## _cr10295

## Source details

**Canonical URL:** [_cr10295](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10295.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10295.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10295.pdf.json)

---

### Executive summary: disaster scale, request, and immediate use of funds
- About one-fifth of the country has been flooded and 10 percent of the population has been directly affected.
- Nearly two million homes have been destroyed or damaged; 1.8 million homes noted elsewhere in the report.
- The costs for humanitarian relief and reconstruction will be in the billions of dollars.
- The authorities request financial assistance under the Fund’s policy for Emergency Natural Disaster Assistance (ENDA): a single purchase of SDR 296.98 million (28.73 percent of quota).
- The assistance will be used to provide food, shelter, and health services.
- Authorities reiterate commitment to the reform program supported by the Stand-By Arrangement (SBA) and hope that the fifth review can be completed in the coming months.
- Significant external assistance is needed for rescue and relief operations, and rehabilitation and reconstruction; budgetary grants would be preferable.

### Macroeconomic impact and outlook (staff preliminary assessment)
- Real GDP growth is unlikely to exceed 2¾ percent in 2010/11 and could be lower; authorities’ post-flood expected 2010/11 growth: 2½–3 percent.
- Real GDP growth in 2009/10: 4.1 percent (provisional).
- Average annual inflation is projected to rise to 13½ percent in 2010/11 compared to 11.7 percent in 2009/10; inflation (period average) expected to increase from 11.7 percent to 13½ percent in 2010/11.
- Inflation jumped in August: headline month-on-month inflation increased by 2.5 percent and year-on-year inflation was 13.2 percent; core inflation declined to 9.8 percent.
- The balance of payments is expected to weaken by US$1.6 billion (0.8 percent of GDP) in 2010/11 compared to the pre-flood forecast; staff expects the floods to result in a weakening of the 2010/11 balance of payments by US$1.6 billion (0.8 percent of GDP).
- Assessment of rehabilitation and reconstruction needs is under way; the initial World Bank and Asian Development Bank assessment is scheduled to be completed in mid-October.
- The budget will need to be revised to accommodate emergency operations and reconstruction in light of available financing; IMF staff will work with the authorities to re-evaluate the macroeconomic framework.

### Humanitarian and sectoral impacts
- Eighteen million people (over 10 percent of the population) have been directly affected; authorities’ letter cites over 15 million people (almost 10 percent of the population) affected and elsewhere notes over twenty million people affected.
- Some 1,540 people have died; 2,320 injured; more than 2 million families displaced; more than two million families displaced cited elsewhere.
- 1.8 million homes have been destroyed or damaged.
- The agriculture sector accounts for 21 percent of GDP and 45 percent of employment and has been hit particularly hard.
- An estimated 8 percent of total cropped area has been flooded, with very significant damage to industrial crops (cotton and sugarcane), wheat, vegetables and fruits, and livestock.
- A 10 percent decline in agricultural output would reduce GDP by over 2 percent.
- Floods are disrupting trade (exports and imports held up in ports) and electricity production (fuel cannot be delivered to power plants).
- Disruption of supply chains and agricultural damage have already started to push up prices, especially for food items; additional demand for building material, medicine, and social services will also contribute to price pressures.

### Balance of payments and external flows
- The current account deficit was expected to increase in 2010/11 before the floods due to higher imports and slower growth in remittances; with the floods, the current account deficit is expected to widen by 0.7 percent of GDP to 3.1 percent of GDP in one statement and staff projects the BOP weakening by US$1.6 billion (0.8 percent of GDP).
- Imports will rise in the short run as food and other basic goods are sourced from abroad and capital equipment imports increase for reconstruction.
- Cotton and textiles exports will likely be lower if the cotton crop is affected significantly.
- Rising remittances may approach a record US$10 billion and will partially offset the higher trade deficit.
- Private capital flows are projected to decline by about 0.1 percent of GDP.
- Gross official reserves: US$13 billion in June 2010 (official reserves rose to about US$13 billion at end-June; projected US$13.5 billion pre-flood); SBP net foreign assets at US$5.9 billion (equivalent of 1.7 months of import cover).
- Exchange rate around 85–86 rupees per dollar in May–July and period average noted similarly.

