## _cr13287 ## Source details **Canonical URL:** [_cr13287](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13287.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13287.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13287.pdf.json) --- ### Political and economic context - Recent Parliamentary elections produced a large victory for Pakistan Muslim League-Nawaz (PML-N) and the first democratic-to-democratic transition in Pakistan’s history. - July 30 election of a PML-N president, Mamnoon Hussain. - New government has a strong mandate to implement a bold reform agenda to lift Pakistan’s growth potential, which deteriorated significantly over the past decade due to: - a difficult regional security situation; - periodic macroeconomic instability; and - long-standing structural impediments—particularly energy bottlenecks. ### Program request, design, and implementation framework - Authorities requested a 36-month extended arrangement under the Extended Fund Facility (EFF) for SDR 4.393 billion (US$6.68 billion, 425 percent of quota). - Initial disbursement: SDR 360 million ($540 million, 34.8 percent of quota) upon Board approval; remainder phased evenly subject to quarterly reviews. - Program objectives: - reduce short-term crisis risk; - address medium-term problems to sustain higher and more inclusive growth. - Quantitative and structural framework: - Quantitative Performance Criteria: reduce government budget deficit; reduce crowding-out of private investment; recalibrate monetary policy to build reserves; reduce inflation over the medium-term. - Structural conditionality: strengthen tax system; address energy bottlenecks; liberalize trade regime; restructure/privatize public sector enterprises (PSEs); improve business climate; strengthen central bank operational independence; enhance financial sector stability; protect most vulnerable. - Prior actions (completed): fiscal measures totaling 2 percent of GDP; tariff increases for certain electricity consumers; SBP net purchase US$125 million in spot market; issuance of 10,000 tax notices; Council of Common Interest fiscal commitments. ### Economic background — growth, investment, and productivity - GDP growth averaged only 3 percent over the past five years. - Per capita income and productivity growth have lagged regional peers; productivity growth has fallen sharply over two decades. - Poverty and multidimensional poverty: - In 2006, 23 percent of the population lived on under US$1 a day. - UNDP: 49.4 percent of the population lived in multidimensional poverty. - Investment and demand: - Domestic private investment dropped from 14 percent of GDP in 2007/08 to an estimated 10.9 percent of GDP in 2012/13. - FDI peaked above 3 percent of GDP in 2007/08 and subsequently fell below ½ percent of GDP. - Private consumption driven by remittances and farm income; private investment has fallen by nearly half over the past five years. ### Inflation, monetary conditions, and reserves - Annual headline inflation: 11.3 percent in June 2012 → 5.9 percent in June 2013. - Core inflation (stripping food, energy and transportation): remains above 9 percent. - Broad money growth: near 15 percent; reserve money grew about 12½ percent in 2012/13. - SBP policy rate: cumulative reductions since July 2012 of 300 basis points to 9 percent (other passages cite cumulative 500 basis points over two years to 9 percent). - SBP gross reserves: dropped to US$6 billion (under 1½ months of imports) as of end-June 2013; alternative assessments cite US$5.4 billion (Box 1). - Net SBP sales in the interbank market: about US$3.5 billion in FY2012/13. - SBP aggregate net position in foreign exchange derivatives: US$–2.2 billion at end-June 2013. - A resurgence in inflation likely until fiscal deficits ease and money growth slows. ### Fiscal position and revenue - 2012/13 fiscal deficit (excluding grants): estimated to be over 8½ percent of GDP (well above original budget target of 4.7 percent of GDP). - Revenue shortfall relative to the 2012/13 budget: 1¼ percent of GDP. - Higher expenditures: 2¾ percent of GDP (reflecting higher energy subsidies). - Energy-related subsidies: reached 1¾ percent of GDP in 2012/13 (other passages cite about 1.8–1.9 percent of GDP). - Circular debt (energy payables): estimated at 4 percent of GDP; government cleared 1.5 percent of GDP of circular debt in June 2013 and expected to clear an additional ¾ percent of GDP. - Tax revenue-to-GDP ratio: about 10 percent of GDP (tax-to-GDP for 2012/13 reported as 9.7 percent of GDP in other sections). - Number of taxpayers filing income tax returns: about 1 percent of the population (Appendix: 1.2 million individuals and firms file income tax returns in a population of nearly 180 million). ### External sector assessment and vulnerabilities - Current account: deficit for nine years, peaked at 8% of GDP in 2008; reached -1.0% of GDP for 2012/13. Approaches suggest slightly weaker than -0.1 to 0.1 of GDP implied by fundamentals. - External position: - Net international investment position: about -30% of GDP as of end-December 2012. - External debt: 27% of GDP, about 90% to the official sector. - Gross external financing requirements (selected): 7,834 (2011/12 FY), 7,582 (2012/13 FY), 7,077 (2013/14 FY), 5,948 (2014/15 FY), 6,284 (2015/16 FY) — (millions of U.S. dollars as in Box 8). - Gross official reserves (memoranda, selected): 10.8 (2011/12), 6.0 (2012/13), 5.6 (2013/14 Q1), 9.6 (2013/14 Q4), 13.4 (2014/15 FY), 18.5 (2015/16 FY) — (US$ billions in Box 8 projections). - External financing assumptions in program: Coalition Support Fund of US$3 billion; PTCL privatization receipts US$0.85 billion; 3G licenses US$1.2 billion; Fund financing US$6.6 billion; external official support expected US$6 billion during program period. ### Energy sector: impact, diagnostics, and program measures - Operational impacts: - Power outages (“load shedding”) averaged around 8–10 hours a day; in some areas blackouts up to 16 hours/day. - Output losses estimated at 2 percent of GDP annually. - Structural problems: price distortions, insufficient collections, poorly targeted subsidies, governance weaknesses, low operational efficiency, regulatory inadequacies, insufficient investment. - Program targets and sequencing: - Authorities’ plan to reduce energy subsidies from about 1.8 percent of GDP to 0.3–0.4 percent of GDP in three years via a four-phase plan. - Phase I: increase tariffs by about 50 percent for industrial, commercial, bulk, and AJ&K users (end-July); majority of domestic consumers excluded initially. - Phase II: increase weighted average notified tariffs by 30 percent for consumers over 200Kwh and specified groups effective October 1. - Phases III and IV (FY 2014/15 and FY 2015/16): reduce remaining subsidies to target levels; subsidies remain for lowest-level consumers; targeted transfers to protect poorest. - Out of Rs. 503 billion of payment arrears identified as of end-May 2013, Rs. 342 billion were cleared at end-June 2013; residual slated for resolution by end-August 2013. - Expected short-run impact: arrears reduction could reduce load shedding by around three hours per day; short-run energy supply improvement could contribute up to 1 percentage point to GDP growth. - Gas sector specifics: - Gas supply falls short of unconstrained estimated demand by half at current prices. - Short-run: prioritize LNG imports; limit expansion of domestic distribution networks; limit CNG expansion for vehicles. - Medium-term: prioritize new investment and exploration; gradual price rationalization; announce gas rationalization plan and new gas levy to generate 0.4 percent of GDP by end-December 2013. ### Fiscal federalism and revenue sharing - Revenue-sharing arrangements: 57½ percent of most tax revenues collected into the common pool are automatically transferred to provinces. - Institutional constraints: - 7th NFC Award increased provincial share to 56 percent in FY2010/11 and 57½ percent afterwards (from 45 percent in FY2009/10); award expires in FY2015/16. - 18th Amendment (2010) devolved functions and states future NFCs shall not reduce provinces’ prior shares. - Council of Common Interest strengthened as conflict-resolution mechanism. - Fiscal implications/options: - Federal government needs additional revenues to reduce deficit; lowering provinces’ share is constrained by NFC and the 18th Amendment. - Options discussed include marginally lowering provincial share, transitional provincial surplus commitments, cooperative outcomes via Council of Common Interest, and revamping revenue-sharing in the 8th NFC Award. ### Banking sector, financial stability, and reforms - Banking system indicators (end-March 2013): - Capital adequacy ratio (CAR): 15.1 percent. - Nonperforming loans (NPLs): 14.7 percent. - Provisions to NPLs: 71.9 percent. - High concentration in public debt: around 37 percent of total assets in government securities in some sections. - Private credit: expanded only 2.5 percent in nominal terms in 2012/13; private credit share of total lending fell from ~75 percent in 2005 to ~45 percent in 2012. - Under-capitalized banks: - Four noncompliant banks (excluding one state-owned bank under liquidation) represent around 7 percent of banking sector assets; total capital shortfall less than 0.1 of GDP. - Nine banks fall below the minimum capital requirement but meet CAR, representing 7.8 percent of system assets. - Staff recommendations: - Time-bound Action Plan for banks below CAR/MCR; restructure/merge some state-owned banks; complete recapitalization where needed. - Introduce bankruptcy law (Corporate Rehabilitation Act) and expedite judicial recovery; complete draft consultation by end-September 2013 and enact by end-December 2015 (timelines vary across sections). - Establish Deposit Protection Fund (DPF) with preconditions: achieve bank compliance with MCR, effective supervision, and special resolution regime; enact Deposit Protection Fund Act by end-September 2014; scheme operations by end-December 2015. - Enhance consolidated supervision (SBP and SECP coordination via MoU and joint task force). ### Macro outlook: baseline and reform scenarios (2013/14–2017/18) - Baseline projections (2013/14–2017/18): - Real GDP at factor cost: 3.3, 3.1, 3.0, 3.0, 3.0. - Consumer prices (period average): 8.2, 10.8, 11.3, 11.8, 11.8. - Budget balance excluding grants (percent of GDP): -8.1, -8.3, -9.0, -10.0, -10.5. - Total public debt (percent of GDP, incl. all obligations to the IMF): 67.6, 60.7, 63.6, 66.2, 69.4. - Current account (percent of GDP): -1.6, -1.1, -1.5, -1.6, -1.5. - Gross reserves (months of next year's imports): 0.5, 0.4, 0.4, 0.4, 0.4. - Unemployment (percent): 6.8, 7.2, 7.7, 8.3, 9.0. - Reform scenario (2013/14–2017/18): - Real GDP at factor cost: 2.5, 3.5, 3.7, 4.5, 5.0. - Consumer prices (period average): 7.9, 9.0, 7.0, 6.0, 6.0. - Budget balance excluding grants (percent of GDP): -5.8, -4.7, -3.9, -3.6, -3.5. - Total public debt (percent of GDP): 66.6, 63.5, 60.5, 58.7, 56.9. - Current account (percent of GDP): -0.6, -0.7, -1.1, -1.8, -1.9. - Gross reserves (months of next year's imports): 2.2, 2.8, 3.6, 3.5, 3.5. - Unemployment (percent): 6.9, 7.3, 7.5, 6.7, 5.8. - Note: Baseline debt does not include future circular debt that may be taken over by government; unemployment assumes employment-growth elasticity of 0.51. ### Key risks (tilted to the downside) - Energy crisis: potential blackouts up to 16 hours/day; significant economic and social costs. - Security concerns: insurgency near Afghanistan border, sectarian violence in Balochistan, street crime in Karachi; NATO drawdown risks. - Commodity and remittance shocks: - Vulnerability to oil price increases: a US$10 per barrel increase raises import bill by about US$600 million. - Remittances: 60 percent originate from the Middle East—risk from GCC slowdown. - External demand shock: 1/4 of exports go to Europe. - Financial sector vulnerability: high NPLs and large exposure to government securities mean fiscal crisis would have large banking-sector impact. - Implementation risks: political constraints, technical capacity limits, possible Supreme Court interventions, provincial resistance, and donor/market financing delays. ### Policy recommendations and reform priorities - Short-term macro: - Implement fiscal consolidation and tighten monetary policy to rebuild reserves and create buffers. - Immediate upfront measures already taken: fiscal consolidation measures totaling 2 percent of GDP; higher electricity tariffs; reorientation of monetary policy to rebuild reserves; new tax enforcement program. - Fiscal reforms: - Raise tax-to-GDP ratio significantly; broaden tax base; move toward integrated VAT and integrated income tax by 2016/17; eliminate SRO-based tax exemptions; strengthen FBR; incorporate 300,000 potential taxpayers via national data warehouse. - Expenditure reforms: phase out untargeted energy and commodity subsidies (currently around 1.9 percent of GDP in some references); shift spending toward infrastructure, health, education; civil service reform to contain wage bill. - Medium-term target: reduce deficit to around 3–3½ percent of GDP and bring public debt back below 60 percent of GDP by 2016/17 (staff view: 60 percent threshold is too high for Pakistan). - Energy sector reforms: - Resolve circular debt; bring tariffs to cost-recovery levels; strengthen NEPRA; shorten tariff determination period; improve governance and operational efficiency; prioritize cheaper fuels (gas and coal) and hydropower development; enact Pakistan Energy Efficiency and Conservation Act; professional audit of payables. - Monetary and exchange rate policy: - Amend SBP Act to establish independent monetary policy committee and prohibit new direct lending to government; rebuild NIR through net foreign exchange purchases; refrain from direct SBP financing of fiscal deficits; limit open-market liquidity injections; set policy rates to maintain positive real rates; gradual scaling back of short swap/forward positions to US$1.25 billion by end of program. - Financial sector structure: - Enact Corporate Rehabilitation Act; establish Deposit Protection Fund; strengthen consolidated supervision; ensure banks comply with minimum capital adequacy; adopt time-bound recapitalization/consolidation plans. - Structural reforms to boost growth: - Privatize/restructure PSEs (time-bound strategy for some 65 PSEs; strategy for 30 firms by end-September 2013); improve business climate (one-stop shop, reduce entry barriers, ADR mechanisms); simplify tariff regime and eliminate trade SROs. - Social protection: - Substantially increase targeted transfers to vulnerable groups to offset regressive impact of fiscal consolidation. - BISP: reach 4.8 million families now; FY2013/14 budget raises benefits from PRs.1000 to PRs. 1200 per family per month and expand coverage to 5.7 million families; CCT to support 560,000 families with Rs. 200 per child per month; coverage expected to reach 6.6 million families by 2015/16 with benefits scaled to inflation. - External strategy: - Use fiscal consolidation and structural reforms to boost national saving and catalyze donor and private inflows; program to catalyze roughly US$6 billion in external official support and substantial private inflows over the program. ### Program financing, disbursements, and safeguards - IMF access: SDR 4.393 billion (425 percent of quota); initial purchase SDR 360 million (34.8 percent of quota). - Donor support: firm commitments to fill financing gap for first 12 months; expected additional resources of around US$6 billion during program period from World Bank, ADB, bilateral partners. - Box 8 program projections: - Current reserves cited as US$5.4 billion; under program reserves projected around US$15.5 billion by Q4 2015/16 (three months of imports). - Selected gross external financing requirements: 7,834 (2011/12 FY), 7,582 (2012/13 FY), 7,077 (2013/14 FY), 5,948 (2014/15 FY), 6,284 (2015/16 FY) — (US$ millions). - Memoranda: Gross official reserves in US$ billions: 10.8 (2011/12), 6.0 (2012/13), 9.6 (2013/14 FY), 13.4 (2014/15 FY), 18.5 (2015/16 FY). - Capacity to repay: - Fund’s exposure to Pakistan at end-June 2013 roughly US$4.5 billion (74 percent of gross official reserves). - Program projects reserves significantly higher, reducing Fund’s exposure to around 1/3 of reserves by end of program period. - Safeguards: - Safeguards assessment update to be completed no later than the first review under the EFF. ### Monitoring, conditionality, and reporting - Performance criteria and continuous targets on: general government fiscal balance (consolidated federal and provincial), SBP net foreign assets, SBP net domestic assets, SBP lending to government, SBP forward/swap position, accumulation of domestic arrears, nonaccumulation of external arrears. - Structural benchmarks (selected deadlines preserved): - Announce rationalization plan for gas prices and new gas levy to generate 0.4 percent of GDP — end-December 2013. - Prepare plans for bank compliance with minimum capital adequacy — end-December 2013. - Hire audit firm to audit energy sector payables — end-November 2013. - Make CPPA operational — end-December 2013. - Enact SBP law amendments to give SBP autonomy — end-March 2014. - Enact Deposit Protection Fund Act — end-September 2014. - Enact Securities Bill — end-December 2014. - Privatize 26 percent of PIA shares to strategic investors — end-June 2014. - Data reporting: comprehensive schedules for SBP, MOF, PBS, FBR with specified frequency and timing for balance sheets, monetary and fiscal statistics, power sector data, tax arrears, customs and VAT refund data, and balance of payments. ### Mission, consultations, and outreach - Discussions held in Islamabad, Karachi, and Lahore during June 19–July 3, 2013. - Staff team: Messrs. Franks (head), Salman, Shahmoradi (MCD), Mr. Flores (FAD), Mr. Al-Hassan (MCM), Ms. Das (SPR); Mr. Dailami (Resident Representative) assisted; Ms. Gressani (MCD) and Mr. Sethi (OED) participated. - Meetings with Finance Minister Dar, SBP Governor Anwar, Finance Secretary Khan, senior officials, private sector, civil society, World Bank and ADB representatives. - Outreach activities included engagement with business and banking leaders, journalists, diplomatic community, donors; Pakistan a pilot for IMF social media outreach (@imf_pakistan referenced). ### Staff appraisal and Board approval - Staff recommendation: support authorities’ request for EFF arrangement (SDR 4.393 billion, 425 percent of quota). - Executive Board approved a 3-year EFF arrangement for SDR 4.393 billion (US$6.64 billion) on September 4, 2013; initial disbursement: SDR 360 million (about US$544.5 million). - Medium-term program expectations (Press Release): raise growth near 5 percent by 2015/16; bring inflation to 6–7 percent by 2015/16; increase central bank reserves to over 3½ months of imports by 2015/16; reduce fiscal deficit to 3½ percent of GDP by 2015/16. *Source: IMF staff report and associated program documents (EXECUTIVE SUMMARY and excerpts) contained in _cr13287* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Political and economic context - Recent Parliamentary elections resulted in a large victory for the Pakistan of Muslim League-Nawaz (PML-N) of Prime Minister Nawaz Sharif and led to the first democratic-to-democratic transition in Pakistan’s history. - The July 30 election by legislators from the national parliament and the four provincial assemblies elected a PML-N president, Mamnoon Hussain. - The convincing win provides a strong mandate to implement a bold reform agenda to lift Pakistan’s growth potential, which deteriorated significantly over the past decade. - Deterioration in growth potential is attributed to: - a difficult regional security situation that discouraged investment; - periodic bouts of macroeconomic instability; and - long-standing structural impediments to growth—in particular energy bottlenecks. ### Article IV discussions (macroeconomic policy and reforms) - Focus: macroeconomic policies to address vulnerabilities and reforms to promote robust inclusive growth. - Authorities’ program aim: reverse the current mix of large fiscal deficits, accommodative monetary policy, and low reserve coverage that provides few buffers to absorb shocks. - Staff and authorities discussed immediate short-term fiscal and monetary measures to reverse unsustainable imbalances. - Recognized need for complementary significant structural reforms in: - fiscal management; - monetary and financial market institutions; - the energy sector; - public sector enterprises; - the business climate; and - trade policy. - Staff advocacy: a substantial increase in targeted transfers to the poorest to compensate for fiscal consolidation and reductions in untargeted subsidies. ### Program discussions (request to the Fund) - Authorities requested a 36-month extended arrangement under the Extended Fund Facility (EFF) for SDR 4.393 billion (US$6.68 billion, 425 percent of quota). - SDR 360 million ($540 million, 34.8 percent of quota) will become available upon Board approval; the remainder will be evenly phased thereafter subject to quarterly reviews. - Program objectives: - reduce the risk of a crisis in the short term; - address underlying medium-term problems to sustain higher and more inclusive growth. - Authorities’ upfront and initial measures already taken: - approving fiscal consolidation measures totaling 2 percent of the GDP; - applying higher electricity tariffs as part of a comprehensive new energy policy; - reorienting monetary policy to begin rebuilding foreign exchange reserves; - launching a new tax enforcement program. - Program design: - Quantitative Performance Criteria: reduce the government budget deficit to sustainable levels; reduce crowding-out of private investment; recalibrate monetary policy to build reserves; and reduce inflation over the medium-term. - Structural conditionality: strengthen the tax system; address energy bottlenecks; liberalize the trade regime; restructure or privatize public sector enterprises; improve the business climate; strengthen central bank operational independence; enhance financial sector stability; and protect the most vulnerable. - Implementation risks: significant given Pakistan’s track record, but mitigated by critical upfront actions, even phasing of Fund disbursements, and the strong electoral mandate and reform commitment of the new government. ### Economic background — key findings and indicators - Growth and productivity - GDP growth has averaged only 3 percent over the past five years. - Per capita income growth has lagged behind other South Asian economies. - Productivity growth has fallen sharply over the past two decades. - In 2006 some 23 percent of the population lived on under US$1 a day; according to the UNDP, 49.4 percent of the population lived in multidimensional poverty. - Investment and demand - Private investment has fallen by nearly half over the past five years. - Domestic