculture under the Agriculture Mandatory Credit Targets, within one month.

### External debt, arrears, and contracting — required reporting
- Quarterly stock of public- and publicly-guaranteed external debt (including deferred payments arrangements), by maturity (initial maturities of up to and including one year, and over one year), by creditor and by debtor (central government and publicly guaranteed), within one month.
- Quarterly contracting or guaranteeing of nonconcessional medium- and long-term government debt, within one month.
- Information on any rescheduling on public- and publicly-guaranteed debt reached with creditors, within one month.
- Quarterly data on external payments arrears on public and publicly guaranteed debt with details as above, within one month.

### Selected key figures and tables (as reported in annexed tables)
- Table 1. Pakistan: Budgetary Support (In million of rupees) — Central Government totals:
  - A. Central Government: 30-Jun-08 = 1,577,064; 30-Sep-08 = 1,693,872; 31-Dec-08 = 1,816,104; 31-Mar-09 = 1,829,279; 30-May-09 = 1,901,105.
  - 1. Scheduled Banks: 30-Jun-08 = 509,710; 30-Sep-08 = 397,816; 31-Dec-08 = 504,189; 31-Mar-09 = 649,648; 30-May-09 = 683,468.
  - 2. State Bank: 30-Jun-08 = 1,067,354; 30-Sep-08 = 1,296,056; 31-Dec-08 = 1,311,916; 31-Mar-09 = 1,179,630; 30-May-09 = 1,217,637.
  - C. Net Govt. Budgetary Borrowings from the Banking system: 30-Jun-08 = 1,364,604; 30-Sep-08 = 1,485,846; 31-Dec-08 = 1,574,898; 31-Mar-09 = 1,570,239; 30-May-09 = 1,674,990.
  - Through SBP: 30-Jun-08 = 1,033,715; 30-Sep-08 = 1,260,460; 31-Dec-08 = 1,256,545; 31-Mar-09 = 1,115,206; 30-May-09 = 1,192,679.
  - Through Scheduled Banks: 30-Jun-08 = 330,888; 30-Sep-08 = 225,386; 31-Dec-08 = 318,353; 31-Mar-09 = 455,033; 30-May-09 = 482,311.
  - Memorandum: Accrued Profit on SBP holding of MRTBs: 30-Jun-08 = 18,200; 30-Sep-08 = 33,855; 31-Dec-08 = 34,500; 31-Mar-09 = 44,031; 30-May-09 = 41,117.
  - Net Govt. Borrowings (Cash basis) From Banking System: 30-Jun-08 = 1,325,371; 30-Sep-08 = 1,429,999; 31-Dec-08 = 1,506,349; 31-Mar-09 = 1,501,553; 30-May-09 = 1,614,511.
- Table 2. Pakistan: External Financing For Budget for 2008/09 and 2009/10 (in millions of US dollars) — selected lines:
  - Project Aid (2008/09 Jul.-Sep. Act.) = 248; (Oct.-Dec. Act.) = 331; (Jan.-Mar. Act.) = 279; (Apr.-Jun. Proj.) = 316; Total (2008/09) = 1,174.
  - Project Aid (2009/10 projected totals shown across quarters with Total = 3,442).
  - Program Loans (2008/09 Total Act/Proj series) and Projected program loans for 2009/10: Total = 2,745 (2009/10 projected, row label: Program Loans).
  - Budget financing from the Fund (2008/09): 715 (Jul.-Sep.); 357 (Oct.-Dec.); 357 (Jan.-Mar.); -1,430 (Apr.-Jun.); 0 (Total proj/act as presented).
  - Amortization (2008/09 totals by quarter and cumulative): Total = 2,462.
  - Memorandum items: Net budget financing (cumulative from beginning of fiscal year) = 824; 521; 1,153; 1,789; 1,593; 2,497; 3,469; 4,336 (series by quarter as presented).
- Table 3. Pakistan: Total Outstanding Domestic Debt (In billion of rupees) — headline stocks (Jun-08 and May-09 1/):
  - A. Permanent Debt: Jun-08 = 608; May-09 = 676.
  - Pakistan Investment Bonds (PIBs): Jun-08 = 412; May-09 = 441.
  - Prize Bonds: Jun-08 = 183; May-09 = 193.
  - B. Floating Debt: Jun-08 = 1,637; May-09 = 1,955.
  - MTBs for Replenishment 2/: Jun-08 = 1,100; May-09 = 1,209.
  - C. Unfunded Debt: Jun-08 = 1,020; May-09 = 1,254.
  - Regular Income Certificates: Jun-08 = 51; May-09 = 88.
  - Bahbood Savings Certificates: Jun-08 = 229; May-09 = 302.
  - D. Total (A+B+C): Jun-08 = 3,266; May-09 = 3,884.
  - Footnotes: 1/ Provisional data. 2/ Inclusive of outright sale of MTBs to commercial banks.
- Sources cited within the unit: State Bank of Pakistan; Pakistani authorities; Fund staff projections.