### Fiscal position and public finance implications
- The 2009/10 deficit (excluding grants) reached 6.3 percent of GDP compared to an unadjusted target of 5.1 percent of GDP; lower revenue and higher provincial spending contributed equally (0.6 percent of GDP each) to the deficit overrun.
- Tax revenue was about 0.3 percentage points of GDP lower than projected in 2009/10.
- Shortfalls in foreign financing tightened the adjusted program deficit target to 4.6 percent of GDP; the margin of nonobservance was 1.7 percent of GDP.
- The end-June target on government borrowing from the SBP was missed by 0.3 percent of GDP and the IMF bridge loan balance was US$400 million higher than programmed at end-June.
- The 2010/11 approved federal budget targeted a general government deficit of 4 percent of GDP; measures introduced on July 1 include raising the general sales tax (GST) rate by 1 percentage point to 17 percent and measures to boost excise and direct tax collection (withdrawal of capital gains tax exemptions and increases in federal excise duty on cigarettes, natural gas, and some other items).
- Provinces’ approved budgets targeted a small deficit, implying a consolidated general government deficit could reach 5 percent of GDP (one percentage point higher than targeted).
- Staff estimates tax revenue will fall short by 0.3 percent of GDP in the current quarter due to flood-related disruptions; demand for budgetary resources is likely to increase substantially for rescue, relief, and reconstruction.
- The government decided to introduce a temporary 10 percent income tax surcharge, which could generate up to 0.4 percent of GDP.
- As an initial assistance, the authorities plan to provide Rs. 20,000 (US$230) to people receiving benefits under the Benazir Income Support Program that have been affected by the floods (about 1 million people).
- The pre-flood deficit is currently projected to be 4.4 percent of GDP, so additional measures will be needed to bring it to 4 percent of GDP and create fiscal space for flood-related spending.

### Financial sector, monetary policy, and banking sector impact
- On July 30, the SBP increased its policy rate by 50 basis points to 13 percent (effective August 2).
- Growth of bank credit to the private sector remained weak at 4½ percent y-o-y as of August 21.
- Financial Soundness Indicators through end-March 2010 deteriorated: Nonperforming loans increased from 12.2 percent at end-December 2009 to 13.1 percent at end-March 2010; risk-weighted capital-to-assets ratio declined from 14.1 to 13.7 percent.
- Official reserves rose to about US$13 billion at end-June (compared with a projected US$13.5 billion); SBP net foreign assets remained weak at US$5.9 billion.
- Initial estimates from the SBP put loan losses related to the floods at about Rs. 54 billion, of which Rs. 34 billion are loans to agriculture; total private sector loans amount to close to Rs. 3 trillion.
- NPLs are expected to rise, especially for banks with large exposure to the flood-hit areas; SBP is closely monitoring such banks.
- The stock market lost 6 percent between end-July and September 8, against an average gain of 2 percent for peer markets.
- Pakistan’s sovereign spread increased by some 80 basis points to 643 basis points between end-July and September 8.
- SBP actions: ensuring smooth functioning of the payment system, mobile banking facilities, ample currency availability in flood-hit areas; measures to encourage banks to supply sufficient credit in flood-hit areas; considering use of refinancing schemes and loan-guarantee program expansion; considering relaxations in provisioning by allowing a higher for-sale-value of some collateral assets.

### Emergency financing decision and terms
- The IMF Executive Board approved a disbursement equivalent to SDR 296.98 million (about US$451 million) under the Emergency Natural Disaster Assistance (ENDA).
- Authorities requested a purchase in the amount of SDR 296.98201 million (28.73 percent of quota).
- ENDA financing features:
  - Not linked to program-based conditionality or review.
  - Carries the IMF’s basic rate of charge.
  - Repayment: three-year and three month grace period; repaid in eight equal installments; final maturity of 5 years.
- Purpose of the disbursement:
  - To help meet immediate financing needs of the government for urgent food, shelter, and health services.
  - To finance additional spending and immediate foreign exchange needs stemming from the floods.
  - To mitigate depletion of foreign exchange reserves and support confidence in Pakistan’s external position.
- GRA credit outstanding (including this purchase and access under the existing SBA) is expected to peak at 69 percent of gross international reserves, equivalent to 6 percent of GDP.
- Debt service payments will peak at about 25 percent of gross reserves and 14 percent of exports of goods and services in 2013/14.