private investment dropped from 14 percent of GDP in 2007/08 to an estimated 10.9 percent of GDP in 2012/13. - FDI peaked above 3 percent of GDP in 2007/08 and has since fallen below ½ percent of GDP. - Private consumption has been driving aggregate demand, supported by workers’ remittances and farm income. - Inflation and monetary conditions - Annual headline inflation dropped from 11.3 percent in June 2012 to 5.9 percent in June 2013. - Core inflation (stripping food, energy and transportation) has declined but remains above 9 percent. - Broad money growth remains near 15 percent, driven in part by the State Bank of Pakistan’s continued financing of the large fiscal deficit. - A resurgence in inflation remains likely until fiscal deficits ease and money growth slows. - External sector and reserves - The current account deficit in 2012/13 is estimated at under 1 percent of GDP, due to lower imports and strong remittances and bilateral inflows. - Severe financial account shortfalls have produced a deterioration in reserves; SBP gross reserves dropped to US$6 billion (under 1½ months of imports) as of end-June 2013. - Net reserves have become negative: gross reserves include over US$7½ billion in borrowed resources, including a substantial net short-term forward/swap position in the domestic market, outstanding Fund credit, and a currency swap arrangement with China. - Net SBP sales in the interbank market totaled about US$3.5 billion in FY2012/13. - The rupee depreciated by 5.3 percent against the dollar during 2012/13, leaving the real effective exchange rate roughly unchanged. - Several exchange rate assessment approaches suggest a modest overvaluation of the exchange rate (of 3–6 percent), but financial account flows and very low reserves point to a more significant external stability problem. - Fiscal position and revenue - The 2012/13 fiscal deficit (excluding grants) is estimated to be over 8½ percent of GDP, well above the original budget target of 4.7 percent of GDP. - Revenue shortfall relative to the 2012/13 budget: 1¼ percent of GDP. - Higher expenditures: 2¾ percent of GDP (reflecting higher energy subsidies). - The deficit has been almost entirely financed domestically due to very low external financing. - Tax revenue-to-GDP ratio is about 10 percent of GDP. - Agriculture is mostly outside the tax net; the number of taxpayers filing income tax returns is about 1 percent of the population. ### External sector assessment (summarized points from Box 1) - Current account: Pakistan’s current account has been in deficit for nine years, peaking at 8% of GDP in 2008; it reached -1.0% of GDP for 2012/13. Approaches suggest the current account is slightly weaker than the -0.1 to 0.1 of GDP implied by medium-term fundamentals. - Reserves and BoP vulnerability: - Reserves have fallen by 44% in the past year and were critically low at US$5.4 billion according to the Box 1 assessment. - IMF adequacy metric suggests a level of $13.7 billion under a floating exchange rate; the Box notes vulnerability to triggers that could result in a BoP crisis similar to 2008. - Real exchange rate: model results suggest the REER appears overvalued by 3% to 6%; exchange market pressure increased from 37% in 2011/12 to 53% in 2013/14. - Capital account: private capital inflows have dried up; FDI decreased an average of 40% per year over the 4 years since the financial crisis; private financial flows are very responsive to political events. - External position: net international investment position about -30% of GDP as of end-December 2012; external debt at 27% of GDP, about 90% to the official sector. ### Policy implications and staff recommendations (high-level) - Short-term: implement fiscal consolidation and tighten monetary policy to rebuild reserves and create buffers against shocks. - Complementary structural reforms: strengthen tax administration and broaden the tax base; address energy sector losses and subsidies; restructure or privatize public sector enterprises; improve the business climate to catalyze private and foreign investment; liberalize trade where appropriate; strengthen central bank operational independence; and enhance financial sector stability. - Social protection: substantially increase targeted transfers to the poorest to offset the regressive effects of fiscal consolidation and subsidy reduction. - External strategy: central bank should accumulate reserves through foreign exchange purchases; a fiscal consolidation plan should boost national saving and catalyze international support; structural reforms in the energy sector could increase elasticity of demand for oil imports; diversify exports toward higher value-added goods over the longer term. ### Mission and approvals - Discussions were held in Islamabad, Karachi, and Lahore during June 19-July 3, 2013. - The staff team comprised Messrs. Franks (head), Salman, Shahmoradi (all MCD), Mr. Flores (FAD), Mr. Al-Hassan (MCM), and Ms. Das (SPR). Mr. Dailami (Resident Representative) assisted the mission. Ms. Gressani (MCD) and Mr. Sethi (OED) also participated. - The team met with Finance Minister Dar, State Bank of Pakistan Governor Anwar, Finance Secretary Khan, and other senior officials, as well as private sector and civil society representatives. Representatives from the World Bank and the Asian Development Bank took part in the discussions. *Source: EXECUTIVE SUMMARY, _cr13287 - EXECUTIVE SUMMARY* ### 7. Revenue sharing agreement continues to pose a challenge to fiscal consolidation ### 7. Revenue sharing agreement continues to pose a challenge to fiscal consolidation ### Revenue sharing arrangements and fiscal implications - Pakistan is a federation where most revenues are collected by the central government and redistributed to provinces; transfers to provinces have increased sharply under successive constitutional amendments and National Finance Commission (NFC) awards. - Due to the revenue sharing arrangements, 57½ percent of most tax revenues collected into the common pool is automatically transferred to the provinces. - Key institutional elements: - The National Finance Commission (NFC) is established by the Constitution, chaired by the Federal Finance Minister, with Provincial Finance ministers as members, and recommends distribution of specified taxes between federal and provincial governments—and among provinces. - The 7th NFC Award increased the share of pool revenues transferred to the provinces to 56 percent in FY2010/11 and 57½ percent afterwards (from 45 percent in FY2009/10). This award will expire in FY2015/16 and a new award should be negotiated. - The 18th Amendment (2010) devolved the functions of 18 ministries to the provinces and states that future NFCs shall not reduce the share of resources allocated to the provinces by a previous commission. - The Council of Common Interest consists of the Chief Ministers of the provinces and an equal number of federal ministers (chaired by the Prime Minister) and was strengthened by the 18th Amendment as a conflict-resolution mechanism. - Fiscal consequences and options: - The federal government needs to use additional revenues from tax measures or improved tax administration to reduce the deficit, but lowering the provinces’ share runs counter to the 7th NFC Award and the 18th Amendment. - Options discussed: - Apply a lower provincial share of the pool only at the margin. - On a transitional basis, commit provinces to run surpluses. - Pursue cooperative outcomes under the umbrella of the Council of Common Interest. - Revamp the revenue-sharing formula in the 8th NFC Award to better match revenue and expenditure responsibilities and to better divide revenue responsibilities (income tax divided by type of income; sales tax split between goods and services complicates tax administration). ### Energy sector: drag on activity and fiscal costs - Structural problems: price distortions, insufficient collections, costly and poorly targeted subsidies, inadequate governance, low efficiency in supply and distribution, regulatory inadequacies, and insufficient investment. - Operational and economic impacts: - Power outages (“load shedding”) have averaged around 8–10 hours a day, constraining production and employment. - Output losses are estimated at 2 percent of GDP annually. - Fiscal and arrears situation: - Energy-related subsidies reached 1¾ percent of GDP in 2012/13. - Payments arrears (“circular debt”) are estimated at 4 percent of GDP and continue to accumulate due to below cost recovery tariff rates and delays in tariff determination and fuel cost adjustments. - The government cleared 1.5 percent of GDP of circular debt in June 2013 and is expected to clear an additional ¾ percent of GDP in the coming months. ### Monetary conditions, credit, and banking sector - Monetary aggregates largely driven by government financing needs: - Broad money increased by about 14½ percent in 2012/13, largely determined by budget support provided by the banking system. - Private credit expanded by only 2.5 percent in nominal terms in 2012/13, the lowest level in recent years. - Reserve money grew by 12½ percent, almost fully driven by direct fiscal borrowing from the SBP which more than offset a large decline in SBP net foreign assets (NFA). - Policy rate: - Since July 2012, the SBP reduced its policy rate by a cumulative 300 basis points to 9 percent, citing declining inflation and the need to promote growth. - Banking system health: - Overall capital adequacy ratio (CAR) at end-March 2013 was 15.1 percent (well above statutory minimum). - Deposit growth nearly 16 percent in recent years. - Nonperforming loans (NPLs) are high at 14.7 percent, though system provisioning is over 70 percent. - A few banks are operating below CAR. - High concentration of assets in public debt (around 37 percent of total assets) poses risk given weak public finances. ### Outlook and key risks - Baseline and near-term risks under unreformed policies: - Low and declining SBP reserves leave the country vulnerable to a balance of payments crisis from relatively minor shocks. - Fiscal side: staff’s baseline projects continued weak revenue collection and high energy subsidies would generate a budget deficit of around 8½ percent of GDP (footnote: fiscal measures in the 2013/14 budget would lower this to around 6½ percent of GDP). - With continued monetization of fiscal deficits and further depreciation of the rupee, inflation will likely increase and return to double digits. - Current account deficit projected at around 1 percent of GDP by end-June 2014. - Reserves declining to around US$3.5 billion by end-June 2014 (0.8 months of imports). - Government financing needs and debt rollover requirements are high (noted elsewhere as 30 percent of GDP per year). - Medium-term baseline outlook (without reforms): - Baseline real GDP growth likely to remain around 3 percent with considerable volatility. - Credit to the private sector would continue to be crowded out. - Fiscal deficit would continue to deteriorate, requiring financial repression to maintain debt sustainability. - International reserves could fall below one month of imports despite assuming large unidentified inflows. - Total debt would rise significantly; external debt sensitive to exchange rate shocks; domestic debt vulnerable to adverse interest rate shocks. - Baseline scenario key quantitative projections (2013/14–2017/18): - Real GDP at factor cost: 3.3, 3.1, 3.0, 3.0, 3.0 (2013/14–2017/18). - Consumer prices (period average): 8.2, 10.8, 11.3, 11.8, 11.8. - Budget balance excluding grants (percent of GDP): -8.1, -8.3, -9.0, -10.0, -10.5. - Total public debt (percent of GDP, incl. all obligations to the IMF): 67.6, 60.7, 63.6, 66.2, 69.4. - Current account (percent of GDP): -1.6, -1.1, -1.5, -1.6, -1.5. - Gross reserves (months of next year's imports): 0.5, 0.4, 0.4, 0.4, 0.4. - Unemployment (percent): 6.8, 7.2, 7.7, 8.3, 9.0. - Reform scenario key quantitative projections (2013/14–2017/18): - Real GDP at factor cost: 2.5, 3.5, 3.7, 4.5, 5.0. - Consumer prices (period average): 7.9, 9.0, 7.0, 6.0, 6.0. - Budget balance excluding grants (percent of GDP): -5.8, -4.7, -3.9, -3.6, -3.5. - Total public debt (percent of GDP, incl. all obligations to the IMF): 66.6, 63.5, 60.5, 58.7, 56.9. - Current account (percent of GDP): -0.6, -0.7, -1.1, -1.8, -1.9. - Gross reserves (months of next year's imports): 2.2, 2.8, 3.6, 3.5, 3.5. - Unemployment (percent): 6.9, 7.3, 7.5, 6.7, 5.8. - (Notes: Baseline debt does not include future circular debt that may need to be taken over by the government; unemployment assumes average employment-growth elasticity of 0.51.) ### Key risks (tilted to the downside) - Energy crisis: structural problems in the sector; blackouts reaching 16 hours/day in some areas; high economic and social costs. - Security concerns: insurgency near the Afghanistan border, sectarian violence in Balochistan, and street crime in Karachi could worsen with NATO drawdown. - Vulnerability to oil price shocks: oil imports rose and oil now accounts for about one-third of electricity generation (up from 16 percent in 2004); oil price vulnerability index has risen; food price vulnerability index about one-third of oil index but volatile. - Remittance spillovers: 60 percent of Pakistan’s remittances come from the Middle East; a slowdown in GCC growth or oil prices could reduce remittances. - External demand shock: 1/4 of exports go to Europe; further global or European downturns could hurt exports and remittances. - Financial sector vulnerability: high NPLs and large exposure to government securities mean a fiscal crisis would have large banking-sector impact. ### Policy recommendations and reform priorities - Fiscal consolidation: - Use additional revenues from tax measures or improvements in tax administration to reduce the federal deficit. - Pursue cooperative federal-provincial arrangements (e.g., margin adjustments, transitional provincial surplus commitments) under the Council of Common Interest while negotiating the 8th NFC Award. - Revamp revenue-sharing formula to better match revenue and expenditure responsibilities and to simplify revenue assignments (address current split responsibilities for income tax and sales tax). - Energy sector reforms: - Address price distortions, improve collections, reduce costly and untargeted subsidies, strengthen governance, improve efficiency in supply and distribution, fix regulatory inadequacies, and attract investment in new production and modernization. - Resolve circular debt and move toward cost-recovery tariff rates with timely tariff determination and fuel cost adjustments. - Monetary and exchange rate policy: - Move toward a more flexible monetary and exchange rate policy to reduce vulnerabilities from low reserves and to restore buffers. - Structural reforms to boost growth and resilience: - Comprehensive structural reforms to raise savings and investment, reduce fiscal deficits, expand private credit, and improve security conditions to lift baseline growth from around 3 percent and reduce unemployment. - International support: - Improved policy environment and reforms could attract significant international financial support, helping to rebuild reserves and buffer against shocks. *Source: IMF staff; Pakistani authorities.* ### 15. Adjustment would raise medium-term growth prospects. As these reforms take hold, ### Adjustment would raise medium-term growth prospects. As these reforms take hold, ### Medium-term impacts of adjustment - Savings and investment rates would increase, inflation would fall, real GDP growth would rise significantly, and unemployment would decline. - Over the medium term and with fiscal deficits reduced to sustainable levels, debt levels would decline rapidly, lowering the country’s vulnerability to exchange and interest rate shocks. - Short-run improvement in energy supplies could contribute up to 1 percentage point to GDP growth. - Joint IMF and World Bank research: a 30 percent increase in energy supply would generate a 2 percent increase in GDP; staff view a 15 percent increase in effective energy supply could be obtained in the first year by reallocating gas to electricity production, improving distribution company administration to reduce losses, and tackling the circular debt problem. ### Risks and mitigation - Fiscal consolidation would be contractionary in the near term. - Negative near-term effects can be mitigated by: - increasing targeted transfers to the most vulnerable population; - increasing investment by improving private sector access to credit; - alleviating acute energy supply bottlenecks to increase productive capacity. - Over 3 years, greater price stability and policy predictability together with pro-growth structural reforms and donor support would place the economy on a sustainably higher growth path. ### Authorities’ views on growth and inflation - The authorities share staff’s concerns about short-term crisis risks and are strongly committed to short-term adjustment measures together with structural reforms. - Government/budget assumptions and views: - The 2013/14 budget assumes a 4–4½ percent rise in GDP growth. - The government envisages growth rising to around 7 percent in the medium-term. - Staff views: - Staff view 5 percent as a more likely positive scenario. - The SBP retains a more sanguine view of inflation prospects than staff. ### Return to fiscal sustainability — diagnosis and targets - Fiscal stance is not sustainable; requires significant consolidation. - Recent developments: - Public debt has climbed above 60 percent of GDP with very short average maturity of domestic public debt. - Domestic financing of the fiscal deficit has produced severe crowding-out of private sector credit and reliance on direct financing from the SBP. - 2013/14 federal budget: - Targets a deficit of 6.5 percent of GDP. - The tax package included is expected to raise revenues by about ¾ percent of GDP. - Staff: tax revenue will likely fall short of the budget target; authorities are willing to take action to compensate. - Staff recommended medium-term targets: - Reduce the deficit to around 3–3½ percent of GDP in the medium-term. - Set public debt on a firmly declining path—back below 60 percent of GDP by 2016/17. - Staff view the 60 percent of GDP threshold as too high for Pakistan given low tax-to-GDP ratio and exposure to shocks. ### Unemployment and labor market projections (Box 5) - Demographics and labor force: - Population growth rate of 2.2 percent (annual average) over the last decade. - About 40 percent of the population below the age of 15. - Labor force expected to grow by 3.5 percent in the coming years. - Unemployment statistics: - Official unemployment rate about 6.7 percent in 2012/13. - Rural unemployment rate 9.1 percent as of 2012Q3. - Urban unemployment rate 4.8 percent as of 2012Q3. - Only 25 percent of employment is in the formal sector. - Projections: - Baseline: projected GDP growth hovers around 3 percent over the medium term; unemployment rate will rise from 6.7 percent in 2012/13 to about 9.0 percent by 2017/18. - Under a Fund supported program: GDP growth will initially decline due to fiscal contraction but will steadily increase to about 5 percent; unemployment rate will increase slightly in the first two years of the program, but decline to about 5.8 percent by 2017/18. ### Fiscal reform priorities and specific measures - Overall strategy: begin consolidation aggressively with measures focusing on the revenue side and on energy subsidies; continue until medium-term targeted deficit is reached; expand targeted cash transfer programs to protect the neediest. - Tax policy: - Pakistan’s tax to GDP ratio for 2012/13 was 9.7 percent of GDP (compared with 11.4 percent of GDP in 2002/3). - Implementation of a full Value Added Tax (VAT) is the first-best option; if infeasible, consider wholesale reductions in exemptions and concessions and fully incorporate services into the tax net. - Eliminate the administrative authority to grant tax exemptions via Statutory Regulatory Orders (SROs) to prevent further degradation of the tax net (staff view). - Income tax should integrate income from all sources; concessions and exceptions should be eliminated; withholding should be adjustable; minimum tax on turnover to remain as a control. - Tax administration: - In a population of nearly 180 million, only 1.2 million individuals and firms file income tax returns (about half are corporate filers). - Some 118,000 entities are enrolled in the sales tax system but only 15,000 actually pay any tax; 82 percent of total sales and federal excise revenue coming from only 100 companies. - Authorities need to develop and implement a strategy to strengthen the Federal Board of Revenue (FBR) with technical assistance from the Fund and the World Bank; step-up enforcement and improve legal authority (e.g., asset seizures, presumptive billing); fully apply the anti-money laundering framework. - Expenditure reforms: - Shift composition of public spending to more growth friendly outlays, including infrastructure, health, and education. - Phase out untargeted energy and commodity subsidies (currently around 1.9 percent of GDP). - Strengthen targeted income support programs. - Consider civil service reform to improve quality of public service, reduce corruption, and contain the public wage bill. - Fiscal federalism: - Reform the revenue sharing system to increase provinces’ incentives to rely less on federal transfers and more on own revenue-raising efforts. - Implement statutory limits on provincial fiscal balances and strengthen limits on provincial borrowing. - Negotiate a binding short-run agreement between provinces and federal government (possibly at the Council of Common Interest) to ensure additional revenues are used for deficit reduction; support agreement with sanctions and technical modifications (e.g., legislated “lock-box”). - Public financial management: - Implement commitment control systems for the general government. - Strengthen the fiscal debt office to improve deficit financing by lengthening maturity of domestic debt, building a longer yield curve, and eventually returning to external private markets for some fiscal financing. ### Reducing energy subsidies (Box 6) - Authorities’ plan: four phase plan to reduce subsidies from about 1.8 percent of GDP to 0.3–0.4 percent of GDP in three years. - Phase I: almost full elimination of the subsidy for industrial, commercial, bulk, and AJ&K users via an increase in tariff of about 50 percent at end--July; majority of domestic consumers excluded at this stage. - Phase II: elimination of the subsidy for consumption over 200Kwh, SCARP, and others (public lighting, housing schemes, railways, HVTL), and reducing the subsidy in agriculture by about 13 percent; corresponding price increases effective October 1st. - Phases III and IV (FY 2014/15 and FY 2015/16): reduce remaining subsidies (on agriculture and consumption below 200Kwh) to reduce fiscal burden to 0.3-0.4 percent of