### IMF program, safeguards, and institutional relations — key points and projected payments
- Stand-By Arrangement: Approval Date 11/24/08; Expiration Date 10/23/2010; Amount Approved = 5,168.50 (SDR Million); Amount Drawn = 2,635.94 (SDR Million).
- PRGF arrangements: Amount Approved = 1,033.70 (SDR Million); Amount Drawn = 861.42 (SDR Million).
- Projected payments to the Fund (SDR Million; based on existing use of resources and present holdings of SDRs) — forthcoming principal and charges/interest by year:
  - 2009 Principal = 68.91; Charges/Interest = 23.28; Total = 92.19.
  - 2010 Principal = 172.28; Charges/Interest = 44.98; Total = 217.26.
  - 2011 Principal = 172.28; Charges/Interest = 44.11; Total = 216.40.
  - 2012 Principal = 1,322.27; Charges/Interest = 35.13; Total = 1,357.41.
  - 2013 Principal = 1,404.11; Charges/Interest = 14.56; Total = 1,418.67.
- Safeguards assessment findings for the State Bank of Pakistan (SBP):
  - Full safeguards assessment under the Stand-By Arrangement approved in November 2008; update assessment included safeguard mission in late January 2009.
  - Findings: improved transparency of audited financial statements; stronger governance oversight by the Central Board and the Audit Committee; SBP modernization program (new organization structure, IT systems, recruitment of qualified professional staff).
  - Outstanding issues: need for prompt action to safeguard central bank independence via amending the SBP Act and expedite its transition to the inter-agency group formed by the authorities; need to strengthen controls over program data reporting to the Fund through an independent review mechanism.
- Exchange system and related measures:
  - Dual exchange rate system unified on May 19, 1999; Fund classifies Pakistan’s exchange rate regime as floating.
  - Pakistan has accepted the obligations of Article VIII, but maintains a restriction subject to Fund approval in the form of a 25 percent limit on advance payments for imports of goods.
  - Authorities eliminated cash margin requirements on letters of credit in June 2009.

*Source: Informational Annex prepared by Middle East and Central Asia Department (July 29, 2009) — content as provided in the unit.*

### 3. The CAS is designed around three main pillars:

### _cr09265 - 3. The CAS is designed around three main pillars:

### CAS Pillars
- Sustained Growth and Improved Competitiveness:
  - Support investments and reforms to improve the business environment for trade and investment and sustain rapid, private sector–led growth.
  - Bank support to key sectors: agriculture and infrastructure.
  - Support to government to strengthen macroeconomic management through improving public expenditures and supporting ongoing tax reforms.
- Strengthened Governance and Service Delivery:
  - Support reforms and investment to increase efficiency, transparency, and accountability in use of public resources.
  - Support cross-cutting reforms to improve service delivery at all levels of government, with particular attention to health, education, water and sanitation, safety nets, and municipal services.
- Improved Lives and Protection of the Vulnerable:
  - Increased investment in education and health to build the skilled, healthy workforce needed to sustain growth.
  - Targeted interventions to help the poor, including strengthened safety nets and targeted interventions and community-based approaches in rural areas.

### Lending Plans and World Bank Group Strategy
- CAS lending program (through FY2009):
  - Flexible lending program of up to $6.5 billion.
  - About half ($3.1 billion) will take the form of IDA credits.
  - Policy-based lending will account for up to half of planned financial support.
  - Expansion in lending will take place primarily in infrastructure (mainly in energy, water, and transport) and human development.
  - Up to $1 billion allocated to support reconstruction and recovery related to the October 2005 earthquake.
- IFC strategy FY2006–09:
  - Target range of $500–600 million in investments during FY2006–09.
  - Focus sectors: financial, SME, and infrastructure.
  - Substantial TA program to build capacity and address constraints in SME, infrastructure, and financial sectors.