### Authorities’ emergency response, donor mobilization, and aid transparency
- The UN appealed for US$460 million to finance Pakistan’s Initial Floods Emergency Response Plan; as of August 25, about 60 percent has been committed.
- Humanitarian assistance pledges (some outside the UN appeal) amount to US$725 million as of September 1, with Saudi Arabia, the United Kingdom, and the United States among the largest donors.
- Private individuals and organizations have pledged US$93 million for humanitarian assistance so far.
- In the absence of a damage assessment, pledges for reconstruction financing are still at an early stage.
- The World Bank and the ADB have pledged to reprogram loans of US$1 and US$2 billion, respectively, in previously committed lending to finance reconstruction and relief efforts in flood-hit areas; World Bank and ADB committed to reallocate US$1 billion and US$2 billion, respectively, to reconstruction.
- Authorities plan to work with World Bank staff on establishing an enhanced framework for monitoring donor contributions to increase transparency and accountability.
- Fund and authorities expect the ENDA disbursement to catalyze additional external support—preferably grants or highly concessional financing—to meet immediate budgetary and balance of payments needs and avoid excessive domestic financing.

### Policy recommendations, governance priorities, and program commitments
- Use IMF ENDA resources (SDR 296.98 million) for immediate budgetary support to deliver food, shelter, and health services without over-burdening domestic financial markets or depleting foreign exchange reserves, and to encourage financing from other sources.
- Revise the 2010/11 budget after the World Bank and ADB assessment to accommodate emergency operations and reconstruction, in light of available financing.
- Seek significant external assistance for rescue, relief, rehabilitation, and reconstruction; budgetary grants are preferable.
- Strengthen accountability and transparency of aid flows; authorities have asked the World Bank to help establish enhanced monitoring of aid flows.
- Accelerate tax policy and administration reforms: transform existing GST into a reformed GST with VAT features (broader base, reduced exemptions, input crediting); improve tax administration and implement an Electronic Payment and Refund System.
- Rein in fiscal contingencies linked with electricity and other sectors and address “circular debt” in the energy sector.
- Continue discussions with the World Bank and ADB on electricity sector reform to release about US$1 billion of program loans needed for 2010/11 budget financing.
- Authorities intend to move ahead with measures for the completion of the fifth review under the SBA; staff will work with the authorities to re-evaluate the macroeconomic framework once the damage needs assessment has been completed.

*Source: _cr10295 - Executive Summary and IMF staff report content unit.*

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

### _cr10295 - Executive Summary ......................................................................................................

### Executive summary: disaster scale, request, and immediate use of funds
- About one-fifth of the country has been flooded and 10 percent of the population has been directly affected.
- Nearly two million homes have been destroyed or damaged and there is extensive damage to roads, telecom and energy infrastructure, and crops and livestock.
- The costs for humanitarian relief and reconstruction will be in the billions of dollars.
- The authorities request financial assistance under the Fund’s policy for Emergency Natural Disaster Assistance (ENDA): a single purchase of SDR 296.98 million (28.73 percent of quota) for immediate budget support.
- The assistance will be used to provide food, shelter, and health services.
- The authorities reiterate their commitment to the reform program supported by the Stand-By Arrangement (SBA) and hope that the fifth review can be completed in the coming months.
- Significant external assistance is needed for rescue and relief operations, and rehabilitation and reconstruction; budgetary grants would be preferable.

### Macroeconomic impact and outlook (staff preliminary assessment)
- Real GDP growth is unlikely to exceed 2¾ percent in 2010/11 and could be lower.
- Average annual inflation is projected to rise to 13½ percent in 2010/11 compared to 11.7 percent in 2009/10.
- The balance of payments is expected to weaken by US$1.6 billion (0.8 percent of GDP) in 2010/11 compared to the pre-flood forecast.
- Budget pressures are expected: tax collection is likely to be lower and budgetary expenditure likely to be higher.
- Assessment of rehabilitation and reconstruction needs is under way; the initial World Bank and Asian Development Bank assessment is scheduled to be completed in mid-October.
- The budget will need to be revised to accommodate emergency operations and reconstruction in light of available financing; IMF staff will work with the authorities to re-evaluate the macroeconomic framework.

### Humanitarian and sectoral impacts
- Eighteen million people (over 10 percent of the population) have been directly affected.
- 1.8 million homes have been destroyed or damaged.
- The agriculture sector accounts for 21 percent of GDP and 45 percent of employment and has been hit particularly hard.
- An estimated 8 percent of total cropped area has been flooded, with very significant damage to industrial crops (cotton and sugarcane), wheat, vegetables and fruits, and livestock.
- A 10 percent decline in agricultural output would reduce GDP by over 2 percent.
- Floods are disrupting trade (exports and imports held up in ports) and electricity production (fuel cannot be delivered to power plants).
- Disruption of supply chains and agricultural damage have already started to push up prices, especially for food items; additional demand for building material, medicine, and social services will also contribute to price pressures.
- Inflation jumped in August: headline month-on-month inflation increased by 2.5 percent and year-on-year inflation was 13.2 percent; core inflation declined to 9.8 percent.