GDP; by end of Phase IV subsidy for consumption above 200Kwh eliminated and reduced for those below 200Kwh; subsidies remain for lowest level consumers and increases in targeted transfer programs will protect the poorest. - Strategy aligns with six key elements linked with successful reforms: comprehensive plan with long-term objectives; communication strategy; phased and sequenced price increases across products; strengthened cash transfer program; improving efficiency in state-owned enterprises; improving timeliness of pricing mechanisms. - Fuel price passes through to electricity prices on a monthly basis. ### Monetary and exchange rate policy recommendations - SBP recent conduct and context: - The SBP cut the policy rate repeatedly over the past two years by a cumulative 500 basis points to 9 percent. - In FY2012/13 the SBP continued direct financing of the large fiscal deficit (accounting for almost all of the increase in reserve money). - SBP’s net sale of foreign exchange in the spot market totaled US$3.35 billion in 2012/13, almost 70 percent of total loss in reserves. - Monetary aggregates expanded relatively quickly despite falling net foreign assets; private credit shrank in real terms. - Staff advice: - Monetary and exchange rate policies should focus on rebuilding foreign exchange reserves and maintaining price stability. - SBP should signal a clear policy shift by purchasing foreign exchange in the interbank market to bolster reserves and refrain from further direct lending to the government. - Limit open market liquidity injections; set the policy rate prudently to contain expected inflationary pressures, maintain positive real interest rates to attract deposits, and help rebuild reserves. - Staff expressed concern about SBP’s heavy reliance on short-term currency swap/forward contracts to boost gross reserves and recommended these be gradually scaled back to limit risk. - External competitiveness factors suggest a moderate weakening of the rupee would be appropriate. *Source: _cr13287 - 15. Adjustment would raise medium-term growth prospects. As these reforms take hold,* ### 27. Independence of the SBP remains inadequate. Staff urged the authorities to amend the ### 27. Independence of the SBP remains inadequate. Staff urged the authorities to amend the ### Monetary policy independence and SBP views - Staff recommendation: - Amend the SBP Act to establish an independent, decision-making monetary policy committee, a pre-requisite for an optimal design and implementation of monetary policy. - Full independence would help pave the way for improved price stability (SBP’s primary objective) and the elimination of future direct financing of fiscal deficits. - SBP’s views and actions: - Argued recent cuts in policy rates were justified given declining headline inflation and the need to stimulate growth. - Acknowledged inflationary risks and pledged to adjust rates if circumstances change. - Stressed that without cuts, impacts on private sector credit could have been severe. - Noted banking system structural factors have limited financial intermediation to the private sector, resulting in negative real rates of private credit expansion. - Argued that law and order and security concerns should be considered when evaluating monetary policy in Pakistan. - Disagreed that capital flows to Pakistan are sensitive to interest rates in the current circumstances, citing other structural factors preventing direct and portfolio investment. - On exchange rate policy, defended intervention policy as necessary to ensure foreign exchange market stability and avoid disruption in market sentiments, particularly during the sensitive election period. - Acknowledged reserves situation was challenging but asserted it was manageable. ### Financial intermediation and lending trends - Key findings: - Lending to private sector as a share of total lending fell from around 75 percent in 2005 to around 45 percent in 2012 as fiscal deficit increased from less than 3 percent to around 8 percent. - Despite strong domestic deposit growth, high capitalization and liquidity levels, and reductions of the policy interest rate and NPLs, private sector lending has been diminishing. - Staff emphasis: - Need to tackle severe crowding-out of the private sector credibly to stabilize the economy and create conditions for future growth. - Envisaged reduction of government’s borrowing requirement and addressing NPLs should help stimulate private sector credit from supply side. - Greater macro stability and broader structural reforms should boost demand for private credit, supporting recovery of private sector investment, employment, and growth. ### Bank capitalization and supervisory actions - Staff recommendations and observations: - SBP identified capital shortfall for each bank below CAR: - Four noncompliant banks (excluding one state-owned bank under liquidation) represent around 7 percent of banking sector assets, with a total shortfall of less than 0.1 of GDP. - Nine banks (six private and three state owned) fall below the minimum capital requirement (MCR) but meet CAR, representing 7.8 percent of banking system assets. - SBP has provided extensions to some banks for meeting MCR, subject to maintaining healthy CAR and presenting a timeline to meet shortfall. - Staff advised developing a well-defined time bound Action Plan to deal with banks below CAR or MCR, and to restructure or merge a few state-owned banks. - Warned that continued forbearance may pose a financial threat to the financial system and have fiscal implications (e.g., need to recapitalize a state-owned bank). ### Financial sector reforms supported by staff - Introduce a bankruptcy law: - Complete consultation with key stakeholders to finalize the draft Corporate Rehabilitation Act (CRA). - Current problems: nonexistence of bankruptcy law, large volume of NPLs, understaffed banking courts, long litigation and resolution processes, weak enforcement capacity. - Revamp recovery mechanisms by speeding up judicial process and filling vacancies in banking courts with necessary skills. - Set up a deposit insurance scheme: - SBP preparing to introduce an explicit Deposit Protection Fund (DPF). - Current ambiguity: under the Banks (Nationalization) Act of 1974 the government implicitly guaranteed safety of all deposits despite Banks Act applying only to nationalized banks; depositors widely anticipate government or SBP compensation in case of bank failure. - Banks support DPF; staff stressed necessary preconditions before launching DPF: - Achieve compliance of all banks with minimum capital requirements. - Ensure appropriate regulation and effective supervision. - Establish a special resolution regime. - Enhance consolidated supervision: - SBP and SECP recognize consolidated supervision of financial conglomerates is critical. - Regulatory framework similar to a “twin peak” model: SBP regulates banking, SECP regulates nonbank financial sector. - Challenge due to ownership inter-linkages; SBP and SECP signed an MoU to share information and monitor risks on a consolidated basis. - Joint task force on financial conglomerates established in 2010 meets periodically. - Strengthen regulatory and supervisory framework: - SBP introduced prudential regulations (loan to value, loans to deposits, exposure limits) to address macro-prudential risk. - Macro stress testing framework improved substantially, but no macroeconomic model exists for generating baseline and adverse scenarios for stress testing. - SBP requested IMF Monetary and Capital Markets technical assistance to assess contingency planning and crisis management framework. - SECP revisited legal framework with draft legislation under government consideration to enhance supervisory and enforcement powers and regulate futures markets. - Staff recommended government restore SECP’s budgetary autonomy. ### Capital markets, stock market, and debt market development - Equity market: - After the 2008 collapse, renewed buoyancy in the stock market; Karachi Stock Exchange (KSE-100) set new records over the 12 months to June 2013, outperforming many other emerging markets. - Staff recommended authorities monitor speculation and market manipulation to maintain confidence. - SECP reforms to continue: attract strategic foreign investors, introduce Shariah-compliant investment products, establish a central counter party to reduce credit risk. - Debt markets: - Corporate debt market is underdeveloped and small. - For government debt market, measures taken include consolidating benchmark securities, automating the auction process, and pre-announcing the auction calendar for the next quarter. - Authorities need to: - (i) continue aligning rates of returns on the National Saving Schemes (NSS) to equivalent government securities; - (ii) improve price discovery during auctions by utilizing cut-off rates much less frequently and allowing market forces to determine yield on government securities; - (iii) build a more complete yield curve by extending maturities of government securities; - (iv) issue Sukuk instruments beyond 3-year maturity; - (v) continue to broaden investor base to include institutional investors; - (vi) list government debt instruments in stock exchanges to increase secondary market liquidity. ### Financial deepening and medium-run reforms - Staff recommendations for medium-run financial deepening: - Continue increasing access to financial services through the Financial Inclusion Program and microfinance. - Stimulate credit to the private sector. - Address undercapitalization of a few banks. - Develop capital markets to provide alternative financing and investment opportunities. - Expected outcomes: - Financial deepening should, over the long term, sustain economic growth and increase the effectiveness of macroeconomic policies. ### Authorities’ views on financial stability and reforms - Authorities’ assessment: - Banking system shows strong indicators of financial soundness: high liquidity, capitalization, and comfortable profitability. - Noted increasing exposure of banks’ balance sheets to the government due to high financing needs. - Acknowledged three noncompliant banks in both CAR and MCR; actively engaged to ensure full compliance. - Believed raising additional capital for meeting MCR is challenging in current domestic and global environment. - Asserted recent policy rate cuts would help stimulate private sector credit, reduce debt burden on borrowers, and thereby lower NPLs. - Reform commitments: - Finalize consultation on draft Corporate Rehabilitation Act and seek to pass legislation on a deposit protection fund over the next two years. - SBP and SECP supported reopening the issue of consolidated supervision while valuing existing interagency coordination arrangements. ### Structural reforms link to fiscal consolidation and growth (overview) - Energy sector centrality: - Energy sector problems cause unreliable electricity supply and large fiscal costs through price distortions, insufficient collections, costly and poorly targeted subsidies, inadequate governance and low efficiency, regulatory inadequacies, and insufficient investment. - Output level estimated to be depressed by some 2 percent. - Short-term actions: - Focus on “quick wins” to contribute to fiscal adjustment and resolve bottlenecks: clearance of circular debt, tariff adjustments, and change to cheaper fuels. - Out of Rs. 503 billion of payment arrears identified as of end-May 2013, Rs. 342 billion were cleared at end-June 2013, with residual slated for resolution by end-August 2013. - Arrears reduction expected to allow cash-constrained power producers to bring additional electricity supply in the short-run and reduce load shedding by around three hours per day. - Phasing out subsidies important for fiscal adjustment; targeted income support programs recommended to protect most vulnerable. - Cost-cutting, improved collection from nonpayers, and efficiency measures needed to reach full cost recovery in electricity sector. - Legal and governance measures: - Strengthened performance contracts with all power sector companies to tackle losses, raise payment compliance, and improve energy efficiency and service delivery. - Accelerate pending amendments to the Penal Code 1860 and the Code of Criminal Procedures 1898 to strengthen legal framework in electricity theft cases. - A new electricity act still needed to modernize governance of the sector. *Source: IMF staff report excerpt.* ### 40. Conservation and energy efficiency are the cheapest and the fastest ways to alleviate ### _cr13287 - 40. Conservation and energy efficiency are the cheapest and the fastest ways to alleviate ### Energy sector: conservation, efficiency, and fuel mix - Conservation and energy efficiency are identified as "the cheapest and the fastest ways to alleviate the electricity shortage." - Pricing and other market based instruments to encourage energy conservation will "significantly improve resource allocation and energy efficiency." - Staff urged authorities to promulgate the Pakistan Energy Efficiency and Conservation Act. - Current generation is "tilted towards the use of costly fuel oil." Changes in the energy mix are required to decrease production costs: - Prioritize the use of gas and coal rather than fuel oil. - Continue development of hydropower projects for long-term sustainable supply. - Gas sector specifics: - "Gas supply falls short of unconstrained estimated demand by half at current prices and investment is limited." - Short-run measures: prioritize import of Liquefied Natural Gas (LNG); limit further expansion of gas distribution networks for domestic consumption; limit use of compressed natural gas to fuel vehicles. - Medium-term measures: prioritize new investment in gas production from existing fields and new exploration; gradual price rationalization to encourage new production and allocate gas to most efficient uses. - Improvements in the business climate to encourage domestic and foreign investment in the sector. - Governance and regulatory improvements: - "Half of current circular debt is caused by inefficiencies in tariff determination and notification." - Minimize time to determine and notify tariffs; consolidate process under the National Electric Power Regulatory Authority (NEPRA); strengthen NEPRA’s administrative capacity. - Make fuel price adjustments on a timely basis. - Strengthen institutional capacity of all energy sector PSEs to allow them to operate independently from the Government as efficient commercial entities. ### Business climate and trade reforms - Initial business climate reforms should tackle major impediments to entry: - Liberalize barriers to new business start-ups. - Simplify legal and taxation requirements (e.g., a "one stop shop" for investors). - Strengthen anti-corruption efforts. - Design frameworks to improve contract enforcement. - Access to credit for SMEs remains "very limited." The State Bank of Pakistan’s Financial Inclusion Program is noted as an important contribution. - Trade policy reforms to stimulate competition, innovation, and foreign investment: - Historical context: a decade ago Pakistan had four tariff rates from 0 to 25 percent; the system has since become complex with special conditions. - According to a 2012 Customs Budget Wing study, "84 percent of traded tariff headings were subject to SROs modifying rates or granting exemptions." - Staff suggested simplifying tariff rates, eliminating exemptions and SROs; return to the 2003 framework of 4 tariff "slabs" with 0 to 25 percent rates. - Suggestions include elimination of the negative list on trade with India and extending India most favored nation status, and shifting to "sensitive list" under SAFTA. - Strategy to take full advantage of trade preferences available from the EU—where currently autonomous trade preferences in 75 items is present. ### Public sector enterprises (PSEs) reform - Comprehensive action needed on some 65 PSEs. - Recommended sequencing: - Initial stock taking of all major loss-making PSEs to diagnose problems. - Implement medium-term action plans to privatize firms, restructure those with profitability prospects that government wishes to retain, and close nonviable firms. - For companies with shares already in private hands, staff suggested privatization via block sales, secondary public offerings for institutional and general public or international listings. - Restructuring should include improved governance and corporatization. ### Authorities' views on reforms - Authorities broadly agreed with staff priorities and are "committed to the elimination of subsidies," preferring gradual moves to match higher prices with increases in energy supply. - To ease public resistance they prefer initially to concentrate price increases on nonhousehold consumers. - Authorities are pursuing gas import projects and recognize need for "bold actions on rationalization of gas prices" once legal impediments are tackled. - To improve electricity collections, authorities plan to introduce amendments to the penal and criminal codes before the end of the year. - On PSE reform, authorities proposed an even more ambitious agenda than staff recommended, noting sequencing should match market conditions and privatization IPOs and SPOs should be offered after gauging investor appetite and global market conditions. - Authorities noted the EU is considering their request for GSP plus benefits (zero percent duty) among other trade facilitation actions. - Authorities agreed to identify legal and bureaucratic impediments to doing business and to build the capacity of the Board of Investment to undertake necessary reforms. ### Program objectives and design - Program discussions focused on adjustment measures to reduce short-term vulnerabilities and promote robust inclusive growth by addressing structural problems. - Authorities and staff agreed on strong fiscal consolidation measures to address unsustainable government deficit and ease external financing needs; measures expected to: - Ease demand-side pressures. - Facilitate increased donor inflows. - Allow for private external deficit financing. - Pave the grounds for foreign exchange inflows through increased FDI and portfolio investment. - Monetary policy objective: independent monetary policy aimed at rebuilding reserves and controlling inflation in the medium-term. - Policy mix includes significant structural reforms to sustain fiscal stance, boost investment and growth, and deliver targeted support spending. - Program designed with lessons from prior arrangements; structural conditionality focused on critical areas where authorities have strong ownership; structural benchmarks phased over time; significant technical assistance planned. ### Fiscal policy: consolidation targets and measures - The Fund supported program contemplates "around 4½ percent of GDP in fiscal consolidation over three years, of which 2 percent of GDP would be taken upfront." - Under the authorities’ proposed program, the fiscal deficit would be reduced to "around 3½ percent of GDP by FY2016/17." - World Bank studies suggest broadening GST and key taxes could yield "up to 4½ percent of GDP over time." - Expenditure-side: current spending—mostly electricity subsidies—could be reduced by "1½–2 percent of GDP over the program period." - Initial fiscal adjustment effort: permanent deficit reduction measures of "2 percent of GDP," mainly from revenue increases and lower energy subsidies. - Tax measures included in the 2013/14 budget—including a one point hike in the GST rate—expected to yield "¾ percent of GDP annually." - Reduced energy subsidies expected to produce "¾ percent of GDP in savings." - Remainder from lower current expenditures ("0.15 percent of GDP"), savings of the PSDP budget, and a new levy on natural gas expected to yield "about 0.4 percent of GDP on an annualized basis" in the second half of the fiscal year. - Contingent strategy: bring forward measures identified for years two and three if needed. - Additional fiscal adjustment in years two and three will concentrate on broadening the tax base and further reducing untargeted subsidies: - Authorities envisage measures yielding "¾ percent of GDP in each of the subsequent years." - Focus on eliminating exemptions and concessions embedded in SROs and in the law; eliminate executive power to grant preferential tax treatment through SROs. - Move GST to a full-fledged integrated VAT-style indirect tax with few exemptions and to an integrated income tax by 2016/17. - Tax administration reforms critical; focus on 300,000 potential taxpayers via national data warehouse. - Notifications and enforcement: 100,000 notifications for late return filing under section 114 envisaged for FY2013/2014; pursue additional 100,000 in each of the following two years. Failure to respond may be followed by provisional assessment under section 122 and collection measures including attachment of bank accounts. - Develop plans to strengthen customs, sales and excise tax administration (structural benchmark). - Expenditure side: further subsidy reductions of "around 0.4 percent of GDP per year" under authorities’ comprehensive energy plan. - Annualized Yield of Key Measures under the Program (In percent of GDP) — figures as presented: - 2013/14: Total 2.08; Tax measures included in the budget 0.74; New levy on natual gas 0.40; Reduction of energy subsidies 0.79; Savings on current non-wage spending 0.15. - 2014/15: Total 1.20; Tax measures to be identified 0.75; Reduction of energy subsidies 0.45. - 2015/16: Total 1.06; Tax measures to be identified 0.75; Reduction of energy subsidies 0.31. - Memorandum: Increase in BISP: 2013/14 = 0.06; 2014/15 = 0.11; 2015/16 = 0.05. ### Provincial contribution and fiscal mechanics - Provinces will contribute to consolidation. In 2013/14, provinces—through the Council of Common Interests—agreed to deliver required fiscal surpluses by saving additional revenue transfers. - To encourage compliance, SBP will begin to pay interest on deposits held by the provinces. - Future institutional arrangements needed for sustainability; in 2014/15 and beyond, negotiations on a new NFC award to adjust revenue sharing arrangements. ### Targeted assistance and social protection - Targeted assistance schemes will be expanded significantly to protect the most vulnerable. - Benazir Income Support Program (BISP): - Reaches "4.8 million families in the two poorest quintiles of the population." - For FY2013/14, budget allocated to BISP increased to raise benefits from "PRs.1000 to PRs. 1200 per family per month" and expand coverage to "5.7 million families." - Additional resources will provide conditional cash transfers (CCTs) to primary education, supporting "560,000 families with a benefit of Rs. 200 per child per month attending school." - Coverage of BISP and CCTs expected to reach "6.6 million families by 2015/16" with benefits scaled up to cover inflation. - Footnote: BISP allocation provides cash assistance to "4.8 million families, which constitutes almost 16 percent of the population (almost 40 percent of the population below the poverty line)." ### Monetary policy - Short-term priority: rebuilding reserves; later focus on maintaining low and stable inflation. Enhanced SBP independence and ending SBP direct financing of fiscal deficit are crucial. - Short-term actions: - SBP has begun net purchases of foreign exchange in the interbank spot market to signal policy shift and attract capital inflows. - Reserves accumulation guided by a tight NIR target under the program. - SBP to allow greater exchange rate flexibility; limit intervention to build reserves, cushion major shocks, and strengthen competitiveness. - Authorities agreed to gradually reduce SBP’s short swap/forward foreign exchange position to a more sustainable level. - Inflation containment: inflation will be contained to "around 8 percent in 2013/14," aided by fiscal consolidation effects. - Medium-term (beginning 2014/15): - Monetary policy should aim to reduce inflation while continuing to rebuild reserves. - A target on NDA of the SBP envisages reduction in money supply growth to rates consistent with inflation objective of "6–7 percent." - Monetary accommodation of fiscal deficits will be scaled back; maintain a positive real policy interest rate. - SBP has halted further direct lending to the government, reflected by a continuous ceiling on total SBP credit to the government (which will fall over time). ### Central bank independence - Authorities agreed to work toward approval of amendments to the SBP law to give greater operational independence, with price stability as the primary objective. - Amendments will establish an independent, decision-making monetary policy committee and prohibit any form of new direct lending to the government from the SBP. ### Financial sector policies and regulatory reforms - SBP will prepare detailed plans to ensure all banks comply with minimum capital adequacy requirements (structural benchmark). Plans will cover state-owned and private banks and include contingency measures. - Consultations underway on new bankruptcy law (Corporate Rehabilitation Act) to revamp recovery mechanisms; law will facilitate rehabilitation of viable entities and speed liquidation of unviable ones. - Deposit insurance scheme to be introduced once preconditions (capital adequacy, effective supervisory and regulatory framework, special resolution framework) are met; legislation to be passed and implemented over the next three years. - Regulatory and supervisory framework revisions: - Securities and Exchange Ordinance, 1969 ("SEO 69") has inconsistencies and gaps. - Planned initiatives: - Draft Securities Bill to enhance supervisory and enforcement power of regulator. - Enhance regulatory power of SECP with a new draft bill. - Prepare a comprehensive framework for the futures markets. - Implement better coordination between SBP and SECP to effectively regulate and supervise banking groups. ### Structural policies: priorities under the program - Critical structural measures in the energy sector together with targeted transfers to protect the most vulnerable are priority under the new Fund-supported program. - Other important reforms: trade liberalization, PSE reform, improvements to the business climate to kick start growth. *IMF staff report excerpt as provided in the content unit.