### IBRD/IDA Financial Operations (Pakistan, selected items from FY2002–FY2007)
- Commitments (in millions of U.S. dollars):
  - IBRD commitments: FY2004: 50; FY2005: 347; FY2006: 315; FY2007: 100.
  - IDA commitments: FY2002: 800; FY2003: 297; FY2004: 731; FY2005: 500; FY2006: 1,161; FY2007: 885.
- Disbursements (in millions of U.S. dollars):
  - IBRD disbursements: FY2002: 38; FY2003: 40; FY2004: 13; FY2005: 203; FY2006: 149; FY2007: 154.
  - IDA disbursements: FY2002: 830; FY2003: 316; FY2004: 290; FY2005: 778; FY2006: 1,061; FY2007: 1,030.
- Repayments (in millions of U.S. dollars):
  - IBRD repayments: FY2002: 255; FY2003: 257; FY2004: 277; FY2005: 299; FY2006: 289; FY2007: 265.
  - IDA repayments: FY2002: 71; FY2003: 83; FY2004: 96; FY2005: 111; FY2006: 117; FY2007: 170.
- Debt Disbursed and Outstanding (in millions of U.S. dollars):
  - IBRD: FY2002: 2,820; FY2003: 2,706; FY2004: 2,526; FY2005: 2,406; FY2006: 2,247; FY2007: 2,132.
  - IDA: FY2002: 5,097; FY2003: 5,604; FY2004: 6,020; FY2005: 6,651; FY2006: 7,627; FY2007: 8,700.

### Proposed SBA Augmentation: Access, Phasing, and Exposure
- Authorities request augmentation of access of about SDR 2.1 billion (200 percent of quota) under the current 23-month SBA approved on November 24, 2008.
- Under proposal:
  - Some SDR 0.95 billion (92 percent of quota) would be used for budget financing before donor pledges are disbursed.
  - Total access would rise to about SDR 7.2 billion (700 percent of quota).
  - Augmentation combined with rephasing of purchases and extension of the arrangement through end-2010, with changed dates of availability to increase access in the balance of 2009 and 2010 and phase evenly for remainder of program.
- If all purchases made under proposed augmentation:
  - Pakistan’s GRA credit would peak at 700 percent of quota (SDR 7.2 billion) by November 2010.
  - Including outstanding PRGF loans, peak exposure would be 744 percent of quota (SDR 7.7 billion) in November 2010.
  - GRA credit would peak at 16.8 percent of total external debt in 2010/11.
  - GRA credit outstanding to Pakistan would reach 6 percent of GDP and about 72 percent of gross international reserves by end of fiscal year 2010/11.

### Capacity to Repay and Debt Service Indicators (selected figures from Table 2)
- GRA credit to Pakistan (SDR millions, end-period projections):
  - Aug-09: 3,402.6
  - 2010: 5,702.6
  - 2011: 7,235.9
  - 2012: 6,648.0
  - 2013: 4,826.1
  - 2014: 2,012.5
  - 2015: 287.5
  - 2016: 0.0
- (In percent of quota):
  - Aug-09: (329.2)
  - 2010: (551.7)
  - 2011: (700.0)
  - 2012: (643.1)
  - 2013: (466.9)
  - 2014: (194.7)
  - 2015: (27.8)
  - 2016: (0.0)
- Charges due on GRA credit (SDR millions):
  - Aug-09: 85.1
  - 2010: 167.0
  - 2011: 183.2
  - 2012: 165.3
  - 2013: 77.4
  - 2014: 18.9
  - 2015: 2.2
- Debt service due on GRA credit (SDR millions):
  - Aug-09: 85.1
  - 2010: 167.0
  - 2011: 771.1
  - 2012: 1,987.2
  - 2013: 2,891.0
  - 2014: 1,743.9
  - 2015: 289.7
- Selected ratios (in percent of GDP; end-June projections):
  - Total external debt: 2011: 35.1; 2012: 35.5; 2013: 34.5; 2014: 32.5.
  - GRA credit to Pakistan (percent of GDP): 2011: 5.9; 2012: 5.1; 2013: 3.5; 2014: 1.4.
  - Total external debt service (percent of GDP): 2011: 2.0; 2012: 2.3; 2013: 3.1; 2014: 3.5.
- Selected ratios (in percent of Gross International Reserves):
  - GRA credit to Pakistan: 2011: 72.0; 2012: 68.4; 2013: 55.4; 2014: 25.0.
  - Debt service due on GRA credit: 2011: 7.9; 2012: 22.8; 2013: 35.9; 2014: 19.0.
- Selected ratios (in percent of Exports of Goods and Services):
  - Total external debt service: 2011: 15.7; 2012: 18.0; 2013: 24.2; 2014: 27.3.
  - Debt service due on GRA credit: 2011: 4.7; 2012: 11.3; 2013: 15.3; 2014: 8.6.
- Selected ratios (in percent of Tax Revenues (excluding grants)):
  - Public external debt service: 2011: 14.9; 2012: 16.4; 2013: 22.2; 2014: 25.1.
  - Debt service due on GRA credit: 2011: 4.9; 2012: 11.4; 2013: 15.2; 2014: 8.5.
- In percent of Total External Debt:
  - GRA credit to Pakistan: 2011: 16.8; 2012: 14.5; 2013: 10.2; 2014: 4.2.
- In percent of Total External Debt Service:
  - Debt service due on GRA credit: 2011: 26.3; 2012: 47.0; 2013: 56.2; 2014: 42.5.
- In percent of Total Public External Debt Service:
  - Debt service due on GRA credit: 2011: 29.8; 2012: 51.3; 2013: 60.4; 2014: 46.5.