### Balance of payments and external flows
- The current account deficit was expected to increase in 2010/11 before the floods due to higher imports and slower growth in remittances; with the floods, the current account deficit is expected to widen by 0.7 percent of GDP to 3.1 percent of GDP.
- Staff expects the floods to result in a weakening of the 2010/11 balance of payments by US$1.6 billion (0.8 percent of GDP).
- Imports will rise in the short run as food and other basic goods are sourced from abroad and capital equipment imports increase for reconstruction.
- Cotton and textiles exports will likely be lower if the cotton crop is affected significantly.
- Rising remittances may approach a record US$10 billion and will partially offset the higher trade deficit.
- Private capital flows are projected to decline by about 0.1 percent of GDP.

### Fiscal position and public finance implications
- The 2009/10 deficit (excluding grants) reached 6.3 percent of GDP compared to an unadjusted target of 5.1 percent of GDP; lower revenue and higher provincial spending contributed equally (0.6 percent of GDP each) to the deficit overrun.
- Tax revenue was about 0.3 percentage points of GDP lower than projected in 2009/10.
- Shortfalls in foreign financing tightened the adjusted program deficit target to 4.6 percent of GDP; the margin of nonobservance was 1.7 percent of GDP.
- The end-June target on government borrowing from the SBP was missed by 0.3 percent of GDP and the IMF bridge loan balance was US$400 million higher than programmed at end-June.
- The 2010/11 approved federal budget targeted a general government deficit of 4 percent of GDP; measures introduced on July 1 include raising the general sales tax (GST) rate by 1 percentage point to 17 percent and measures to boost excise and direct tax collection (withdrawal of capital gains tax exemptions and increases in federal excise duty on cigarettes, natural gas, and some other items).
- Provincial fiscal pressures are material: under the Seventh National Finance Commission Award the share of tax revenues distributed to provinces rose significantly in 2010/11; provinces’ approved budgets targeted a small deficit, implying a consolidated general government deficit could reach 5 percent of GDP (one percentage point higher than targeted).
- Staff estimates tax revenue will fall short by 0.3 percent of GDP in the current quarter due to flood-related disruptions; demand for budgetary resources is likely to increase substantially for rescue, relief, and reconstruction.
- A reformed GST (broad-based VAT features: broader base, reduced exemptions, input crediting) remains central to boosting tax revenues.

### Financial sector and monetary policy
- Official reserves rose to about US$13 billion at end-June (compared with a projected US$13.5 billion); SBP net foreign assets remained weak at US$5.9 billion (equivalent of 1.7 months of import cover).
- The exchange rate was 85–86 rupee per dollar in May–July and the real exchange rate has appreciated.
- On July 30, the SBP increased its policy rate by 50 basis points to 13 percent (effective August 2).
- Growth of bank credit to the private sector remained weak at 4½ percent y-o-y as of August 21.
- Financial Soundness Indicators through end-March 2010 deteriorated: Nonperforming loans increased from 12.2 percent at end-December 2009 to 13.1 percent at end-March 2010; risk-weighted capital-to-assets ratio declined from 14.1 to 13.7 percent.
- Bank liquidity remains high due to increasing share of t-bills in banks’ portfolios; return on assets and equity has improved.

### Policy recommendations and governance priorities
- Use IMF ENDA resources (SDR 296.98 million) for immediate budgetary support to deliver food, shelter, and health services without over-burdening domestic financial markets or depleting foreign exchange reserves, and to encourage financing from other sources.
- Revise the 2010/11 budget after the World Bank and ADB assessment to accommodate emergency operations and reconstruction, in light of available financing.
- Seek significant external assistance for rescue, relief, rehabilitation, and reconstruction; budgetary grants are preferable.
- Strengthen accountability and transparency of aid flows: the authorities have asked the World Bank to help establish enhanced monitoring of aid flows to bolster accountability and transparency and to improve targeting to the poor and vulnerable.
- Accelerate tax policy and administration reforms (reformed GST introduction, improved tax administration, Electronic Payment and Refund System) to broaden the tax base and enhance revenue mobilization.
- Rein in fiscal contingencies linked with electricity and other sectors and address “circular debt” in the energy sector.
- Continue discussions with the World Bank and ADB on electricity sector reform to release about US$1 billion of program loans needed for 2010/11 budget financing.