* ### 62. The authorities have launched a comprehensive energy policy (MEFP ¶26). The policy to ### _cr13287 - 62. The authorities have launched a comprehensive energy policy (MEFP ¶26). The policy to ### Energy policy: scope and measures - The policy will cover all elements of the energy supply chain, demand management, and pricing policies. - Electricity sector (MEFP ¶27, and 32): - Tariff rationalization has already begun. - Elimination of payables arrears in the power sector is a positive development; more is needed to limit recurrence of arrears. - During the program period Tariff Differential Subsidies (TDS) will be phased out and tariffs will be brought to cost recovery levels. - Tariff adjustments aim to improve resource allocation and efficiency, and will encourage conservation. - Cost-cutting and efficiency measures will be undertaken in both generation and distribution companies. - Legal changes will be undertaken to tackle electricity theft by enhancing investigation, prosecution, and penalties. - High priority will be given to improve energy sector governance and transparency. - Additional electricity production projects will be accelerated. - Gas sector (MEFP ¶34): - Authorities will prepare a gas price rationalization plan to accompany electricity price rationalization. - In the short-run, gas will be administratively allocated to uses with higher economic value (e.g., energy production). - Preparations will be made to let price mechanisms take over allocation in the future. - Authorities will develop facilities to import gas and increase incentives for higher domestic production. ### Business climate reforms - Authorities agreed to move forward with business climate reforms (MEFP ¶36) to increase foreign and domestic private investment. - Measures include: - Corporate Rehabilitation Act. - Alternative Dispute Resolution (ADR) Mechanisms. - Setting up a one-stop shop (including the human resource and funding needs). - Identifying required changes in regulations and administration to tackle impediments to doing business. - The Board of Investment, in coordination with SECP, Federal Bureau of Revenue, provincial governments, and other agencies, will develop a plan to further simplify procedures and reduce costs for setting-up businesses in Pakistan. ### Trade policy and PSE reforms - Trade policy reforms (MEFP ¶37) to increase consumer welfare, stimulate growth via increased competition, and improve public resource allocation. - Authorities will prepare a three-year program to return to a simplified import tariff regime with 4 tariff rates ranging from 0-25 percent with few exceptions. - Elimination of SROs to remove sources of trade regime distortions. - Stock-taking of all major loss-making PSEs, followed by medium-term action plans to: - Privatize firms. - Restructure those with prospects of profitability which the government wishes to retain. - Close nonviable firms. ### Social protection - Enhanced and better-targeted assistance for the poorest households is necessary (MEFP ¶13). - Benazir Income Support Program (BISP): - Largest targeted social assistance mechanism reaching 4.8 million families (16 percent of the population) within the two poorest quintiles. - As savings from tariff adjustments and fiscal space are realized, authorities agreed to expand coverage and increase the benefit amount to protect real purchasing power of beneficiaries. ### Program modalities: access, donor support, and prior actions - Access, Duration, Phasing: - An extended arrangement under the EFF is proposed to meet medium-term financing needs and build reserve buffers from their current level of US$5.4 billion. - Access of 425 percent of quota (SDR 4,393 million, equivalent to US$6.68 billion) based on Pakistan’s external financing needs. - The proposed arrangement will be within normal access limits for an extended arrangement under the EFF, even after the implementation of the 14th quota review and possible changes to normal access limits. - Even phasing over the program would imply net repayments to the Fund in the first four quarters of the program. - The first disbursement would be at program approval and remaining purchases contingent on completing quarterly reviews. - Support from other donors: - Firm commitments from donors to fill the entire financing gap for the first 12 months of the arrangement. - Financial support expected to reach US$6 billion during the program period, with strong technical assistance particularly in tax administration and the energy sector. - Prior actions undertaken: - Implementation of fiscal adjustment measures (including those in 2013/14 budget) totaling 2 percent of GDP on an annualized basis. - Elimination of tariff differential subsidies in industrial, commercial and bulk users and reduction of subsidies to high levels of consumption totaled 0.75 percent of GDP in annualized savings. - Sustained purchases of foreign exchange by the SBP. - Agreement at the Council of Common Interest on respecting the 2013/14 fiscal balances for the provinces under the program. - Issuance of 10,000 collection notices to individuals not registered to pay taxes where indirect methods suggest large potential income tax liabilities. ### Monitoring, benchmarks, and risks - Quantitative and Continuous Performance Criteria: - Quarterly performance targets on: general government fiscal balance (consolidated federal and provincial), net foreign assets, net domestic assets, SBP lending to the government, the SBP’s forward/swap position, accumulation of domestic arrears, and nonaccumulation of external arrears. - Structural Benchmarks: - Fiscal sector benchmarks to secure fiscal consolidation and distribute burden across wider groups of taxpayers. - Monetary policy benchmark aimed at bringing more independence to the SBP through changing the composition of the Board, extending the tenure of the Governor and eliminating SBP lending to the Government. - Financial sector benchmarks to mitigate short-term risks posed by undercapitalized banks and ensure institutions to protect medium-term financial stability. - Structural policy benchmarks intended to address long-standing problems in the energy sector and loss-making public sector enterprises. - Risks: - Program implementation risks are high given Pakistan’s track record, political constraints, and limited technical capacity. - Mitigating factors: critical upfront actions, strong electoral mandate, commitment to reform, and strong technical assistance. - Additional risks: interventions by the Supreme Court in economic and administrative issues; limited political support in provinces outside Punjab complicating provincial-federal financial agreements. - Delays or shortfalls in financing from public or private sources; public funding risks mitigated by commitments from World Bank, ADB, and bilateral partners. - Private financing risks may be reduced by strong privatization program (flows conservatively estimated). ### Box 8 — BOP projections and external financing requirement: key figures and assumptions - Reserve and financing overview: - Current reserves level cited as US$5.4 billion. - Under the program scenario, reserves are projected to reach to around US$15.5 billion by the fourth quarter of 2015/16 (three months of imports). - Assumptions incorporated: - Coalition Support Fund inflows of US$3 billion. - PTCL privatization receipts of US$0.85 billion. - Sales of 3G licenses of US$1.2 billion. - Fund financing of US$6.6 billion to close the remaining financing gap. - Latest WEO assumptions on commodity prices and external demand. - Program expected to catalyze external official (US$6 billion) and private financial inflows. - Sensitivities and downside risks: - A US$10 per barrel increase in the oil price raises the import bill by about US$600 million. - Capital inflows expected in 2013/14 may not materialize. - Program scenario assumes Pakistan will regain modest access to international capital markets in 2015/16. - SBP’s short forward foreign exchange positions (currently at US$2.2 billion) may unwind faster than envisaged. - Selected table highlights (2011/12–2015/16, in millions of U.S. dollars unless otherwise specified): - Gross external financing requirements: 7,834 (2011/12 FY), 7,582 (2012/13 FY), 2,482 (2013/14 Q1), 2,821 (Q2), 874 (Q3), 901 (Q4), 7,077 (2013/14 FY), 5,948 (2014/15 FY), 6,284 (2015/16 FY). - Current account deficit: 4,658 (2011/12 FY), 2,299 (2012/13 FY), 904 (2013/14 Q1), 994 (Q2), -246 (Q3), -334 (Q4), 1,318 (2013/14 FY), 1,719 (2014/15 FY), 2,723 (2015/16 FY). - Amortization of medium- and long-term debt: 3,076 (2011/12 FY), 4,892 (2012/13 FY), 1,420 (2013/14 Q1), 1,315 (Q2), 1,120 (Q3), 1,235 (Q4), 5,090 (2013/14 FY), 3,729 (2014/15 FY), 3,262 (2015/16 FY). - Net FDI (including privatization receipts): 744 (2011/12 FY), 1,229 (2012/13 FY), 319 (2013/14 Q1), 663 (Q2), 365 (Q3), 981 (Q4), 2,327 (2013/14 FY), 3,166 (2014/15 FY), 3,960 (2015/16 FY). - Available financing: 7,834 (2011/12 FY), 7,582 (2012/13 FY), 1,939 (2013/14 Q1), 2,239 (Q2), -203 (Q3), -177 (Q4), 3,797 (2013/14 FY), 1,479 (2014/15 FY), 1,633 (2015/16 FY). - Remaining financing gap: 0 (2011/12 FY), 0 (2012/13 FY), 543 (2013/14 Q1), 581 (Q2), 1,077 (Q3), 1,078 (Q4), 3,280 (2013/14 FY), 4,469 (2014/15 FY), 4,652 (2015/16 FY). - Memorandum items: - Gross official reserves in US$ billions: 10.8 (2011/12), 6.0 (2012/13), 5.6 (2013/14 Q1), 5.3 (Q2), 7.2 (Q3), 9.6 (Q4), 9.6 (2013/14 FY), 13.4 (2014/15 FY), 18.5 (2015/16 FY). - In months of imports: 2.7 (2011/12), 1.4 (2012/13), 1.3 (2013/14 Q1), 1.2 (Q2), 1.6 (Q3), 2.2 (Q4), 2.2 (2013/14 FY), 2.8 (2014/15 FY), 3.6 (2015/16 FY). - Total gross external debt in percent of GDP: 29.1 (2011/12), 27.0 (2012/13), 26.7 (2013/14 Q1), 26.4 (Q2), 26.3 (Q3), 26.2 (Q4), 27.0 (2013/14 FY), 25.2 (2014/15 FY), 23.4 (2015/16 FY). ### Capacity to repay the Fund and safeguards - Capacity to repay: - New program will help restore external stability and catalyze capital inflows from donors and private sector. - Net repayment profile to the Fund eases significantly with an extended arrangement under the EFF. - At end-June 2013 the Fund’s exposure to Pakistan stood at roughly US$4.5 billion (74 percent of gross official reserves). - Repayments concentrated in remainder of 2013 and during 2014 (roughly US$4 billion). - Program scenario projects reserves significantly higher, reducing the Fund’s exposure to around 1/3 of reserves by end of program period. - Safeguards: - A safeguards assessment update will be completed no later than the first review under the new extended arrangement under the EFF. ### Other issues - Outreach: - Mission held meetings with business and banking leaders in Karachi and Lahore, journalists and opinion leaders in Islamabad, diplomatic community, and key donors. - Joint press conference held with Minister of Finance Dar. - Pakistan is a pilot case for outreach via social media, with an active twitter account (@imf_pakistan). - AML/CFT: - Authorities have taken steps toward improving Pakistan's AML/CFT regime in the context of FATF initiative, but some strategic deficiencies remain. - Amendments to the Anti-Terrorism Act enacted earlier this year have addressed part of FATF concerns; further amendments needed regarding identification and freezing of terrorist assets. - Pakistan’s current listing by the FATF creates costs on financial intermediation due to heightened due diligence requirements. - Exchange rate regime: - Pakistan has accepted the obligations of Article VIII, Sections 2, 3, and 4. - Pakistan’s exchange rate regime has been classified as floating since January 2008. - Data quality: - Macroeconomic statistics are broadly adequate for surveillance and program monitoring. - Authorities are progressing towards closing gaps in real sector and strengthening fiscal and social data. - National accounts have been rebased and quarterly national accounts will be published starting from November 2013 in line with SDDS; plan to extend new series back to FY1999/2000 before year-end. - Technical Assistance: - Highest priority: tax administration diagnostic mission. - Additional TA needs: public financial management, federal-provincial fiscal arrangements, SBP foreign exchange auctions, banking supervision, and assistance for applying BPM6. ### Staff appraisal: challenges and outlook - Pakistan faces serious economic challenges with high vulnerabilities and crisis risks, subpar growth, and unsustainable fiscal and balance of payments positions. - Contributing factors include lack of reliable electricity supply and a difficult security situation. - Risks to outlook are on the downside and strong policy action is required. - Domestic risks: fiscal imbalance, high government debt rollover requirements, worsening energy crisis, security problems. - External risks: significant downside risks to the balance of payments, international oil and food price volatility, vulnerability to adverse global spillovers through trade and remittances channels. *Source: IMF staff report content provided in the supplied document excerpt.* ### 81. Pakistan’s newly elected government has a strong mandate to stabilize the economy ### Pakistan’s newly elected government has a strong mandate to stabilize the economy ### Fiscal policy and consolidation - The authorities approved a FY2013/14 budget with measures to boost revenues, reduce energy subsidies, and cut the fiscal deficit. - Headline deficit reduction: from 8.8 percent of GDP in 2012/13 to 5.8 percent of GDP in 2013/14. - Further consolidation is needed in subsequent years to secure medium-term fiscal sustainability. - Key fiscal actions recommended: - Raise the tax-to-GDP ratio significantly. - Broaden the tax base via an ambitious reduction in exemptions and concessions. - Extend taxation to areas currently not fully covered by the tax net. - Overhaul tax administration by boosting training, transparency, and enforcement capabilities. - Ensure provinces are full partners in the adjustment effort. - The authorities undertook additional fiscal measures to prepare for a new extended arrangement under the EFF with the Fund. ### Monetary and exchange rate policy - Short-run SBP priorities: - Stabilize foreign exchange reserves using program disbursements, financial support from other donors, foreign exchange intervention, and exchange rate flexibility. - Net international reserve targets under the program reflect this objective. - Medium-run SBP focus: - Maintain low and stable inflation in the 5-7 percent range. - Cease direct lending to the government. - Ensure liquidity injections are exclusively through open market operations calibrated to achieve the program’s NDA targets. - Full operational independence will help the SBP improve monetary policymaking and achieve the needed inflation reduction. ### Financial sector stability and market deepening - Systemic risks to the banking sector are not particularly high at this time, but prompt action is needed for banks below the minimum CAR or below the MCR. - Recommended measures to strengthen the financial system: - Develop deposit insurance. - Implement consolidated supervision. - Enhance legislation on nonbank financial activities. - Deepening financial markets will facilitate increased private investment and growth over time. ### Structural reforms and growth prospects - Energy sector reforms are central: the authorities implemented significant energy price adjustments and launched a comprehensive energy reform policy. - Staff anticipates a boost in GDP on the order of 2 percentage points over the coming years as the energy crisis is resolved. - Other structural reforms highlighted: - Reforms in the gas sector. - Liberalization of trade policy. - Restructuring or privatization of public sector enterprises (PSEs). - Measures to improve the business climate. - Expected outcomes: decline in rent-seeking behaviors and sharp rises in productive investment—both foreign and domestic—boosting medium-term growth prospects. ### Social protection and mitigating impacts - Protecting the most vulnerable from the direct and indirect impacts of fiscal consolidation and price adjustments is a priority. - Authorities committed to boosting targeted income support programs; an indicative floor on such spending is included in the program targets. - Coverage and benefits of these programs are slated to gradually increase as savings from tariff adjustments and fiscal space are realized. ### Implementation risks, ownership, and political economy - Risks to successful implementation: - Pakistan’s track record is spotty on sustained adherence to IMF programs, making this a relatively high risk arrangement. - Possible external shocks could continue to pose risks to Pakistan’s fragile balance of payments until well into the second year of the program. - Delicate security situation could pose risks. - Constraints on legal, administrative, or technical abilities could impede simultaneous implementation of an ambitious reform agenda across several governance areas. - Positive indicators of ownership and commitment: - The new government demonstrated political will by undertaking as a prior action around 45 percent of the total 4½ percent of GDP fiscal adjustment required in the three-year program. - The government took increases in sensitive energy prices upfront. - Ownership of the program is strong, with authorities’ reform initiatives predating program discussions and a government majority in the national assembly. ### Program access and financing - Proposed Fund access: 425 percent of quota is consistent with medium-term external and debt sustainability provided the program is implemented as envisaged and unforeseen shocks are addressed swiftly. - Donor financing: - Firm commitments from donors to fill the remaining financing gap for the first 12 months of the arrangement. - Donors are expected to provide around US$6 billion of additional resources over the next three years. - Good prospects for adequate multilateral and bilateral financing for the remaining program period beyond the first 12 months. *Source: IMF staff assessment of Pakistan’s proposed extended arrangement under the EFF.