### Impact on Fund’s GRA Finances (Table 3, as of 07/20/2009)
- One-year Forward Commitment Capacity (FCC) (in millions of SDRs): 91,300.0
- Impact on FCC of Pakistan's Augmentation: (2,067.4)
- Fund GRA credit outstanding to Pakistan (percent of current precautionary balances): 48.0
- Pakistan's annual GRA charges (percent of Fund's residual burden sharing capacity): 425.7
- Fund GRA credit outstanding to Pakistan (percent of total GRA credit outstanding): 13.8
- Memorandum items:
  - Fund's precautionary balances (in millions of SDRs): 7,093.0
  - Fund's residual burden sharing capacity (in millions of SDRs): 20.0
  - Fund GRA credit outstanding to five largest debtors (percent of total GRA credit outstanding): 84.1

### Assessment by IMF Staff
- Key risks and impacts:
  - Proposed augmentation involves substantial financial risks to the Fund; access was already large at program approval and will increase significantly under augmentation.
  - About half of augmentation could finance near-term government spending until donor pledges disbursed.
  - Program implementation to date: mixed, complicated by difficult security and political situation.
  - Debt service to the Fund will become a significant fiscal burden, particularly high relative to reserves.
  - Reserves vulnerable to weaker exports, remittances, FDI, and possible delays in donor disbursements.
  - Delays in implementation of key structural fiscal reforms, notably measures to raise revenues and to address rising electricity subsidy costs.
- Policy implications and corrective actions:
  - Revised program framework sets out corrective actions to address implementation delays and renew fiscal reform efforts.
  - Prompt implementation of corrective actions deemed critical to timely repayment and averting prolonged financial engagement with the Fund.

### Staff Representative Statement (developments since staff report, circulated July 29, 2009)
- Balance-of-payments update:
  - Slightly larger current account deficit for 2008/09 than estimated in staff report: estimated difference $0.3 billion or 0.2 percent of GDP.
- Reserves update:
  - Gross official reserves: $8.2 billion on August 3, 2009, compared with $9.1 billion at end-June 2009.
  - July reserve decline explained by official payments ($312 million), reduction in net forward position ($100 million), larger SBP provision of foreign exchange for oil import payments, and some pre-financing for petroleum product imports as SBP announced it would stop providing foreign exchange for petroleum product imports from August 1.
- Fiscal management and provincial overdrafts:
  - Efforts to strengthen enforcement of limits on provincial government use of SBP overdrafts.
  - Ministry of Finance initiated discussions with provinces to agree on new limits on Ways and Means Advances.
  - Pending new limits, SBP instructed to enforce strictly existing limits and not honor checks in excess of limits.
  - Regular monthly meetings to be held between federal and provincial finance ministries to agree on provincial expenditure and financing.
  - Discussion begun on schedule of reduction of overdraft stock between provinces, Ministry of Finance, and SBP.

*Source: _cr09265 - 3. The CAS is designed around three main pillars:*

### 5.      The National Electric Power Regulatory Authority (NEPRA) Act was amended by a

### 5.      The National Electric Power Regulatory Authority (NEPRA) Act was amended by a

### Amendment details and implementation mechanism
- The NEPRA Act was amended by a Presidential Ordinance on July 31, 2009—a prior action.
- The amendment puts in place:
  - (i) monthly determination by the NEPRA of the fuel adjustment surcharge in line with international fuel prices and automatic implementation upon determination; and
  - (ii) quarterly determination of overall electricity tariffs by NEPRA and notification of the adjusted tariffs usually within 15 days unless the government requests a review of the calculations made, in which case the maximum period before notification is made will be 33 days.
- The amendment varies from what was envisaged under the prior action but is assessed by staff to broadly achieve the intended objective.
- World Bank staff agrees that the amendments are largely consistent with the agreed plan for eliminating electricity tariff differential subsidies.