*Source: _cr10295 - Executive Summary*

### 17.      NPLs are expected to rise, especially for banks with large exposure to the

### 17.      NPLs are expected to rise, especially for banks with large exposure to the

### Nonperforming loans and banking sector impact
- Initial estimates from the SBP put loan losses related to the floods at about Rs. 54 billion, of which Rs. 34 billion are loans to agriculture.
- Total private sector loans amount to close to Rs. 3 trillion, making the estimated losses unlikely to materially affect the banking system overall.
- The SBP is closely monitoring banks with large exposures in the flood-hit areas.

### Financial market indicators
- The stock market lost 6 percent between end-July and September 8, against an average gain of 2 percent for peer markets.
- Pakistan’s sovereign spread increased by some 80 basis points to 643 basis points between end-July and September 8, against a broadly stable composite index.
- Ratings agencies indicated a lower probability of securing an upgrade of sovereign credit ratings in the coming months because of the floods.
- The exchange rate has remained stable.

### Authorities’ emergency response and donor mobilization
- The UN appealed for US$460 million to finance Pakistan’s Initial Floods Emergency Response Plan; as of August 25, about 60 percent has been committed.
- Humanitarian assistance pledges (some outside the UN appeal) amount to US$725 million as of September 1, with Saudi Arabia, the United Kingdom, and the United States among the largest donors.
- Private individuals and organizations have pledged US$93 million for humanitarian assistance so far.
- In the absence of a damage assessment, pledges for reconstruction financing are still at an early stage.
- The World Bank and the ADB have pledged to reprogram loans of US$1 and US$2 billion, respectively, in previously committed lending to finance reconstruction and relief efforts in flood-hit areas.
- The authorities plan to work with World Bank staff on establishing an enhanced framework for monitoring donor contributions to increase transparency and accountability and encourage larger and swifter aid disbursements.

### Fiscal framework and government measures
- Prior to the floods, a consolidated budget deficit target of 4 percent of GDP was seen as consistent with macro needs; the floods will increase the deficit due to rescue, relief, rehabilitation and reconstruction spending.
- The budget deficit target will need to take account of flood-related needs; additional outlays should be financed mainly by external assistance to avoid inflationary pressure and crowding out of the private sector.
- Additional external financing is urgently needed, preferably in the form of budgetary grants or on highly concessional terms, to finance flood-related spending.
- The government decided to introduce a temporary 10 percent income tax surcharge, which could generate up to 0.4 percent of GDP.
- The government will shift resources from nonpriority current and development spending to relief and reconstruction spending.
- As an initial assistance, the authorities are planning to provide Rs. 20,000 (US$230) to people receiving benefits under the Benazir Income Support Program that have been affected by the floods (about 1 million people).
- Provinces have agreed to scale back their spending plans which should limit the consolidated deficit.
- The pre-flood deficit is currently projected to be 4.4 percent of GDP, so additional measures will be needed to bring it to 4 percent of GDP and create fiscal space for flood-related spending.

### Monetary policy and SBP actions
- No monetary policy announcements have been made since the floods hit; the next monetary policy statement is expected in late September.
- The SBP faces a difficult balancing act: an estimated Rs. 2 trillion in t-bills needs to be rolled over this year and there may be higher domestic net financing needs of the government on account of the floods, while domestic private demand will soften and weaken private sector credit growth.
- The SBP has focused on ensuring smooth functioning of the payment system, set up mobile banking facilities, and ensured ample currency availability in flood-hit areas.
- The SBP has announced measures to encourage banks to supply sufficient credit in flood-hit areas, especially as the wheat financing season gets underway in October.
- The SBP is considering using existing SBP refinancing schemes to encourage credit in flood-hit areas and is discussing with donors expansion and modification of a loan-guarantee program to support agriculture and small and medium enterprises.
- The SBP is considering relaxations in provisioning for loans that have become delinquent because of the floods by allowing a higher for-sale-value of some collateral assets, which are currently zero for real assets.
- The authorities remain committed not to impose or intensify exchange or trade restrictions for balance of payments purposes.