* ### 89. In view of Pakistan’s balance of payments needs and the comprehensive package of ### _cr13287 - 89. In view of Pakistan’s balance of payments needs and the comprehensive package of ### Program approval and IMF staff recommendation - Staff supports the authorities’ request for an extended arrangement under the EFF in the amount equivalent to SDR 4.393 billion (425 percent of quota). - Staff recommends that the next Article IV Consultation with Pakistan take place on the 24-month cycle. ### Program size, schedule, and Fund engagement - Extended arrangement amount: SDR 4.393 billion (425 percent of quota). - Table of reviews and purchases (selected): approval on September 4, 2013; multiple reviews scheduled through March–June 2016; Total shown as "Total4393425" in the source (representing the arrangement amount and percent of quota as presented). ### Key macroeconomic indicators and projections (selected) - Population: 178.9 million (2011/12). - Per capita GDP: US$1,228 (2011/12). - Poverty rate: 17.2 percent (2007/08). - Main exports: Textiles ($9.9 billion). - Real GDP at factor cost (annual percent change): - 2009/10: 2.6 - 2010/11: 3.7 - 2011/12: 4.4 - 2012/13: 3.6 - 2013/14 (Estimates/Table 2 baseline): 2.5 - Medium-term baseline projections (Table 2): 2014/15: 3.5; 2015/16: 3.7; 2016/17: 4.5; 2017/18: 5.0 - Consumer prices (period average, percent): - 2009/10: 10.1 - 2010/11: 13.7 - 2011/12: 11.0 - 2012/13: 7.4 - 2013/14: 8.2 - Medium-term program (Table 3): 2014/15: 9.0; 2015/16: 7.0; 2016/17: 6.0; 2017/18: 6.0 - Exchange rate (Pakistani rupees per U.S. dollar, period average): - 2009/10: 7.6 - 2010/11: 2.2 - 2011/12: 4.1 - 2012/13: 8.7 - (Source presents additional exchange rate series in figures and tables for 2008–13.) ### Public finances (selected fiscal indicators and projections) - Revenue and grants (percent of GDP): - 2009/10: 14.3 - 2010/11: 12.6 - 2011/12: 13.1 - 2012/13: 13.2 - 2013/14 (baseline): 13.0 - Medium-term baseline (Table 2): 2014/15: 12.8; 2015/16: 12.7; 2016/17: 12.1; 2017/18: 12.1 - Expenditure (including statistical discrepancy, percent of GDP): - 2009/10: 20.2 - 2010/11: 19.5 - 2011/12: 21.5 - 2012/13: 21.7 - 2013/14: 20.8 - Overall budget balance (including grants, percent of GDP): - 2009/10: -5.9 - 2010/11: -6.9 - 2011/12: -8.4 - 2012/13: -8.5 - 2013/14 (baseline): -7.8 - Medium-term baseline projections (Table 2): 2014/15: -8.0; 2015/16: -8.7; 2016/17: -9.8; 2017/18: -10.4 - Primary balance (percent of GDP): - 2009/10: -1.6 - 2010/11: -2.9 - 2011/12: -4.0 - 2012/13: -3.9 - 2013/14: -3.0 - Medium-term program (Table 3 program): 2014/15: -0.9; 2015/16: 0.1; 2016/17: 0.7; 2017/18: 0.5 - Total general government debt (percent of GDP): - 2009/10: 61.5 - 2010/11: 59.5 - 2011/12: 63.8 - 2012/13: 66.6 - 2013/14: 69.2 (Table 1) / 66.6 (Table 7 medium-term fiscal framework; contexts differ by table) - External general government debt (percent of GDP): - 2009/10: 30.2 - 2010/11: 26.6 - 2011/12: 25.8 - 2012/13: 24.1 - 2013/14: 23.2 ### External sector and reserves - Current account balance (percent of GDP): - 2009/10: -2.2 - 2010/11: 0.1 - 2011/12: -2.1 - 2012/13: -1.0 - 2013/14: -1.6 (Table 1); alternative program projection in Table 3 shows end-year current account outcomes in US$ terms. - Medium-term program (Table 3 program): 2014/15: -1.3; 2015/16: -1.7; 2016/17: -2.7; 2017/18: -4.8; 2018: -5.4 (Table 3 baseline program variants) - Gross official reserves (millions of U.S. dollars): - 2009/10: 12,958 - 2010/11: 14,784 - 2011/12: 10,799 - 2012/13: 6,008 - 2013/14 (Table 1): 2,283 (end-year) - Medium-term program (Table 3): projections include 2014/15: 9,566; later years rising to 13,430; 18,532; 19,310; 19,737 in projections/memoranda - In months of next year's imports of goods and services: - 2009/10: 3.6 months - 2010/11: 3.6 months - 2011/12: 2.7 months - 2012/13: 1.4 months - 2013/14: 0.5 months (Table 1) / 2.2 months in some program memoranda (Tables differ by scenario and inclusions) ### Debt sustainability and vulnerability indicators - Public sector gross debt (selected baseline path, percent of GDP, Table 12): - 2008: 57.1 - 2009: 56.0 - 2010: 56.8 - 2011: 55.3 - 2012: 60.4 - 2013: 64.2 - 2014: 66.0 - 2015: 63.4 - 2016: 60.5 - 2017: 58.7 - 2018: 56.9 - Debt-stabilizing primary balance (Table 12): shown as -1.6 (percent in the source table context). - External debt (percent of GDP, Table 10 / Table 3): - 2009/10: 34.7 - 2010/11: 31.1 - 2011/12: 29.1 - 2012/13: 26.9 - 2013/14: 26.0 - Medium-term program projections show decline to mid-20s and into low-20s by 2017/18. - Gross external financing needs (in billions of U.S. dollars; Table 4 and Table 10 memoranda): - 2009/10: 7,363 (Table 4 memorandum) - 2010/11: 2,408 - 2011/12: 6,960 - 2012/13: 6,052 - 2013/14: 4,586 (program memorandum) - Program/medium-term projections show needs rising in later years (e.g., 9,496; 9,336 in certain rows). ### Monetary and financial sector indicators - Broad money (percent change, selected): - 2009/10: 12.5 - 2010/11: 15.9 - 2011/12: 14.1 - 2012/13: 15.9 - 2013/14 (Table 6 program): 17.7 / 13.8 in different table contexts - Reserve money (percent change): - 2009/10: 11.4 - 2010/11: 17.1 - 2011/12: 11.3 - 2012/13: 15.9 - 2013/14: 14.2 - Private credit (percent change): - 2009/10: 3.9 - 2010/11: 4.0 - 2011/12: 7.5 - 2012/13: -0.6 - 2013/14: 8.0 (Table 1); Table 6 shows alternative sequencing. - Financial soundness indicators (Table 8, end-March 2013): - Regulatory capital to risk-weighted assets: 15.1 (Dec. 2012 / Mar. 2013 series in table) - Nonperforming loans (NPLs) to gross loans: 14.7 (Mar. 2013) - Provisions to NPLs: 71.9 (Mar. 2013) - Return on assets (after tax): 1.2 (Mar. 2013) - Liquid assets to total assets: 47.4 (Mar. 2013) ### Fiscal and structural policy measures / conditionality (selected) - Quantitative performance criteria and indicative targets for FY2013/14 include (Table 14): - Floor on net international reserves of the SBP (millions of US dollars) and ceilings on SBP net domestic assets, overall budget deficit (excluding grants), SBP net foreign currency swaps/forward position, net government borrowing from the SBP. - Indicative target: cumulative floor on Targeted Cash Transfers Spending (BISP) (billions of Pakistani rupees) with levels shown (54, 19, 38, 56, 75 across quarters in the table). - Prior actions (implemented before Board consideration) and structural benchmarks (Table 15) include items such as: - Prior actions: Net purchase of $125 million by the SBP in the foreign exchange spot market from July 1, 2013; development and approval of a three-year plan to phase out Tariff Differential Subsidies (TDS) and implementation steps; implementing fiscal adjustment measures totaling 2 percent of GDP on an annualized basis; imposing a balanced budget requirement on provinces; issuing 10 thousand notices based on large potential fiscal liabilities; develop and launch initiatives to enhance revenue administration for sales tax, excises, and customs (timing/specifics as in Table 15). - Structural benchmarks with deadlines include: announce a rationalization plan for gas prices to generate 0.4 percent of GDP fiscal savings by end-December 2013; enact amendments to the SBP law to give SBP autonomy (end-March 2014); prepare plans to achieve compliance of banks below minimum capital adequacy and plan for recapitalization/consolidation/liquidation (end-December 2013); enact Deposit Protection Fund Act (end-September 2014); enact Securities Bill (end-December 2014); develop PSE reform strategy for thirty firms (end-September 2013); hire audit firm to audit energy sector payables (end-November 2013); operationalize Central Power Purchasing Agency (CPPA) (end-December 2013); enact specified criminal code amendments (end-December 2013); privatize 26 percent of PIA's shares to strategic investors (end-June 2014). ### Key balances and memorandum items (selected from tables) - Merchandise exports (U.S. dollars, percentage change): 2009/10: 2.9; 2010/11: 28.9; 2011/12: -2.6; 2012/13: 0.2; 2013/14: 9.6; 2014/15: 11.4 (Table 1). - Merchandise imports (U.S. dollars, percentage change): 2009/10: -1.7; 2010/11: 14.9; 2011/12: 12.8; 2012/13: -1.6; 2013/14: 7.3; 2014/15: 6.9 (Table 1). - Debt service (percent of exports or other context shown): 2009/10: 21.5; 2010/11: 13.0; 2011/12: 16.0; 2012/13: 20.6; 2013/14: 22.5; 2014/15: 19.4 (Table 1). - Memorandum: Nominal GDP (billions of U.S. dollars) shown across tables, e.g., 2009/10: 177.6; 2010/11: 213.7; 2011/12: 225.6; 2012/13: 236.5; 2013/14: 235.6 (Table 1). *Source: Pakistani authorities; and IMF staff estimates and projections as presented in the source document.* ### Appendix I. Letter of Intent ### Appendix I. Letter of Intent ### Request to the IMF and Program Overview - The Government of Pakistan requests a 36-month extended arrangement under the Extended Fund Facility (EFF) in the amount equivalent to SDR 4,393 million (equivalent to 425 percent of Pakistan’s quota, about US$6.6 billion at current exchange rates). - The first purchase is expected in the amount equivalent to SDR 360 million (34.8 percent of quota, about US$540 million) upon approval by the IMF Executive Board. - Progress will be assessed through quarterly reviews, quantitative performance criteria, indicative targets, and agreed structural benchmarks as described in attached Tables 1-2 and the Technical Memorandum of Understanding (TMU). - The government and the State Bank of Pakistan (SBP) commit to provide the Fund with requested information and to consult the Fund in advance of revisions to the policies contained in the MEFP. ### Economic Context and Key Vulnerabilities - Growth and investment - Real GDP growth slipped to an estimated 3.6 percent in 2012/13. - Private investment has fallen by half in the past six years. - GDP growth has averaged 3 percent over the past few years. - Macroeconomic imbalances - Fiscal deficit widened from 5 percent of GDP in 2008/09 to about 8.8 percent of GDP in 2012/13. - SBP’s reserves have fallen around 40 percent over the last 12 months to US$6.0 billion in end-June 2013. - Contributing factors - Difficult external environment, high international oil prices, two major floods, continued security problems. - Poor macroeconomic management during the previous government and long-standing structural problems, especially in the energy sector. - Energy sector technical and financial problems causing large-scale power outages. - Weak performance in large public enterprises and a difficult investment climate. ### Medium-Term Macroeconomic Scenario and Projections - Growth and inflation - Growth initially modest: about 2½-3 percent in 2013/14. - Growth strengthening to around 4½-5 percent in the outer years as reforms are implemented. - Inflation expected to initially increase; monetary policy tightened in later years to bring inflation down to the 6-7 percent range by the end of the program period. - Fiscal and external balance - Fiscal consolidation aims to bring the fiscal deficit from 8.8 percent of GDP (excluding grants) in FY2012/13 to around 3½ percent in FY2016/17. - Current account: initially narrows, subsequently projected to widen to around 2 percent of GDP, fully financed by capital inflows. - Reserves - SBP’s foreign exchange reserves projected to improve to US$18 billion, equivalent to over 3 months of imports of goods and services. ### Economic Program — Fiscal Policy (A) - Overall objectives - Fiscal consolidation of around 4-4½ percent of GDP over the three-year program to place the debt-to-GDP ratio on a declining path. - An upfront adjustment of near 2 percent of GDP as prior action to restore policy credibility. - Revenue measures - Government measures to strengthen tax revenues by over 1 percent of GDP on an annualized basis. - 2013 Finance Bill seeks to increase revenues by 0.75 percent of GDP through: - increase in the GST rate; - increase in corporate minimum tax rate; - higher personal income tax rates for top income brackets; - higher excises on cigarettes; - increases in several withholding rates; - introduction of several withholding rates; - imposition of new levy on movable assets. - By end-December 2013 implement a new gas levy increasing tax revenue by 0.4 percent of GDP on an annualized basis. - Tax administration reforms: initiative to incorporate three hundred thousand new taxpayers into the income tax net launched in July; FBR access to bank information; issuance of ten thousand notices by end-July (prior action); increase risk-based tax audits to 4.2 percent of declarations (from 2.2 percent). - Structural benchmark: enhance revenue administration for sales, excises and customs to be developed and launched by end-December 2013. - Further measures: finalize plan to separate existing SROs by end-December 2013; introduce remaining FY14/15 finance bill by end-June 2014; approve legislation by end-December 2015 to permanently prohibit issuing tax concessions or exemptions through SROs except by an act of Parliament. - Expenditure measures - Phase out electricity subsidies over the program; periodic increases in average tariff aiming at eliminating the tariff differential subsidy for all consumers except the very lowest over the next three years. - First adjustments reduced subsidies by 0.75 percent of GDP on an annualized basis (prior action). - For first year maintain tariffs for consumers between 0-200 kWh consumption. - For the second and third years further reduce subsidies by roughly 0.4 percent of GDP per year to reach a maximum of 0.3 percent of GDP thereafter. - Across-the-board reduction of ministries’ nonwage current expenditures by 30 percent from the budget allocations—amounting about 0.15 percent of GDP (by ministerial decision). - Scaled back budgeted increase in capital spending and will delay some capital spending until gas levy revenues materialize. - Contingent and additional measures - Contingent measures to yield savings amounting to 0.5 percent of GDP, including reduced expenditure allocations in the first 9 months and use of reserves built into the capital expenditure budget if needed. - Stand ready to take any other measures needed to assure compliance with fiscal target. - Medium-term measures - Further fiscal consolidation of about 1¼ percent of GDP per year in the coming 2 fiscal years to reach around 3½ percent of GDP by 2016/17. - Roughly half of the adjustment to come from revenue side via widening tax base and improved tax administration. - Move GST to a full-fledged integrated modern indirect tax system with few exemptions and to an integrated income tax by 2016/17. - Reduce untargeted subsidies in 2014/15 and 2015/16; streamline wage and salary costs via civil service reforms. ### Social Protection and Targeting - Benazir Income Support Program (BISP) - BISP currently reaches 4.8 million families (16 percent of the population) within the two poorest quintiles. - For FY2013/14 approved increase in budget to PRs. 75 billion, translating into increase in benefits from PRs.1000 to PRs. 1200 per family per month reaching 5.7 million families. - Provide conditional cash transfers (CCTs) to primary education supporting 560,000 families in 20 districts with a benefit of Rs. 200 per child per month attending school. - Expansion plans: - FY2014/15: expand coverage of basic cash payments to 6.3 million families. - FY2015/16: expand coverage to 6.6 million families (24 percent of the population) and expansion of CCTs in at least 80 districts. - Complementary actions: phase-out non-targeted subsidies; strengthen technology-based platform linked with National ID database for effective delivery; explore evidence-based income generation schemes including microfinance, youth training, skills development and asset transfer schemes. ### Provincial Role and Fiscal Federalism - NFC and provincial finances - The most recent National Finance Commission (NFC) award grants 57.5 percent of most revenues to the provinces and devolves spending responsibilities and taxation authority in agriculture, property and services. - Agreement at the Council of Common Interest that the bulk of additional revenue generated by the program will be used for deficit reduction or saved. - Government has tightened balanced-budget requirement on provinces and provided incentives for them to maintain surpluses (prior action). - Negotiations on a new NFC award will begin before the end of FY 2013/14 to adjust terms of fiscal decentralization consistent with macroeconomic stability. ### Public Debt Management - Current structure and risks - Treasury bills amount to over half of domestic debt; National Savings Schemes account for almost a quarter; outstanding bonds amount to only 20 percent of domestic debt. - Around 60 percent of total domestic debt (including SBP Market Related Treasury Bills) has a maturity of less than a year. - Pakistan Investment Bonds average duration around 3½ years. - Debt management operations fragmented across several agencies; Debt Policy Coordination Office has only an advisory role. - Planned reforms - Revamp the Debt Policy Coordination Office into a debt management unit with enhanced authority to independently administer government financial obligations and cash flows. - Objectives: increase duration, lower interest rates and rollover risks, broaden investor base, improve benchmarking to develop deeper financial market. - Seek technical assistance from the IMF and the World Bank to develop a Medium Term Debt Strategy (MTDS). ### Monetary and Exchange Rate Policies (B) - Recent stance and liquidity - SBP pursued an accommodative monetary policy to stimulate the economy amid weak private investment and declining headline inflation. - Over the past two years, SBP reduced the policy rate by a cumulative 500 basis points to 9 percent. - In FY2012/13, SBP continued direct financing for the large fiscal deficit (about 20 percent of the reserve money). - Open market operations and foreign currency swaps have pumped additional liquidity into the market. - Outcomes - Despite falling net foreign assets (NFA), monetary aggregates have expanded relatively quickly. - Private credit has shrunk in real terms. *Source: Appendix I. Letter of Intent (Memorandum on Economic and Financial Policies for 2013/14–2015/16).* ### 17. To address declining reserves and a projected rebound in inflation, the SBP will adjust ### _cr13287 - 17. To address declining reserves and a projected rebound in inflation, the SBP will adjust ### Monetary and exchange rate policy - Objectives: rebuilding foreign exchange reserves and maintaining price stability. - Immediate actions: - The SBP began net purchases of foreign exchange in the interbank market, which since July 1 have totaled US$125 million (prior action). - The SBP will refrain from further net direct lending to the government. - Open market liquidity injections will be limited to those consistent with the program. - Program design and timeline: - Inflation reduction will not be a primary focus of the first year of the program to mitigate the impact of the envisaged fiscal contraction. - Beginning in 2014/15, monetary policy will aim to reduce inflation while continuing to rebuild foreign exchange reserves. - The program initially envisages a moderate monetary policy, with policy tightening in years two and three to bring inflation down to the 6-7 percent range. - Reserve losses exceeding $500 million in any 30-day period during the program will trigger consultation with IMF staff. - Monetary-fiscal interaction: - Monetary accommodation of fiscal deficits will be scaled back considerably. - Policy rates will be set prudently to ensure positive real interest rates. - Greater exchange rate flexibility will be allowed; intervention limited to building reserves, cushioning major shocks, and strengthening competitiveness. - The program envisages no further direct financing of the budget by the SBP including purchases of government papers on the primary market (continuous PC) and limits on Net Domestic Assets of the SBP. - The SBP’s short swap/forward foreign exchange position will be gradually scaled back to US$1.25 billion by the end of the program. ### Central bank governance and independence - Legislative reform: - Amendments to the SBP law will be enacted to strengthen the autonomy of the SBP, including full operational independence in its pursuit of price stability as its primary objective, complemented with enhanced governance structure including strong internal controls, by end-March 2014 (structural benchmark). - The amendments will establish an independent, decision-making monetary policy committee to design and implement monetary policy. - The amendments will also prohibit any form of new direct lending from the SBP. ### Financial sector condition and policy measures - System-wide assessment: - The banking system is generally well-capitalized, profitable, and liquid. - NPLs remain high but have come down since September 2011. - Growth in banks’ lending to private sector continues to be weak while banks’ holdings of government securities continue to expand. - Bank deposits continue to grow strongly, supported by branchless banking and a floor on deposit rates. - Capital adequacy shortfalls: - As of end-March 2013, four small banks (one state-owned and three private) comprising 6.7 percent of banking system assets fall below the minimum CAR of 10 percent of risk-weighted assets. - Immediate capital needs of these institutions are Rs. 12.6 billion (less than 0.1 percent of GDP). - SBP actions and benchmarks: - The SBP will prepare a more detailed plan by end December 2013 to achieve compliance of all banks that fall below minimum capital adequacy (structural benchmark). The plan will include contingency measures and alternatives if banks cannot raise expected capital. - State-Owned Banks: completion of recapitalization of the state-owned bank slightly below the CAR by end-December 2014. - Private Banks: three private banks below CAR—measures include capital subscription from a private foreign investor for one bank, issuance of non-cumulative perpetual preferred stock for another, and exploring merger or acquisition by a foreign investor for the third. All three must provide approved capital plans and complete required capital formation by end-December 2014. - Insolvency and deposit protection: - Consultations on the new bankruptcy law (Corporate Rehabilitation Act) are ongoing; draft law expected finalized by end-September 2014 and enacted by end-December, 2015. - Deposit insurance scheme: - Proposed initial coverage limit: Rs. 100,000 per depositor per bank. - Coverage: 72 percent of depositors and 40 percent of total insurable deposits. - The Deposit Protection Fund will be established as a subsidiary of SBP, funded by flat premium payments from banks. - Draft act for the Fund expected enacted by end-September 2014 (structural benchmark); scheme to begin operations by end-December 2015. - Regulatory and supervisory reforms: - Draft Securities Bill to enhance supervisory and enforcement power of the regulator to be submitted to Parliament by end-March 2014 and enacted by end-December 2014 (structural benchmark). - Securities and Exchange Commission of Pakistan (Regulation and Enforcement) Bill drafted and to be sent to parliament by March 2014. - Futures Trading Bill drafted and expected approval by end-December 2014. - SBP and SECP have agreed on a Memorandum of Understanding (MoU) for sharing information and regulatory assistance; will seek technical assistance from the IMF and World Bank to develop a legal framework for consolidated supervision, to be prepared by end-December 2015. ### Structural reforms and growth strategy - Growth context: - Average growth fell from around 5 percent (1995-2005) to around 3 percent since 2008. - Energy sector estimated to have lowered output by up to 2 percentage points per year. - Reform priorities: - Comprehensively tackle energy sector problems and undertake growth-promoting initiatives: improve investment climate, liberalize and simplify international trade regime, and reform/privatize public sector enterprises in key economic areas. ### Energy sector reforms — policy, implementation, and targets - Overarching policy: - A comprehensive energy policy covering supply chain, demand management, and pricing policies finalized at end-July 2013 and approved by federal government with provincial support. - An energy committee chaired by the Prime Minister established to meet regularly and take key decisions. - Price adjustments and subsidies: - Three-year plan developed to phase out Tariff Differential Subsidies (TDS) and bring tariffs to cost recovery. - Initial measures to begin by August 1, 2013 (prior action), including: - Notification of NEPRA determined tariffs for FY2012/13. - Phasing-out immediately the subsidy on industrial consumers and moving to minimum determined tariff on commercial, bulk and AJ&K consumers through increasing the weighted average notified tariffs by 50 percent. - Announce elimination and reduction of the subsidy on second group of consumers through increasing the weighted average notified tariffs by 30 percent effective from October 1, 2013. - Costs of servicing the syndicated term credit finance facility to be incorporated into the notified base tariff by end-December 2013. - In years two and three of the program, generate around 0.4 percent of GDP of savings per year through reduction in subsidies to 0.3-0.4 percent of GDP at the end of the program. - Tariffs for consumption between 0-200 kWh will be retained for now; income support programs to cushion the most vulnerable. - In years 2 and 3, subsidies phased out for users above 200 kWh and reduced for all but the lowest consumers in the 0–200 kWh range. - Arrears and circular debt resolution: - Out of Rs. 503 billion of payment arrears identified as of end-May 2013, Rs. 342 billion was paid off at end-June 2013; residual to be resolved by end-August 2013. - Expected impact: reduce load shedding by around three hours. - A professional audit firm to conduct a technical and financial audit of the system (including Power Sector Holding Company Limited) by end-November 2013 (structural benchmark); roadmap to prevent recurrence of payables to be designed based on findings. - Monitoring, enforcement, and legal measures: - Strengthened performance contracts with all power sector companies to tackle losses and raise payment compliance; remedial measures under the Companies’ Ordinance for non-compliance. - Government to enact pending amendments to the Penal Code 1860 and the Code of Criminal Procedures 1898 to strengthen legal framework against electricity theft by end-December 2013 (structural benchmark). - Drafting a new Electricity Act to modernize governance, establish investigation systems and a fast track judicial mechanism. - Empower DISCOs to take commercial decisions and impose differential outages on neighborhoods with low payment rates. - Move to a web-based reporting portal to monitor electricity draws; metering at the incoming and outgoing 11kv feeders to be completed by end-August 2013. - Lease fuel storage and delivery facilities to Pakistan State Oil (PSO) by end-December 2013 to minimize losses in fuel delivery to GENCOs. - Demand-side measures: - Place the Pakistan Energy Efficiency and Conservation Act before Parliament for expected approval by end-September 2013. - Enforce equipment performance standards covering key electrical and gas equipment and appliances. - Supply-side measures and capacity targets: - Prioritize use of gas and coal rather than fuel oil; encourage conversion of fuel oil-based GENCOs and IPPs to coal-based plants to reduce production costs. - Initiate regular efficiency testing of GENCOs by end-September 2013. - Current round of three rehabilitations to be completed by end-December 2013 with 500 MW capacity recovery and a 1–2 percent increase in efficiency. - Policies to promote private investment and expand IPP capacity; expansions expected to generate additional 2000 MW by 2016. - Governance, regulatory, and transparency improvements: - Augment independence, accountability, and administrative capacity of NEPRA. - Reduce NEPRA’s tariff determination period from 8–10 months to 90 days by the next determination cycle. - For FY2013/14: DISCOs will submit tariff petitions by end-July 2013; NEPRA will issue determined tariff by end-October 2013; government will notify new determined tariffs within 15 days. - Address court injunctions causing a lag of 7 months for application of fuel price adjustments (FPAs) and revise monthly application of FPAs to reflect next quarter’s prices by end-November 2013. - Introduce web-based reporting of dispatching, merit order of all power plants, and payment records to stakeholders by end-July 2013. - Make the Central Power Purchasing Agency (CPPA) operational by separating it from NTDC, hiring key staff, issuing CPPA rules and guidelines, and taking over payment and settlement system by end-December 2013 (structural benchmark). - Dissolution of PEPCO to be finalized by end-December 2013 and remaining functions devolved. - PSE reform and corporatization: - Transfer governance of DISCOs and the NTDC to new boards of directors and management by end-2013. - Build institutional capacity of WAPDA through corporatization and commercialization; allow tariff to incorporate capital investment plans and ensure timely payments by NTDC/CPPA for power purchased from WAPDA. - In the medium term, introduce competitive pricing and direct contracting between power producers and wholesale customers and incorporate this transition into future IPP solicitations. *Source: _cr13287 - 17. To address declining reserves and a projected rebound in inflation, the SBP will adjust* ### 34. Oil and Gas Sector. The current level of gas supply is barely one half of unconstrained ### 34. Oil and Gas Sector ### Gas supply and allocation - The current level of gas supply is barely one half of unconstrained demand due to low prices and insufficient investment. - To help tackle gas shortages: - Facilitate the import of Liquefied Natural Gas (LNG) and through pipelines. - Limit further expansion of the gas distribution networks for domestic consumption. - Accelerate new investment in existing fields, projected to increase supply by some 7 percent by end-December 2013. - Retain the priority ranking of the power sector to second (after households). - Divert an additional 16 percent of gas to the most efficient power plants. ### Gas pricing, fiscal treatment, and policy tools - New Petroleum Exploration and Production Policy 2012 announced to offer higher gas prices for enhanced production from existing and new fields. - As new production comes on line, the cost of this gas will be fully reflected in the base tariff on a semiannual basis. - Commitment to gradually rationalize gas prices to: - Continue encouraging new investment. - Promote efficiency in gas use. - Assure that there will continue to be no fiscal cost from the gas sector. - Structural benchmark: announce a rationalization plan and introduce the new gas levy by end-December 2013. - Structural benchmark (table): Announce a rationalization plan for gas prices which will involve a levy to generate 0.4 percent of GDP fiscal savings by end-December 2013. ### Losses, operational improvements, and institutions - Current level of unaccounted for gas losses (UFG) is on average 11 percent due to commercial and technical losses. - Directed companies to reduce losses benchmarking international standards through: - Investment measures. - Managerial and administrative improvements. - Building the capacity of the gas distribution companies. - Committed to enhancing the capacity of Oil and Gas Regulatory Authority (OGRA) and Ministry of Petroleum and Natural Resources. --- ### Business Climate ### Key impediments - Legal framework weaknesses for creditors’ rights and contract enforcement. - Barriers to new business start-ups. - Complicated legal and taxation requirements. - Impaired access to finance. ### Policy actions and timelines - Contract enforcement: - Consult with stakeholders to finalize a new draft bankruptcy law (Corporate Rehabilitation Act) and submit for public consultation by end-September 2013 (¶22). - Send to parliament by end-September 2014. - Undertake a diagnostic of needs to speed up rehabilitation of weak but viable corporate entities and expedite liquidation of insolvent entities. - Provide Alternative Dispute Resolution (ADR) Mechanism (already functional in Karachi). - Start-ups: - Establish a “one stop shop” (OSS) for registering limited liability companies (LLC), including human resource and funding needs by end-December 2013. - By end-September 2013, BOI, in coordination with SECP, FBR, provincial governments and other agencies, will develop a plan to further simplify procedures and costs for setting-up businesses. - Access to credit: - Build on the State Bank of Pakistan’s Financial Inclusion Program to enhance access of micro and small enterprises to financial services (regulatory reforms, product innovation, delivery mechanisms, financial literacy, consumer protection). --- ### Trade Policy ### Objectives - Increase consumer welfare and stimulate growth via increased competition. - Simplify tariff rates, eliminate statutory regulatory orders (SROs) that establish special rates and/or nontariff trade barriers in some 4,000 product areas, and normalize trade relations. ### Policy actions and timelines - Tariff simplification: - Begin work to return to the 2003 framework, with 4 slabs and 0 to 25 percent rates. - Design of the new system to be completed by end-December 2013. - Application of revised tariff rates and begin phase-out of trade SROs by June 2014. - Implementation of the new trade framework to be completed by end-June 2016. - Normalizing trade relations: - Move forward with eliminating the negative list on trade with India and extending India most favored nation status, shifting to “sensitive list” under SAFTA. - Develop strategy to take full advantage of trade preferences available from the EU (autonomous trade preferences in 75 items). - EU is considering request for GSP plus benefits (zero percent duty) from January 1, 2014 on exports. --- ### Public Sector Enterprises (PSEs) ### Strategy and scope - Time-bound strategy for 65 PSEs approved for privatization by the Council of Common Interest (CCI) to: privatize firms, restructure firms with profitability prospects to retain in public sector, or close nonviable firms. - Strategy will include financial statements and detailed information on government liabilities. ### Targets and measures - Privatization: - Strategy for 30 firms to be announced by end-September 2013 (structural benchmark); plans for remainder completed by end-December 2013. - Restructuring: - Hiring professional chief executives and board members for enterprises with corporate structure in line with corporate governance rules. - Developing medium-term action plans for Pakistan International Airlines (PIA), Pakistan Steel Mill, and Pakistan Railways, including partial privatization through initial or secondary public offerings. ### Company-specific actions and timelines - Pakistan International Airlines (PIA): - Restructuring plan includes stripping nonviable components into PIA2 by end-December 2013. - Service guaranteed past loans of PIA2, apply a voluntary “handshake” plan for excess workforce and liquidate by end-June 2014. - PIA to retain serviceable liabilities, streamline workforce, receive government capital injection. - Plan to privatize 26 percent of PIA’s shares to strategic investors by end-June 2014 (structural benchmark). - Continue leasing more efficient airplanes and rationalizing routes; shifting non-flight activities to a new subsidiary could be an option. - Pakistan Steel Mill: - Appointed a professional board and secured a commercial credit line mostly from private banks to pay loans, wages, and raw materials. - Privatization commission and Cabinet Committee on Restructuring to approve a new comprehensive restructuring plan by end-September 2013, with immediate implementation thereafter. - Pakistan Railways: - Develop a comprehensive restructuring plan by end-March 2014. - Convert railways company from a government department to a state-owned limited liability company. - Other companies: - Identify companies for quick privatization in financial and energy sectors. - Plan to include block sales, secondary public offerings, or international listings. - Hire transaction advisors by end-December 2013 to sell residual shares in two major companies already in private hands and to undertake operations for minority stake sales. --- ### Financing ### Overall gap and commitments - Current projections suggest a financing gap of US$15 billion through June 2016, almost half to be filled by the extended arrangement under the EFF. - Roughly US$3.5 billion expected from estimated improvement in the balance of payments due to program adjustment measures. - Additional external financing assurances expected from: - World Bank: $1.5 billion - Asian Development Bank: $1.6 billion - United Kingdom: $0.5 billion - United States: $0.4 billion - Others: $1.5 billion - Firm commitments that financing will be in place for the first 12 months of the arrangement. --- ### Program Issues and Monitoring ### Risks - High vulnerability to increases in oil prices. - High reliance on textile exports makes volatility in international cotton prices a key risk. - A further economic slowdown in trading partner countries, including Europe, would adversely affect exports. - A scaling back of workers’ remittances would undermine the external position. ### Monitoring and reviews - Program subject to quarterly reviews, quarterly performance criteria and continuous performance criteria as set out in the TMU. - Completion of the first two reviews scheduled for December 2, 2013 and March 2, 2014 will require observance of quantitative performance criteria for end-September 2013 and end-December 2013, respectively, and continuous performance criterion as specified in Table 1. - Commitment to provide detailed statistical information as specified in the TMU. - Continue to improve economic statistics, including beginning to produce quarterly national accounts data and by improving coverage and organization of fiscal data. - An updated safeguards assessment of the SBP will be conducted in the context of the first review. --- ### Quantitative Targets, Definitions, and Technical Parameters ### Selected numeric program parameters and definitions - Program exchange rate of the Pakistani rupee to the U.S. dollar is set at 99.66 rupee per one U.S. dollar. - Gold is valued at 35 SDR (US$52.5) per fine troy ounce. - On July 1, 2013, the net international reserves (NIR) of Pakistan amounted to US$-2,437 million. - Performance criteria include: - Floor on the net international reserves (NIR) of the State Bank of Pakistan (SBP) (millions of U.S. dollars). - Ceiling on the net domestic assets (NDA) of the SBP (stock, billions of Pakistani rupees). - Ceiling on the overall budget deficit excluding grants (cumulative flows, billions of rupees). - Ceiling on net borrowing from the SBP by the government (including provincial governments, stock, billions of rupees). - Ceiling on SBP’s stock of net foreign currency swap/forward contracts (millions of U.S. dollars). - Continuous performance criterion: - Ceiling on the accumulation of external payment arrears by the general government. - Indicative target: - Floor on targeted cash transfers spending (BISP) (cumulative, billions of Pakistani rupees). *Source: IMF country memorandum content (August 19, 2013 technical material and related program text).* ### 6. Aggregate net position in the foreign exchange derivatives is defined as the aggregate ### 6. Aggregate net position in the foreign exchange derivatives is defined as the aggregate ### Definitions of monetary and fiscal aggregates (¶6–14) - Aggregate net position in foreign exchange derivatives: - Defined as the aggregate net positions in forward and futures in foreign currencies of the SBP vis-à-vis the domestic currency (including the forward leg of currency swaps). - The SBP’s aggregate position was US$–2.2 billion at end-June 2013. - Reserve money (RM) (¶7): - RM is defined as the sum of: - currency outside schedule banks (deposit) money banks); - schedule banks’ domestic cash in vaults; - schedule banks’ required and excess rupee and foreign exchange deposits with the SBP; - deposits of the rest of the economy with the SBP, excluding those held by the federal and provincial governments and the SBP staff retirement accounts. - Net domestic assets (NDA) of the SBP (¶8): - NDA = RM minus NIR, minus other assets not included in gross official international reserves, minus commercial bank required and excess reserves at the SBP in foreign currency, plus medium and long-term liabilities (i.e., liabilities with a maturity of one year or more) of the SBP, plus other foreign liabilities not included in official reserve liabilities, minus the balance of outstanding Fund purchases credited to the government account at the SBP. - NDA is composed of net SBP credit to the general government plus outstanding credit to domestic banks by the SBP (including overdrafts) minus liabilities not included in RM and other items net. - Net SBP credit to the government (¶9): - Defined as SBP claims on the government minus government deposits with the SBP. - SBP claims on the government include government securities, treasury bills, 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 (Table 4). - Net purchase of foreign exchange (¶10): - Defined as outright purchase of foreign exchange minus outright sale of foreign exchange in the foreign exchange spot market as net addition to the stock of NIR of the SBP by using foreign exchange market intervention. - External public debt arrears (¶11): - Defined as all unpaid debt-service obligations (i.e., payments of principal and interest) of the general government (government, SBP, and state-owned enterprises) to non-residents arising in respect of public sector loans, debt contracted or guaranteed, including unpaid penalties or interest charges associated with these obligations that are beyond 30 days after the due date. - The definition of debt, for the purposes of the EFF, is set out in Point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Executive Board Decision No. 6230–(79/140), last amended by Executive Board Decision No. 14416–(09/91), adopted August 31, 2009). - The ceiling on external payment arrears is set at zero. - Overall budget deficit (excluding grants) monitoring (¶12): - Will be monitored quarterly under the cash balance of the general government balance, excluding grants, including operations of district governments financed from local funds. - Measured below the line and will include: - Net external financing, excluding valuation gains and losses. - Change in net domestic credit from the banking system, excluding valuation gains and losses from deposits denominated in foreign currency. - Change in the net domestic nonbank financing, excluding valuation gains and losses. These include: - (i) domestic privatization receipts transferred from the privatization accounts to the budget, - (ii) the stock of issued government securities held outside the general government and the banking system, net of valuation changes, - (iii) net deposits and reserves received by the government (public accounts deposits), - (iv) any other government borrowing from domestic nonbank sources net of repayments, - minus (v) government deposits with nonbank financial institutions. - Total external grants to the federal and provincial governments, defined as the sum of project grants, cash external grants for budgetary support, capital grants reflecting the principal amounts of external debt cancellation or swaps, and other grants. - Net external program financing (¶13): - Includes external privatization receipts; budget support grants; budget support loans from multilateral (other than the IMF, but including World Bank and Asian Development Bank (ADB) budget support and program 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 (the latter including any accelerated amortization including related to debt swaps or debt cancellation recorded as capital grants). - Also includes foreign loans on lent to financial institutions and companies (public or private) and emergency relief lending. - Program financing excludes all external financing counted as reserve liabilities of the SBP (defined above). - Amounts projected for net external program financing and external grants are provided in Table 3. - Net external budget financing (¶14): - Defined as net external program financing minus privatization receipts, minus budget support grants, plus all other external loans for the financing of public projects or other federal or provincial budget expenditures, plus transfers of external privatization receipts from the privatization account to the budget. ### Electricity Tariff Pricing Formulas and Definitions (¶15) - Increase in weighted average tariffs by 50 percent on industrial, commercial, bulk and AJ&K consumers: - Weighted Average Notified Tariff for industrial, commercial, bulk and AJ&K consumers = - (Changes in the Industrial Users Tariff Rate for each category x DISCO’s estimated sales to Industrial Users for each category - + Change in the Commercial Users Tariff Rate for each category x DISCO’s estimated sales to Commercial Users for each category - + Change in the Bulk users’ Tariff Rate for each category x DISCO’s estimated sales to Bulk Users for each category) - + Change in the AJ&K users’ Tariff Rate for each category x DISCO’s estimated sales to AJ&K Users for each category) - / DISCO’s total sales to Industrial, Commercial, Bulk, and AJ&K Users - = 50 percent - Elimination and reduction of the subsidy on second group of consumers by October 1, 2013 through increasing the weighted average notified tariffs by 30 percent: - Second group of consumers is defined as: - (i) those with consumption levels above 200kWh, - (ii) Salinity Control & Reclamation Programme (SCARP), - (iii) Agricultural tube wells consumers, - (iv) Other customers (public lighting, housing schemes, railways, HVTL). - Weighted Average Notified Tariff for second group of consumers = - (Change in the Tariff Rate of users whose consumption levels are above 200kWh x Revenue from users whose consumption levels are above 300kWh - + Change in the Tariff Rate of users in SCARP x DISCO’s estimated sales to users in SCARP - + Change in the Tariff Rate of users in Agricultural tube wells x DISCO’s estimated sales to users in Agricultural tube wells - + Change in the Tariff Rate of Other users x DISCO’s estimated sales to Other customers) - / DISCO’s total estimated sales to users whose consumption levels are above 200kWh, SCARP, Agricultural tube wells and other consumers. - = 30 percent ### Adjustors to program floors and ceilings (¶16–18) - NIR floor adjustor (¶16): - The floor on NIR will be adjusted upward (downward) by the cumulative excess (shortfall) of multilateral and bilateral creditors, Coalition Support Fund (CSF), and bond issuance relative to projected inflows (Table 2). - Gross cumulative inflows are defined as external disbursements (including grants) from official multilateral creditors (World Bank, Asian Development Bank, Islamic Development Bank), official bilateral creditors (UK-DFID, USAID), and external bond