### Legal permanence and parliamentary approval
- For the amended NEPRA Act to become effective on a permanent basis, these amendments will need to be approved by parliament before the Presidential ordinance expires after four months.

### Context within IMF program and fiscal/energy reform objectives
- The amendment is part of broader electricity sector reform agreed with World Bank and Asian Development Bank staffs, aimed at:
  - addressing deep-seated problems in the sector, including the resolution of the intercorporate circular debt that burdens energy sector enterprises; and
  - the elimination of tariff differential subsidies within a year from now, making additional fiscal resources available for priority spending.
- The government adopted a mechanism to ensure that all changes in costs are passed through to prices, with the amendment of the NEPRA act through an ordinance while the National Assembly is not in session. This measure resolved the “flow” problem given changes in international prices, mainly of fuel oil.

### Operational implications and sequencing for tariff adjustments and arrears
- The amendment and accompanying measures address cost pass-through to prices, helping manage the generation of circular debt and the “flow” problem.
- Regarding the stock of liabilities (arrears), the government remains committed to addressing the issue through gradual price rises as the supply of electricity improves.
- A one-shot large price increase is considered politically infeasible following the introduction of the carbon tax and given an inadequate social safety net; the gradual adjustment strategy has been agreed with the ADB and the World Bank.

### Relevant program and macroeconomic figures (selected exact values from the Press Release and accompanying statement)
- Presidential Ordinance date: July 31, 2009.
- Notification timeframe for adjusted tariffs: usually within 15 days; maximum 33 days if government requests review.
- Ordinance expiry without parliamentary approval: after four months.
- IMF augmentation of access approved: SDR 2,067.4 million (about US$3,236.3 million).
- Total financial support after augmentation: SDR 7,235.9 million (about US$11,327.0 million), equivalent to 700 percent of Pakistan’s quota or 6.3 percent of its GDP.
- Extension of the arrangement to end 2010 (originally approved on November 24, 2008).
- Immediate disbursement enabled by review completion: SDR 766.7 million (about US$1,200.2 million).
- Total disbursements under the program after this disbursement: SDR 3,402.6 million (about US$5,326.5 million).
- Waiver sought for non-observance of the end-June quantitative performance criterion on the fiscal deficit, missed by an amount equivalent to 0.9 percent of GDP.
- Internally displaced persons (IDPs) estimate in statements: 3 to 4 millions; elsewhere referenced as over 3 million and “around 3 million IDPs”.
- Earlier fiscal deficit for 2007/8: 7.6 percent of GDP.
- Fiscal adjustment achieved: around 2.5 percent of GDP (overall net fiscal adjustment, as stated).
- Tax revenue outcomes: tax/GDP at 8.8 percent of GDP in 2008/9 outcome; target in 2008/9 budget envisaged 10.3 percent of GDP; projected move in tax ratio to 10.6 in 2009/10.
- Carbon tax (petroleum levy) yield: set to yield around 1.2 percent of GDP.
- Exchange rate adjustment during the year: almost 30 percent.
- Estimated power-sector tariff adjustments discussed over time: 4 percent (earlier estimate), 16 percent (May estimate), 31 percent (July estimate).
- Augmentation request to the IMF by the Pakistan authorities: 200 percent of quota (requested).

### Policy implications and recommendations reflected in the document
- Ensure parliamentary approval of NEPRA Act amendments before the Presidential ordinance expires after four months to make changes permanent.
- Maintain the mechanism for automatic monthly fuel adjustment surcharge pass-through and quarterly tariff determinations to align tariffs with international fuel prices and reduce tariff differential subsidies.
- Continue gradual electricity price adjustments combined with improvements in electricity supply to address stock liabilities, rather than a one-shot price increase, given political and social safety net constraints.
- Coordinate electricity tariff reform with strengthened social safety nets to protect vulnerable populations, particularly IDPs.
- Implement complementary fiscal and structural reforms (VAT/VAT law, FBR reform, strengthened State Bank independence and supervision) to support fiscal consolidation and reduce reliance on temporary financing.

*Source: Excerpt from IMF Press Release No. 09/281 and accompanying statements (August 7, 2009) contained in the provided content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09265.pdf_