### Access to IMF assistance and capacity to repay
- The authorities have requested a purchase for an amount equivalent to SDR 296.98 million (28.73 percent of quota) under the Fund’s policy of ENDA.
- The purchase represents approximately ¼ percent of Pakistan’s 2010/11 GDP and will be directed to the budget to help finance additional spending and immediate foreign exchange needs stemming from the floods.
- GRA credit outstanding (including this purchase and access under the existing SBA) is expected to peak at 69 percent of gross international reserves, equivalent to 6 percent of GDP.
- Debt service payments will peak at about 25 percent of gross reserves and 14 percent of exports of goods and services in 2013/14.
- The authorities’ past record at servicing obligations to the Fund has been good.
- Improved fiscal performance is needed to buttress Pakistan’s ability to repay the Fund; the most prominent downside risk is a combined shock to growth, primary budget balance, higher interest rates, and a large depreciation.

### Staff appraisal and recommendations
- The impact of the floods has affected 10 percent of the population and urgent action by the government and the international community is required to avert additional loss of life, injuries, and damage to infrastructure.
- Humanitarian relief and reconstruction expenditures are needed and, given limited non-inflationary financing, it is important that assistance be provided as grants or on highly concessional terms.
- The staff welcomes the authorities' intention to introduce a reformed GST to broaden the tax base and enhance tax revenue and to continue with the SBA, which targets macroeconomic and social stability.
- Careful management of the budget and mobilization of external donor support for humanitarian assistance and reconstruction are needed to avoid excessive recourse to domestic financial markets.
- The staff welcomes the authorities’ plan to work with the World Bank on establishing an enhanced framework for monitoring disbursement and use of aid flows to ensure accountability and transparency.
- The authorities intend to move ahead with measures for the completion of the fifth review under the SBA; staff will work with the authorities to re-evaluate the macroeconomic framework once the damage needs assessment has been completed, noting the floods will impact the economy significantly in 2010/11 and necessitate revisions to the budget.

*Source: IMF staff report (content unit provided).*

### 31.      We support the authorities’ request for a purchase under the Fund’s policy on

### _cr10295 - 31. We support the authorities’ request for a purchase under the Fund’s policy on emergency assistance for natural disasters

### Emergency financing decision and terms
- The IMF Executive Board approved a disbursement equivalent to SDR 296.98 million (about US$451 million) under the Emergency Natural Disaster Assistance (ENDA).
- Authorities requested a purchase in the amount of SDR 296.98201 million (28.73 percent of quota).
- ENDA financing features:
  - Not linked to program-based conditionality or review.
  - Carries the IMF’s basic rate of charge.
  - Repayment: three-year and three month grace period; repaid in eight equal installments; final maturity of 5 years.
- Purpose of the disbursement:
  - To help meet immediate financing needs of the government for urgent food, shelter, and health services.
  - To finance additional spending to help the population affected by the floods and associated immediate foreign exchange needs.
  - To mitigate depletion of foreign exchange reserves and support confidence in Pakistan’s external position.

### Economic impact of the floods (authorities’ assessment)
- Human and social impact (authorities’ letter):
  - Some 1,540 people have died; 2,320 injured; more than 2 million families displaced.
  - Over 15 million people (almost 10 percent of the population) affected.
- Output and growth:
  - Real GDP growth in 2009/10: 4.1 percent (provisional).
  - Pre-flood projection for 2010/11: at least 4½ percent (authorities were on track).
  - Post-flood expected 2010/11 growth: 2½–3 percent (about 1¾ percentage points lower than without the floods).
- Inflation:
  - Consumer prices (period average) expected to increase from 11.7 percent to 13½ percent in 2010/11.
  - State Bank increased policy interest rate by 50 basis points to 13 percent in July (to contain inflation).
- External sector and reserves:
  - Gross reserves reached US$13 billion in June 2010.
  - Exchange rate stable around 85–86 rupees per dollar (period average noted).
  - Current account deficit narrowed to US$3.5 billion (2 percent of GDP) in 2009/10.
  - Anticipated short-run rise in imports for food and reconstruction-related capital equipment.
- Fiscal and budgetary effects:
  - 2009/10 fiscal deficit reached 6.3 percent of GDP (compared with unadjusted program target of 5.1 percent and adjusted target of 4.6 percent).
  - Central bank financing exceeded the target by Rs. 42 billion in 2009/10.
  - Pre-flood 2010/11 budget target: overall deficit of 4 percent of GDP (federal fiscal deficit of 5 percent of GDP and provincial surplus of 1 percent of GDP).
  - Post-flood: massive spending needs and revenue shortfall will push the deficit above 4 percent of GDP.
- Sectoral damage:
  - Agriculture accounts for 21 percent of GDP and 45 percent of employment; significant damage to cotton, rice, sugarcane, and livestock expected to hurt exports (textile sector) and domestic demand.
- Financial sector:
  - Dozens of bank branches closed in flood-hit areas; SBP coordinating with banks to facilitate credit flows and redirect financing to affected SMEs and microfinance.