placements that are usable for the financing of the central government budget. - NDA ceiling adjustor (¶17): - The ceiling on NDA will be adjusted downward (upward) by the cumulative amount of any excess (shortfall) of budget support loans or budget support grants compared to the program amounts (Table 3) and Euro bond issuance or project grants compared to projected inflows (Table 2). - Budget support grants to the public sector are defined as grants received by the government (including provincial governments) for direct budget support from external donors and not related to the projected financing. - Budget support loans to the public sector are defined as disbursements of loans from bilateral and multilateral donors for budget support (including provincial governments). - Consolidated overall budget deficit ceiling adjustor (¶18): - The ceiling on the consolidated overall budget deficit (excluding grants) will be adjusted upward for the cumulative excess in net external program financing in rupee terms for up to: - PRs 25.0 billion at end-December 2013, - PRs 42.0 billion at end-March 2014, - and 50 billion at end-June 2014. - The ceiling will be adjusted downward for any shortfall in federal PSDP spending below: - PRs 25 billion in September-2013, - PRs 80 billion in December 2013, - PRs 243 billion in March 2014, - and PRs. 410 in June 2014; - and for any shortfall in the targeted cash transfers (BISP) from their indicative target. ### Program reporting requirements and data transmission (¶19 and reporting table) - Authorities (SBP, Ministry of Finance, Ministry of Water Power, PBS, FBR) will transmit promptly to IMF staff any data revisions and other information necessary to monitor the arrangement. - Selected reporting items, descriptions, frequency, and timing (exact wording and timing preserved): - State Bank of Pakistan (SBP): - SBP balance sheet — Summary — Weekly — First Thursday of the following week. - SBP balance sheet — Summary at program exchange rates; and by official exchange rates — Monthly — Within 15 days of the end of each month. - Monetary survey — Summary banking system balance sheet for the central bank at both program exchange rates and by chart of accounts at actual official exchange rates; the consolidated balance sheet of commercial banks at actual official exchange rates — Monthly — Within the first three days of the following month. - International reserves — By (i) program exchange rates; and (ii) at actual official exchange rates — Daily — The following working day. - Foreign exchange market — Market exchange rates (buying and selling); weighted average customer exchange rate; daily trade volume, and weighted average exchange rate of the interbank, the KERB market — Daily/Monthly — Within one day/ monthly within 6 working day. - Foreign exchange market — SBP foreign exchange operations, and intervention,(average exchange rate, volume) — Daily — Within one day. - Foreign exchange market — SBP operation against the domestic currency in swap/forwards by average exchange rate, maturity, volume — Daily — Within one day. - Foreign exchange market — Outstanding swap/forward positions by maturity buckets — Monthly — Third working day of the following month. - Interbank money market — Daily interbank repo volume and interest rate of trades — Daily — Within one day. - SBP operations — Repo (reverse repo) operations, open market operations, standing facility, deposit facility — Weekly — First Monday of the following week. - Bank liquidity — Excess reserves, in local currency — Bi-weekly — With a lag of 15 days. - T-bill and coupon bond financing, SBP securities — Auction data: date, original and remaining maturities, issuance volume, allocation, average yield and coupon yield (if available) — Bi-Weekly — Last working day of the fortnight. - Banking data — Sectoral distribution of loans and deposits; dollarization of loans and deposits; deposit and lending rates, by maturity — Monthly — Within 25 days of the end of each month. - Loan maturities — Quarterly — Within 45 days of the following quarter. - Banking indicators — Capital adequacy; asset composition and quality; profitability; liquidity; open FX positions — Quarterly — Within 45 days of the following quarter. - Banking sector stress tests — Results of stress tests on exchange rate, liquidity, and credit risk — Quarterly — Within first week of the following quarter. - CPI — Index of core inflation — Monthly — Within 21 days of the end of each month. - Transfers — Noncommercial transfers of individual, including workers’ remittances — Monthly — Within 25 days of the following month. - Other monetary data — IFS format — Monthly — Within 45 days of the end of each month. - Balance of payments — Detailed export and import data; Detailed balance of payments data — Monthly — Within 28 days of the end of each month. - Ministry of Finance (MOF): - Revenue collection — FBR — Total revenue collected separately by the tax administration and customs administration, including revenue by individual tax, and social contributions — Monthly — Within 7 days of the end of each month. - Domestic expenditure arrears — All unpaid claims outstanding at the end of the month which includes wages, social contributions (including for pensions), family allowances, and amortization and domestic interest payments — Monthly — Within 45 days of the end of each month for government arrears. - Privatization receipts — Balance on the SPA; gross inflows into and outflows from the SPA during the month, specifying the nature of each transaction — Quarterly — Within seven days of the end of each month. - External debt — Disbursements and stock of outstanding short-term and contracting or guaranteeing and outstanding stock of medium-and long-term external debt of the government, the SBP, and state-owned companies; any stock of arrears on external debt service and outstanding stock of government guarantees and external arrears — Monthly — Within 25 days of the following month. - Consolidated federal government — State budget — Monthly — Within 30 days of the end of each month. - Consolidated general government — Federal and provincial governments, including further sub-national levels — Quarterly — Within 60 days of the end of each quarter. - Consolidated general government — Federal and provincial governments, including further sub-national levels — Annual — Within 180 days of the end of each year. - Budget execution — All cash receipts, cash expenditures, including domestic and external debt-service payments, external and domestic borrowing operations, and inflow of grants to the central government; expenditure data will be provided according to both economic and functional classifications — Monthly — Within one month following the end of each quarter. - Pakistan Bureau of Statistics (PBS): - SPI, CPI, WPI — Detailed monthly price indices — Monthly — Within five days of the following month. - Federal Bureau of Statistics (FBR) reporting lines included: - Tax arrears — By category — Quarterly — Within five days of the end of each month. - Tax arrears — By type of tax — Quarterly — Within 30 days of the end of each quarter (monthly data provided on a quarterly basis). - Tax credits — For or the 30 largest debtors and for all major companies in the energy, water, and irrigation sectors — Quarterly — Within 30 days of the end of each quarter. - VAT refund claims in arrears — Detailed data, by type of tax, of outstanding tax credits for all types of tax revenues — Monthly — Within 45 days of the end of each month (monthly data provided on a quarterly basis). - VAT refund claims in arrears — Detailed data on VAT refunds in arrears which include all outstanding VAT refunds that have not been accepted (and refunded), or offset (in full or in part), or rejected (in full or in part) after the 90 day statutory processing period. Number of refund applications processed per month — Quarterly — Within 45 days of the end of each month (monthly data provided on a quarterly basis). - Large taxpayers — Data on the number of taxpayers and amount of taxes managed by the large tax inspectorate — Monthly — Within 45days after the end of each month. - Import data — Items requested include: 1. Total value of recorded imports, breaking out raw diamond imports; 2. Total value of non-duty free recorded imports; 3. Number of total transactions involving recorded imports; 4. Number of total transactions involving non-duty free recorded imports; 6. Value of non-duty free recorded imports where customs value was assessed using transaction prices; 7. Number of transactions involving recorded imports where customs value was assessed using transaction prices. *Source: IMF staff report text.* ### 8. Number of transactions involving non duty free ### 8. Number of transactions involving non duty free ### Customs, VAT, and Refunds Reporting - Data items and timing: - Number of transactions involving non duty free recorded imports where customs value was assessed using transaction prices — Frequency: Quarterly — Timing: Within 30 days of the end of each quarter. - Automated VAT refunds: - Number of refunds that were processed automatically (share of total refunds); - Total value of automated and automatic refunds and offsets; - Average waiting time (days) to receive refund. - Frequency: Monthly (monthly data provided on a quarterly basis) — Timing: Within 45 days of the end of each month. - Risk-based selection approach: - Percentage of selected companies chosen on the basis of risk-based approach; - Identified revenue from risk-based audits. - Frequency: Quarterly (monthly data provided on a quarterly basis) — Timing: Within 45 days of the end of each month. ### Power Sector and Ministry of Water and Power Reporting - Key Power Sector Statistics (template referenced) — Frequency: Cumulative Monthly. - Cumulative Monthly Subsidy Position (Rs. Billion) — Frequency: Monthly. - PEPCO Month End Payables and Receivables Positions And Aging Schedule, Rs. Billion — Frequency: Monthly. - Receivables Positions - Total and DISCO-wise Break-up — Frequency: Monthly. - CPPA/PEPCO Month-wise Consolidated Cash Flow — Frequency: Monthly. - AT&C Statistics — Frequency: Monthly. - TDS Claims by DISCOs and Total — Frequency: Monthly — Timing: Within 30 days of the end of each month. - Inter Corporate Circular Debt Sheet Prepared by Ministry of Finance — Frequency: Monthly. - DISCOs Consolidated Income Statement — Frequency: Monthly. - Net Electrical Output & Power Purchase Price by Source, GWh — Frequency: Monthly. - Generation, Demand and Shortfall for FY10 to date — Frequency: Monthly. - Net Electrical Output (MkWh) Plant and Fuel-wise Detail — Frequency: Monthly. - Working Capital Loans for each loan type — Frequency: Quarterly — Timing: Within 30 days. - Determined and Notified Tariff’s for each User and User Group (template referenced) — Frequency: Annual — Timing: Within 30 days of determination and notification. ### Table 1 — Exchange Rates of the SBP (As of June 28, 2013 in U.S. dollars per currency) - Currency / Rupee per Currency / Dollars per Currency: - EUR 130.18 1.31 - JPY 1.01 0.01 - CNY 16.24 0.16 - GBP 151.80 1.52 - AUD 92.11 0.92 - CAD 95.04 0.95 - THB 3.21 0.03 - MYR 31.54 0.32 - SGD 78.77 0.79 - INR 1.68 0.02 ### Table 2 — Projected Disbursements to Pakistan (In millions of US dollars) - Period columns: Sep-13 / Dec-13 / Mar-14 / Jun-14 - Gross Inflows: 939 / 1,388 / 2,371 / 2,943 - Multilateral and bilateral disbursement: 639 / 822 / 1,471 / 1,509 - of which: project grants: 77 / 80 / 94 / 98 - Bond issuance: 0 / 0 / 0 / 0 - Coalition Support Fund: 300 / 300 / 300 / 300 - Other 1/: 0 / 266 / 600 / 1,134 - Debt service: 820 / 1,013 / 583 / 809 - Memorandum items: - Gross International Reserves: 5,640 / 5,328 / 7,198 / 9,566 - Net International Reserves: -2,499 / -2,090 / -141 / 2,532 - Note: 1/ includes privatization and 3G licenses. ### Table 3 — External Inflows to the General Government (In millions of U.S. dollars) - Period columns: Sep-13 / Dec-13 / Mar-14 / Jun-14 - Non Tax Revenue: 300 / 300 / 900 / 900 - Coalition Support Fund: 300 / 300 / 300 / 300 - 3G Licenses: 0 / 0 / 600 / 600 - Grants: 67 / 150 / 183 / 183 - External interest payments: 209 / 311 / 211 / 291 - Net external debt financing: -115 / -110 / 722 / 1109 - Disbursements: 495 / 592 / 1093 / 1628 - of which budgetary support: 0 / 0 / 75 / 575 - Amortization: 611 / 702 / 372 / 519 - Privatizations: 0 / 266 / 0 / 534 - Memorandum item — Program financing: 67 / 416 / 308 / 842 ### Table 4 — Government Sector (Budgetary Support) (End-of-period stocks/Rs. in Millions) - Item entries for 30-Jun-12 and 30-June-13: - A. Central Government: 4,064,537 / 5,561,908 - Schedule Bank: 2,360,271 / 3,320,870 - Government Securities: 829,485 / 1,117,115 - Treasury Bills: 1,928,287 / 2,611,512 - Government Deposits: -397,501 / -407.757 - State Bank: 1,704,266 / 2,241,037 - Government Securities: 3,131 / 3,111 - Accrued Profit on MRTBs: 43,935 / 44,888 - Treasury Bills: 1,759,696 / 2,275,184 - of which: MTBs created replenishments of cash balances: 1,759,187 / 2,274,675 - Treasury Currency: 8,653 / 8,653 - Debtor Balances (Excl. Zakat Fund) — Government Deposits (Excl. Zakat and Privatization Fund): -116,611 / -96,260 - Payment to HBL on a/c of HC&EB: -287 / -287 - Adjustment for use of Privatization Proceeds for Debt Retirement: 5,749 / 5,749 - B. Provincial Governments: -264,620 / -315,607 - Scheduled Banks: -266,362 / -287,393 - Advances to Punjab Government for Cooperatives: 1,024 / 1,024 - Government Deposits: -267,386 / -288,417 - State Bank: 1,742 / -28,214 - Debtor Balances (Excl. Zakat Fund): 26,737 / 13,715 - Government Deposits (Excl. Zakat Fund): -24,996 / -41,930 - C. Net Govt. Budgetary Borrowings from the Banking system: 3,799,917 / 5,246,300 - D. Through SBP: 1,706,008 / 2,212,823 - Through Scheduled Banks: 2,093,909 / 3,033,477 - Memorandum Items: - Accrued Profit on SBP holding of MRTBs: 43,935 / 44,888 - Scheduled banks’ deposits of Privatization Commission: -4,287 / -5,433 - Outstanding amount of MTBs (Primary market; discounted value): 1,835,265 / 2,529,412 - Net Govt. Borrowings (Cash basis): - From Banking System: 3,667,246 / 5,124,746 - From SBP: 1,662,073 / 2,167,935 - From Scheduled Banks: 2,005,173 / 2,956,811 ### Relations with the Fund and Institutional Context (as of June 30, 2013) - Membership Status: - Joined: 07/11/1950; Article VIII - General Resources Account (SDR Million / Percent Quota): - Quota: 1.033.70 / 100.00 - Fund Holdings of Currency: 3,881.53 / 375.50 - Reserve Tranche Position: 0.12 / 0.01 - SDR Department (SDR Million / Percent Allocation): - Net cumulative allocation: 988.56 / 100.00 - Holdings: 573.07 / 57.97 - Outstanding Purchases and Loans (SDR Million / Percent of Quota): - Stand-by Arrangements: 2,550.96 / 246.78 - Emergency Assistance 1/: 296.98 / 28.73 - ECF Arrangements 2/: 68.91 / 6.67 - Notes: - 1/ Emergency Assistance may include ENDA, EPCA, and RFI. - 2/ Formerly PRGF. - Latest Financial Arrangements (type / date / expiration / amount approved (SDR Million) / amount drawn (SDR Million)): - Stand-by: 11/24/2008 — 09/30/2011 — 7,235.90 — 4,936.04 - ECF: 12/06/2001 — 12/05/2004 — 1,033.70 — 861.42 - Stand-by: 11/29/2000 — 09/30/2001 — 465.00 — 465.00 - Projected Payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs) — Forthcoming by year: - 2013 / 2014 / 2015 / 2016 / 2017 — Principal: 1,234.52 / 1,379.29 / 303.04 - Charges/Interest: 14.94 / 13.10 / 2.21 / 0.34 / 0.34 - Total: 1,249.46 / 1,392.39 / 305.26 / 0.34 / 0.34 - Safeguards Assessment summary: - March 2010 update found: - (i) Continued efforts to strengthen safeguards framework at the SBP, including improved transparency and a more proactive Audit Committee role. - (ii) SBP’s legal framework continues to present a safeguards risk due to unclear timetable for enacting amendments to the SBP Act. - (iii) Treatment and use of Fund resources for budgetary support clarified in agreement between SBP and Ministry of Finance. - Authorities implemented some recommendations; latest amendment to the SBP Act does not cover safeguards risks raised previously. - Exchange Rate Arrangement: - On May 19, 1999, the dual exchange system was unified; interbank market exchange rate (FIBR) used for international transactions. - De facto exchange rate arrangement classified as “floating”. - De Jure exchange rate arrangement: managed floating with no predetermined path. - SBP intervenes in foreign exchange market but does not publish information regarding interventions. - Pakistan has accepted the obligations of Article VIII, sections 2, 3, and 4; system free of restrictions on payments and transfers for current international transactions. - Last Article IV Consultation: - Country Report 12/35 discussed by the Executive Board on January 23, 2012. - FSAP and ROSCs: - Last FSAP: September 2008 (report not published). Previous FSAP: February and April 2004 (published). - Data Module, Reassessment of Monetary Statistics and Detailed Assessment Using Quality Assessment Framework completed November 2006 (published). - Fiscal transparency fiscal module update prepared April 2008 (published). Original fiscal ROSC November 2000; update December 2004. - Resident Representative: - Mr. Mansoor Dailami started assignment in Islamabad in January 2013. - Recent Technical Assistance (selected entries by department and year): - FAD: January 2002; January 2003; February/March 2003; April 2004; April 2007; July and November 2009; July 2010. - MCM: November/December 2004; March/April 2005; December 2006; April 2007; April 2011; October 2011; November 2012; June 2013. - STA: February 2002; April/May 2005; May 2007; October 2009; March 2011; January 2012. - LEG: July 2008; July 2008; August 2008. *Source: _cr13287 - 8. Number of transactions involving non duty free* ### 5. IFC is an integral part of the World Bank Group’s program in Pakistan. The IFC strategy in ### _cr13287 - 5. IFC is an integral part of the World Bank Group’s program in Pakistan. The IFC strategy in ### IFC strategy and activities - IFC seeks to continue expanding investments in sectors with the highest potential development impact and opportunities, including: - infrastructure (e.g. renewable energy, ports) - financial markets (e.g. SME support through access to finance, housing finance) - manufacturing and services (e.g. agribusiness, technical education) - IFC is also focused on successful implementation of advisory programs designed to: - improve the business enabling environment - strengthen financial markets - support development of small businesses ### MIGA engagement - Pakistan is a focus country for MIGA; MIGA has already provided guarantees in hydropower and microfinance. - MIGA’s forward strategy seeks to support: - investments into IDA countries - South-South investments - complex infrastructure projects - investments into conflict-affected areas ### World Bank key principles of engagement in Pakistan - (i) delivering fewer but larger operations to allow the Bank to focus its limited resources on strategic areas where the needs are the greatest; - (ii) increasing the use of performance-based instrument; - (iii) strengthening attention to implementation, results and communications; - (iv) deepening the engagement with the provinces, which will require significant attention to capacity support; - (v) leveraging partnerships for shared objectives; - (vi) for MDTF, start small and scale up success. - The Bank would not be able to provide policy support unless the macro-economic conditions improve, but will remain engaged in revenue mobilization and power through: - analytical work - ongoing projects - exploring results based operations ### Country Partnership Strategy (CPS) timeline - The current CPS implementation period is ending in June 2014. - The Bank started preparation for the new Country Partnership Strategy in parallel to avoid a gap. - The new CPS covering the five-year period from 2015-19 is scheduled for Board presentation in June 2014. - Implementation of this new strategic framework will start from July 1, 2014. ### IBRD/IDA financial operations since FY2006 (as presented) - Header: Pakistan: World Bank Group Financial Operations - Presented lines (preserve original numeric strings exactly as in source): - FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 - IBRD315100174002615000 - IDA1183885371 1610300 1292 1290744 - IBRD252254569186359285 - IDA1555 1716267 1333963772565447 - IBRD297273295273225172157162 - IDA117170143181165169190182 - US$ million - Commitments - Disbursements - Repayments ### Relations with the Asian Development Bank (ADB) - ADB has provided more than $20 billion in assistance since 1968 through ADF and OCR windows. - ADB’s CPS 2009-2013 (endorsed January 2009) supports sustainable and inclusive growth, facilitating structural change, investment and institutional effectiveness. - Main areas of current ADB operations in Pakistan: - (i) energy; - (ii) infrastructure investments in transport, logistics and irrigation; - (iii) reforms in key sectors including energy, finance, agriculture and industry; - (iv) urban services, including water, waste management and transport. - Multi-tranche financing facilities (MFFs): - 8 active MFFs: energy (4, $2.89 billion total); transport (2, $1.67 billion total); irrigation (1; $700 million) and urban services (1, $300 million). - Of the total $5.76 for all eight MFFs, $2.5 billion has been committed for subprojects and tranches, with $3.0 billion available for new projects. - For 2012, three more periodic finance requests (PFR) in power, irrigation and urban services for a combined amount of $417 million were approved. - Current portfolio total value: about $3.0 billion, composition: - energy: $1.1 billion - emergency assistance (floods): $650 million - agriculture and irrigation: $611 million - transport: $400 million - other: $138 million - A new CPS for 2014-2018 is being prepared, continuing focus on inclusive growth through infrastructure development and reforms in key sectors. - Trade Finance Facilitation Program (TFFP): - Provided trade finance support to nine Pakistani banks. - TFFP has supported over $2.0 billion in trade in Pakistan through guarantees, working with 13 participating and 3 issuing banks in Pakistan. ### ADB contact (as presented) - Dawn Elizabeth Rehm - Senior Economist - Asian Development Bank-Pakistan Resident Mission - Tel +92 51 208 7300 x345 - Fax +92 51 208 7397 & 98 - derehm@adb.org ### Statistical issues (as of June 30, 2013) — assessment and data adequacy - General: Data provision has some shortcomings, but broadly adequate for surveillance. - National Accounts: - In 2013, Federal Bureau of Statistics (FBS) completed rebasing and revising national accounts from fiscal year 1999/2000 to 2005/06 to align with 2008 SNA. - Methodology changes: value-added at basic prices (instead of factor cost), double deflation, FISIM. - PBS compiled national accounts on basic prices; finance and insurance sectors revamped; transport, storage and