### Authorities’ response and policy measures
- Relief and mobilization:
  - National Disaster Management Authority, provincial counterparts, and agencies carried out evacuations, distribution of food and medicine, and emergency repairs.
- Fiscal measures and resource reallocation:
  - Shift resources from non-priority current and development spending to relief and reconstruction spending.
  - Introduce a temporary 10 percent income tax surcharge.
  - Work with provinces to scale back spending plans and secure provincial surpluses as envisioned by transfers under the 7th National Finance Commission award.
- Revenue and structural reforms (commitment to SBA reforms):
  - Transform existing GST into a reformed GST capturing VAT features to broaden the tax base.
  - Resume tax audits using risk-based selection criteria.
  - Continue electricity sector reform to eliminate tariff differential subsidies and resolve circular debt; address quasi-fiscal implications of commodity credit.
- External policy and trade:
  - No restrictions on payments and transfers for current international transactions; no trade restrictions or bilateral payment agreements inconsistent with Article VIII.
- Cooperation with development partners and aid transparency:
  - Work with World Bank on enhanced monitoring of aid flows to target assistance to the poor and vulnerable and bolster transparency and accountability.
- Request for donor support:
  - Authorities emphasized need for additional external financing, preferably grants; World Bank and ADB committed to reallocate US$1 billion and US$2 billion, respectively, to reconstruction.
  - United Nations early recovery and assistance operations estimated need US$460 million; US$275 million secured to date.

### Macroeconomic projections and key fiscal/external figures cited
- Growth and inflation:
  - 2009/10 growth: 4.1 percent (provisional).
  - 2010/11 post-flood growth: expected 2½–3 percent.
  - Inflation (period average) projected to rise from 11.7 percent to 13½ percent in 2010/11.
- Fiscal balances:
  - 2009/10 fiscal deficit: 6.3 percent of GDP.
  - Pre-flood 2010/11 budget deficit target: 4 percent of GDP (federal 5 percent; provincial surplus 1 percent).
- Reserves and external:
  - Gross official reserves: US$13 billion in June 2010 (noted as reached US$13 billion).
  - Exchange rate: around 85–86 rupees per dollar (period average).
  - Current account deficit: US$3.5 billion (2 percent of GDP) in 2009/10.
- ENDA financing amounts and equivalents:
  - Authorities’ request: SDR 296.98201 million (28.73 percent of quota).
  - Executive Board approval: SDR 296.98 million (about US$451 million).

### IMF Board and staff assessments / expected catalytic effect
- IMF press release: ENDA disbursement intended to catalyze additional external support—preferably grants or highly concessional financing—to meet immediate budgetary and balance of payments needs and avoid excessive domestic financing.
- Board noted that the authorities’ immediate relief efforts and mobilization of humanitarian aid are commendable.
- Fund and authorities expect cooperation to continue under the Stand-By Arrangement, with authorities aiming to complete the fifth review under the SBA later in the year.

*Source: IMF staff report and authorities’ letters and press release (September 2010).*

### 4.1 percent; annual average inflation fell to 11.7 percent (with core inflation at 10.4 percent);

### _cr10295 - 4.1 percent; annual average inflation fell to 11.7 percent (with core inflation at 10.4 percent);

### Macroeconomic performance and external sector
- Real GDP growth recorded 4.1 percent.
- Annual average inflation fell to 11.7 percent (with core inflation at 10.4 percent).
- The current account deficit narrowed sharply to 2 percent of GDP.
- Official reserves increased to about US$13 billion.
- The nominal exchange rate remained broadly stable.
- Rating agencies were considering upgrading the sovereign credit rating prior to the catastrophe described.

### Fiscal developments and program targets
- Program targets on growth and the external position were met; average inflation was only marginally above target.
- Fiscal outcome underperformed due to:
  - Increased spending on security and the fight against terrorism.
  - Higher provincial spending.
  - A temporary shortfall in tax revenue following reorganization of the tax administration and court appeals by taxpayers.
  - Lower nontax revenue due to reduced dividends and profit transfers.
- Fiscal deficit (excluding grants) reached 6.3 percent of GDP, compared to an unadjusted target of 5.1 percent of GDP.
- The end-June target on government borrowing from the State Bank of Pakistan (SBP) was missed by 0.3 percent of GDP.
- Authorities committed to bringing the SBA-supported program back on track through strengthened fiscal consolidation.

### 2010/11 budget measures and revenue actions
- The 2010/11 approved federal budget targets a general government deficit of 4 percent of GDP.
- Immediate measures implemented on July 1:
  - General sales tax (GST) rate raised by 1 percentage point to 17 percent.
  - Some excise and direct taxes increased.
  - Capital gains tax exemptions withdrawn.
- Administrative and structural measures:
  - Sustained efforts to improve tax administration, including strengthened audits.
  - Active discussions with Fund and World Bank staff on modalities for a reformed GST.
  - Contemplated spending-side savings, including cuts in subsidies and a nominal freeze in federal current spending.

### Monetary policy and banking sector
- Monetary policy focused on price stability while supporting stable growth.
- In late July, the policy rate was raised by 50 basis points.
- Banking sector liquidity remained high; return on assets and equity improved.
- Despite potential increase in NPLs from the floods, the impact on the banking system was expected to be limited.
- SBP actions:
  - Working closely with banks to facilitate the flow of credit.
  - Coordinating with international development agencies to expand and redirect existing financing facilities to SMEs and microfinance in affected areas.

### Electricity sector reforms
- Tariff was raised on July 1 by 7.6 percent—rather than 6 percent—to offset the financial impact of the three-month delay.
- Discussions resumed with the World Bank and the Asian Development Bank (ADB) on a comprehensive reform strategy.
- Objective: reach an early agreement to release about US$1 billion of program loans to help finance the 2010/11 budget.
- Authorities plan to reform the electricity sector to eliminate subsidies and resolve circular debt.

### The floods and their macroeconomic impact
- The floods caused immense human tragedy and severely harmed the economy; the economic outlook weakened considerably.
- Human and physical impact:
  - More than two million families displaced.
  - Over twenty million people affected.
  - Extensive damage to roads, telecommunication, energy infrastructure, and private property.
  - Costs will amount to billions of dollars; World Bank and ADB to submit Damages and Needs assessment by mid-October.
- Agriculture:
  - Agriculture accounts for 21 percent of GDP and 45 percent of employment.
  - An estimated 8 percent of total cropped area has been flooded, with very significant damage to food and industrial crops.
  - Damage will hurt export performance, especially in the textile sector.
- Growth and inflation outlook:
  - GDP growth expected to drop to 2.5-3.0 percent in 2010/11, much lower than the 4.25 percent projected before the floods.
  - Decline could be higher if crop damage exceeds preliminary assessments or floods recede slower than expected.
  - Inflation expected to be higher due to lower agricultural output, supply chain disruptions, and demand pressures on building materials, medicines, and social services.
- Balance of payments and reserves:
  - Floods expected to weaken the BOP by close to 1 percent of GDP.
  - Current account deficit projected to increase due to larger imports of food and other basic goods and capital equipment for reconstruction, only partially offset by increased remittances.
  - Reserves had already fallen by US$700 million since end-June.
- Public finances:
  - Tax revenues likely to be lower than projected before the floods because of weakened economic activity.
  - Demand for budgetary resources expected to increase significantly for rescue, relief, and reconstruction.

### Authorities’ response and financing needs
- Immediate relief actions:
  - Evacuation of thousands of people.
  - Distribution of food and medicines to displaced persons.
  - Emergency repairs to some roads and infrastructure.
- Donor response: emergency assistance, aid pledges, and reallocation of resources.
- Budgetary adjustments and revenue measures:
  - Plan to shift resources from nonpriority current and development spending to relief and reconstruction.
  - Introduction of a temporary 10 percent income tax surcharge.
  - The large spending needs and revenue shortfall will push the deficit in 2010/11 above 4 percent of GDP.
- Financing request:
  - Authorities requested emergency financing under the Fund’s ENDA to meet urgent food, shelter, and health services needs without overburdening domestic financial markets or reserves.
  - Full support of the Executive Board for the request was sought.

### Conclusion and program commitments
- Authorities fully committed to the SBA-supported program and to putting the program back on track.
- Planned measures and reforms:
  - Cap the budget deficit target to 4 percent of GDP, excluding the impact of the floods.
  - Introduce a reformed GST that captures the features of VAT on October 1.
  - Reform the electricity sector to eliminate subsidies and resolve circular debt.
  - Address the quasi-fiscal implications of commodity credit.
- Continued support from the Fund and development partners deemed crucial to shore up emergency response to the floods.

*Source: _cr10295 - 4.1 percent; annual average inflation fell to 11.7 percent (with core inflation at 10.4 percent);*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10295.pdf_