communication coverage expanded. - Current national accounts series goes back only to 2005/06; FBS working to produce backward linking to 1999-2000 by December 2013. - FBS intends to produce quarterly national accounts (QNA) completed by November 2013. - FBS compiled and started releasing quarterly employment/unemployment data; first release February 2011 including 5 years of historical data; investigating feasibility of disseminating wages/salaries. - Price statistics: - FBS produces CPI, WPI (monthly), and SPI (weekly; 46 essential commodities). - CPI and WPI follow international guidelines. - COICOP classification introduced with rebasing to 2007/08 in August 2011; CPI changes included updated weights, expanded item and geographic coverage. - Plans to develop a Producer Price Index (PPI); IMF providing technical assistance. - Government finance statistics: - Concepts broadly based on GFSM 1986; privatization proceeds included below the line. - Central government data scope limited (does not cover extra budgetary funds). - Classification and sectorization follow GFSM 1986 to a limited extent; expenditure classification mixes economic and functional classifications. - Basis of recording GFS is on, or close to, a cash basis; transactions recorded gross; corrective transactions not necessarily made in original period. - Authorities intend to adopt GFSM 2001 methodology over the medium term; compiled fiscal tables in GFSM 2001 presentation with staff assistance. - Improvements are needed; progress underway via Project for the Improvement of Financial Reporting and Auditing (PIFRA). - Budgetary central government operations data regularly reported for GFS Yearbook using GFSM 2001 framework; no data reported on transactions in nonfinancial and financial assets and liabilities. - Authorities do not report higher frequency data for inclusion in the IFS. - Monetary statistics: - ROSC mission found scope of monetary statistics comprehensive. - Classification and sectorization of monetary survey by State Bank of Pakistan (SBP) broadly in line with MFSM. - Basis for recording flows and stocks largely consistent with MFSM; SBP intends to adopt MFSM to further improve statistics. - ROSC reassessment (November 2006) found implementation of MFSM guidelines on sectorization, instrument classification, and repos recording. - New reporting framework for other depository corporations designed and being implemented. - Progress in resolving interbank position discrepancies between SBP and scheduled banks. - SBP reported Standardized Report Forms 1SR, 2SR, and 5SR to the Fund for IFS publication. - Balance of payments: - Since July–September 2003, Pakistan’s BOP statements prepared according to BPM5. - 2007 Fund TA mission recommended aligning recording practices with BPM5; some improvements made. - Differences between two trade data sources (customs records for FBS and exchange records for SBP) for exports and imports have been widening; most differences can be reconciled ex post; authorities working to narrow differences before publication. - International investment position: - Annual IIP data compiled and published on SBP website. - Since 2010 SBP started publishing quarterly IIP data. - Annual data available back to 2003. ### Data Standards and Quality - Pakistan participates in GDDS since 2003, meeting recommendations for coverage, periodicity, and timeliness of most GDDS categories. - Authorities are keen to subscribe to SDDS; SDDS assessment mission scheduled in January 2012 (as presented). - For SDDS subscription, Pakistan will need to disseminate: - (a) monthly data on central government operations with a timeliness of one month; - (b) quarterly data on national accounts, employment and unemployment, wages/earnings, and external debt, all with a timeliness of one quarter; - (c) more detailed breakdown of data on central government debt and external debt; - (d) update and expand metadata on compilation and dissemination practices. - ROSC and DQAF materials: ROSC—Data Module and Detailed Assessment Using DQAF published December 2004; ROSC reassessment on monetary statistics November 2006; update to ROSC on fiscal transparency published April 2008. ### Pakistan: Table of Common Indicators Required for Surveillance (as of December, 2011) — selected table entries (preserve format and values) - Date of latest observation / Date received / Frequency of Data7 / Frequency of Reporting7 / Frequency of publication7 / Memo / Data Quality – Methodological Soundness7 / Data Quality Accuracy and Reliability8 - Exchange Rates: real time / real time / D / D / D - International Reserve Assets and Reserve Liabilities of the Monetary Authorities1: May. 2013 / June. 2013 / M / M / M - Reserve/Base Money: May. 2013 / June. 2013 / M / M / M / O, O, O, LO - Broad Money: May. 2013 / June. 2013 / M / M / M / O, O, O, O, LO - Central Bank Balance Sheet: May. 2013 / June. 2013 / M / M / M - Consolidated Balance Sheet of the Banking System: May. 2013 / June. 2013 / M / M / M - Interest Rate2: June. 2013 / July, 2013 / M / M / M - Consumer Price Index: June.2013 / July,2013 / M / M / M / O, LO, LO, O - Revenue, Expenditure, Balance and Composition of Financing3 – General Government4: June.2013 / July, 2013 / Q / Q / Q / LO, LO, LNO, LO - Revenue, Expenditure, Balance and Composition of Financing3 – Central Government: June.2013 / July, 2013 / Q / Q / Q / O, O, LO, LO, LO - Stocks of Central Government and Central Government-Guaranteed Debt5: May. 2013 / June, 2013 / Q / Q / Q - External Current Account Balance: June.2013 / July, 2013 / M / M / M / LO, LO, LO, O - Exports and Imports of Goods and Services: June.2013 / July, 2013 / M / M / M / O, O, O, O, LNO - GDP/GNP: 2012/13 / July, 2013 / A / A / A / LO, LNO, LO, LO - Gross External Debt: Oct.2011 / Nov.2011 / M / M / M - International Investment Position6: Mar.2011 / Aug. 2011 / A/Q / A/Q / A/Q (Notes and footnotes in original table retained in source and not reproduced here beyond the listed entries.) ### Supplementary information for the 2013 Article IV Consultation and EFF request — update (prepared by Middle East and Central Asia Department; Approved By Daniela Gressani and Mark Flanagan) - Purpose: Provides an update on economic and policy developments since the staff report on August 22, 2013. The additional information does not change the thrust of the staff appraisal. - Recent developments: - Headline inflation rebounded from 5.9 in June to 8.3 percent in July. This rate was slightly higher than staff projections, reflecting the impact of energy and transportation price increases. - Core inflation remained at 9.3 percent. - Gross official reserves are at US$4.8 billion as of August 27, 2013 in line with Staff’s projections. - SBP continued to purchase foreign exchange in the spot market consistent with program objectives. - Payments to the Fund (US$392 million) and unwinding of the swap/forward contracts (US$150 million) are the main reasons behind the decline in reserves. - Provisional figures point to 8 percent of GDP budget deficit for 2012/13. The deficit is ½ percent of GDP better than originally estimated, mainly due to lower interest, defense and grant expenditures. *IMF staff report content as presented in the provided source document.* ### 5. The authorities have completed the five prior actions: (i) The government ### _cr13287 - 5. The authorities have completed the five prior actions: (i) The government ### Prior actions completed (before Board consideration of the program) - (i) The government implemented a series of fiscal adjustment measures reaching 2 percent of GDP. - (ii) Electricity prices were raised on certain groups of consumers as a part of the new Energy Policy. - (iii) The Council of Common Interest (including representatives of the provinces) ratified the fiscal commitments under the program. - (iv) The Federal Bureau of Revenue launched an income tax enforcement scheme by issuing over 10 thousand notices to suspected high income individuals and firms who did not file returns. - (v) The State Bank of Pakistan purchased net US$125 million in the foreign exchange spot market. ### Prior Actions and Structural Benchmarks (selected entries from Table 2) - Net purchase of $125 million by the SBP in the foreign exchange spot market from July 1, 2013. — Met - Develop and approve a three-year plan by the Government for phasing out Tariff Differential Subsidies (TDS), and implement the first step by: - (i) the notification of new tariffs for FY2012/13; - (ii) increasing the weighted average tariffs by 50 percent on industrial, commercial, bulk, and AJ&K consumers’ electricity consumption; - (iii) announcing a reduction of the subsidy on second group of consumers (as defined in the TMU) through increasing the weighted average notified tariffs by 30 percent that will be in effect from October 1st, 2013. — Met - Implement a series of fiscal adjustment measures (including those in the 2013/14 budget) totaling 2 percent of GDP on an annualized basis. — Met - Impose a balanced budget requirement on provinces and agree with provinces to save additional revenues generated by the program. — Met - Issue 10 thousand notices based on large potential fiscal liabilities. — Met Selected structural benchmarks (deadlines preserved as in source): - Develop and launch initiatives to enhance revenue administration for sales tax, excises, and customs similar to that prepared for income tax. — end-December 2013 - Announce a rationalization plan for gas prices which will involve a levy to generate 0.4 percent of GDP fiscal savings by end-December 2013. — end-December 2013 - Enact the amendments to the SBP law to give SBP autonomy in its pursuit of price stability as its primary objective, while strengthening its governance and internal control framework, in line with Fund staff advice. — end-March 2014 - Prepare detailed plans to achieve compliance of all banks that fall below minimum capital adequacy, including specific actions, end dates, and contingency arrangements. Also detail a plan for recapitalization, consolidation or liquidation of 9 banks that fall below the minimum capital requirement but not CAR. — end-December 2013 - Enact the Deposit Protection Fund Act, in line with Fund staff advice. — end-September 2014 - Enact the Securities Bill, in line with Fund staff advice. — end-December 2014 - Develop and approve PSE reform strategy for thirty firms among the 65 PSEs approved for privatization by the Council of Common Interest (CCI). — end-September 2013 - Hire a professional audit firm to conduct a technical and financial audit of the system to identify the stock and flow of payables at all levels of the energy sector (including Power Sector Holding Company Limited). — end-November 2013 - Make Central Power Purchasing Agency (CPPA) operational by separating it from the National Transmission and Despatch Company (NTDC), hire key staff, issue CPPA rules and guidelines, and initiate the payment and settlement system. — end-December 2013 - Enact the amendments to the Pakistan Penal Code 1860 and the Code of Criminal Procedures 1898. — end-December 2013 - Privatize 26 percent of PIA's shares to strategic investors. — end-June 2014 ### IMF Executive Board approval and program summary (Press Release No.13/322, September 4, 2013) - The Executive Board approved a 3-year arrangement under the Extended Fund Facility (EFF) for Pakistan in an amount equivalent to SDR 4.393 billion (US$6.64 billion, or 425 percent of Pakistan’s quota). - Initial disbursement: amount equivalent to SDR 360 million (about US$544.5 million); remaining amount to be evenly disbursed over the duration of the program, subject to quarterly reviews. - Program objectives highlighted: - Help the economy rebound, forestall a balance of payments crisis and rebuild reserves. - Reduce the fiscal deficit. - Undertake comprehensive structural reforms to boost investment and growth. - Catalyze mobilization of resources from other donors. ### Medium-term program targets and expectations (as stated in the Press Release) - Raising growth gradually to near 5 percent by 2015/16 as macroeconomic stability is entrenched and structural reforms are pursued. - Bringing inflation down to 6-7 percent range by 2015/16, from the current level of 8.3 percent. - Increasing central bank reserves to over 3 ½ months of imports by 2015/16. - Reducing the fiscal deficit to 3 ½ percent of GDP by 2015/16 from an estimated 8.0 percent in 2012/13, with provincial governments contributing their fair share of the fiscal consolidation process. - Liberalizing the trade regime and reforming public sector enterprises through restructuring and/or privatization. - Improving the business climate. - Strengthening the tax system. - Protecting the most vulnerable from the direct and indirect impacts of fiscal consolidation and price adjustments. ### Executive Board assessment and key policy recommendations (summarized) - Pakistan faces high vulnerabilities and crisis risks with subpar growth and unsustainable fiscal and balance of payments positions. - Short-term macroeconomic measures must be complemented by significant structural and governance reforms in: - Fiscal management (including raising tax-to-GDP ratio by broadening tax base and reducing exemptions and concessions). - Monetary policy framework and exchange rate policy (rebuild external buffers, cease direct lending to the government, and strengthen monetary policy independence). - Energy sector (implement new energy policy to address long-standing problems and large fiscal costs). - Public sector enterprises (restructure or privatize). - Trade regime (liberalize). - Business climate (improve). - Protecting the most vulnerable is a priority; expand coverage and benefits of targeted income support programs as savings from tariff adjustments and fiscal space are realized. - Directors noted risks to the program from security situation, deterioration in external environment, and constraints in legal, administrative, or technical capacity and resistance from vested interests; underlined importance of collaboration with development partners and strong political will. ### Recent macroeconomic developments and program rationale (Annex and Statement highlights) - Growth and structural constraints: - GDP growth averaged only 3 percent over the past five years. - Power outages averaged about 8-10 hours a day. - Private domestic investment declined from 14 percent of GDP in 2007/08 to around 11 percent of GDP in 2012/13. - External positions and reserves: - Central bank reserves fell by some 45 percent in the past year alone; as of end June 2013, reserves stood at US$6 billion. - Policy actions already implemented: - Fiscal consolidation measures totaling 2 percent of GDP, including measures in the 2013/14 budget. - Adjusting electricity tariffs as part of the new comprehensive energy policy. - Reorienting monetary policy to rebuild foreign exchange reserves and reduce inflation. - Launching a decisive tax enforcement program (issuance of 10,000 tax notices). ### Fiscal consolidation measures and specifics (from authorities’ statement) - Program target: reduce the fiscal deficit to around 3½ percent of GDP by FY 2016/17, entailing fiscal consolidation of about 4–4 ½ percent of GDP over three years. - Upfront revenue measures contributing to the 2 percent of GDP adjustment include: - A new levy on natural gas. - Higher rates of GST. - Corporate minimum tax increases. - Personal income tax increases for higher income bracket. - Increases in excises and fees. - Tax administration reforms to be strengthened via: - Improved Federal Board of Revenue access to information. - Increased number of risk-based tax audits. - Enhanced assessment, collection, and prosecution procedures. - Issuance of 10,000 tax notices based on large potential fiscal liabilities (prior action). - Expenditure-side measures: - Commitment to phase out electricity subsidy over the life of the program. - First round: eliminating tariff differential subsidy amounting to 0.75 percent of GDP by increasing weighted average tariff for commercial, industrial, bulk and large consumers. - Further tariff subsidy reductions envisaged to reach a maximum subsidy of 0.3 percent of GDP as indicated in the MEFP. - Nonwage current expenditures reduced through a 30 percent across the board cut from this year’s budget allocations. ### Selected economic indicators (extracts, numeric values preserved) - Population: 178.9 million (2011/12) - Per capita GDP: US$1,228 (2011/12) - Poverty rate: 17.2 percent (2007/08) - Main exports: Textiles ($9.9 billion) - Real GDP at factor cost (annual percentage change): 2009/10: 2.6; 2010/11: 3.7; 2011/12: 4.4; 2012/13: 3.6; 2013/14 baseline: 3.3; 2013/14 program: 2.5 - Consumer prices (period average): 2009/10: 10.1; 2010/11: 13.7; 2011/12: 11.0; 2012/13: 7.4; 2013/14 baseline: 8.2; 2013/14 program: 7.9 - Budget balance (including grants, percent of GDP): 2009/10: -5.9; 2010/11: -6.9; 2011/12: -8.4; 2012/13: -7.9; 2013/14 baseline: -7.8; 2013/14 program: -5.5 - Total general government debt (percent of GDP): 2009/10: 61.5; 2010/11: 59.5; 2011/12: 63.8; 2012/13: 66.6; 2013/14 baseline: 69.2; 2013/14 program: 66.6 - Gross reserves (in millions of U.S. dollars): 2009/10: 12,958; 2010/11: 14,784; 2011/12: 10,799; 2012/13: 6,008; 2013/14 baseline: 2,283; 2013/14 program: 9,566 - Gross reserves (in months of next year's imports): 2009/10: 3.6; 2010/11: 3.6; 2011/12: 2.7; 2012/13: 1.4; 2013/14 baseline: 0.5; 2013/14 program: 2.2 *Source: IMF staff report and Press Releases summarized in the supplied content.* ### 0.15 percent of GDP. While some scaling back of the budgeted increase in capital spending ### _cr13287 - 0.15 percent of GDP. While some scaling back of the budgeted increase in capital spending ### Fiscal policy and social spending - The authorities envisage some scaling back of the budgeted increase in capital spending this year, but intend to preserve investment expenditure as fiscal space is realized. - Ratification of the fiscal commitments by the Council of Common Interest (which includes representatives of the provinces) is implemented as a prior action and will ensure full contribution of all levels of Government to fiscal consolidation. - Social program allocations under the 2013/14 budget: - Increased allocation for Benazir Income Support Program (BISP, the largest targeted social assistance program) to enable an extended outreach to over 5.7 million families through conditional cash transfers for primary education. - It is expected that by the end of the program, 24 percent of the population (6.6 million families) would be covered under the basic cash transfer program. - Reference fiscal magnitude: 0.15 percent of GDP. ### Monetary and exchange rate policies - Monetary policy has been subject to intense discussion between the authorities and staff. - Authorities' stance: - Recognize importance of adjusting the policy rate as needed to mitigate inflation risks, but believe recent cuts were warranted by declining headline inflation and the need to support growth. - Foreign exchange intervention policy motivated by smoothing exchange rate volatility and strengthening market confidence by building reserves. - As a prior action, the SBP has purchased US$125 million in the foreign exchange market on a net basis since July1. - Flexibility: In view of macroeconomic uncertainty, adequate flexibility will be needed in calibrating monetary and exchange rate measures and their timing to future circumstances that cannot be predicted with a reasonable degree of certainty. - Technical issues: - The SBP has expressed reservations on the methodology used by Fund staff for the calculation of core inflation and looks forward to further consideration of the issue in the context of the first review of the EFF. - The Selected Issue Paper on the performance of monetary policy in Pakistan has not benefited from a thorough review and comments from the SBP before circulation to the Board; the authorities will send detailed comments to staff and stand ready for extensive discussions if needed. ### Structural reforms - Long-run objective: Structural reforms are key to stronger growth by enhancing overall efficiency and supporting long-term fiscal sustainability. - Energy sector reform (top priority): - Poor performance and significant adverse costs to the economy and the budget necessitate reform. - Major step: Preparation of a comprehensive energy policy addressing structural, governance, and regulatory issues. - Governance: A high level national committee on energy chaired by the Prime Minister meets regularly to monitor progress. - Short-term measures: Tackling the supply gap by clearing payment arrears and improving governance of the power transmission and distribution system, which currently records high losses due to poor infrastructure, mismanagement and theft of electricity. - Long-term plans: Improve energy mix and build generation capacity to generate affordable electricity for commercial and industrial use, while promoting energy conservation and responsibility. - Business environment and private sector: - Priority to provide a conducive and business friendly environment for investment, including a “one stop shop” for access to multiple government departments and agencies. - Continued engagement with development partners to strengthen the Board of Investment and streamline procedures for establishing businesses in Pakistan. - Implementing restructuring and privatization of public enterprises, further trade liberalization, and improved SMEs’ access to financing under the SBP’s Financial Inclusion Program to strengthen private sector role, increase competitiveness, and enhance growth potential. ### Financial sector reform - Banking sector assessment: - Generally well capitalized and liquid. - A few banks representing less than 7 percent of the system face financial pressures; these are being addressed through fresh injections of equity or mergers. - Policy measures under consideration: - Introduction of a deposit insurance scheme to further stabilize the banking system. - New legislation for corporate rehabilitation is under discussion with relevant stakeholders to improve the recovery mechanism. - Authorities recognize the need for close monitoring and are further strengthening the supervisory and enforcement power of the regulator. ### Conclusion and commitments - The incoming government led by Prime Minister Mian Nawaz Sharif is fully committed to prudent policies and bold structural reforms under the proposed EFF-supported program. - Authorities acknowledge challenges but are confident that adjustment and reform will help achieve goals of higher growth and employment with macroeconomic stability. - They are committed to taking necessary measures to ensure achievement of program objectives and look forward to continued support from management and the Board. *Source: Excerpt from document content provided.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13287.pdf_