## _cr16325 — EXECUTIVE SUMMARY

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### Program overview and status
- Extended Arrangement under the Extended Fund Facility (EFF): a 36 month, SDR 4,393 million (216 percent of the new quota) Extended Arrangement under the EFF approved September 4, 2013.
- Total disbursement through the eleventh review: SDR 4.32 billion.
- The thirteenth and final tranche amounting to SDR 73 million will be available upon completion of this review.
- The authorities have not requested a follow-up arrangement; Fund engagement to continue, including through Post-Program Monitoring.
- Authorities’ intended policy directions:
  - Continue gradual fiscal consolidation while expanding tax revenue and priority spending.
  - Further bolster external buffers while maintaining adequate monetary policy stance to keep inflation expectations well-anchored.
  - Strengthen financial sector resilience.
  - Advance growth-enhancing structural reforms, including restructuring or privatizing ailing PSEs, completing the energy sector reform, and improving the business climate.

### Macroeconomic performance (selected indicators and changes)
- Real GDP growth: from 3.7 to 4.7 (percent).
- CPI inflation (annual average): from 7.4 to 2.9 (percent).
- Overall fiscal balance (excluding grants, percent of GDP): from -8.5 to -4.6.
- Structural primary balance (percent of GDP): from -4.5 to 0.4.
- Public debt (percent of GDP): from 62.3 to 64.8.
- Tax-to-GDP: from 10.0 to 12.4 (percent).
- Energy subsidies (percent of GDP): from 2.0 to 0.6.
- Social Spending under BISP (per beneficiary per quarter, in rupees): from 3,000 to 4,700.
- Coverage of BISP (million beneficiaries): from 3.78 to 5.36.
- Exports (y-o-y growth): from 0.4 to -8.6.
- GIR ($U.S. billions): from 6.0 to 18.1.
- NIR ($U.S. billions): from -2.4 to 7.5.
- REER (2000=100): from 100.7 to 118.3.
- Private sector credit (y-o-y growth): from -0.6 to 11.1.
- Change in borrowing from the SBP (percent of reserve money): from 23.2 to -16.3.
- Capital Adequacy Ratio: from 15.5 to 16.1.
- Non-performing Loans to gross loans: from 14.8 to 11.1.

### Key program achievements and remaining vulnerabilities
- Achievements:
  - Macroeconomic resilience improved; short-term vulnerabilities declined.
  - Gross international reserves tripled over the program period to cover 4.2 months of imports.
  - Structural primary balance turned into surplus; tax-to-GDP rose by nearly 2½ percentage points.
  - Energy subsidies reduced by about 1½ percent of GDP.
  - BISP coverage expanded to 5.36 million beneficiaries; per-beneficiary stipend increased from PRs 3,000 to PRs 4,700.
  - Banking sector: higher profitability, strengthened liquidity, robust capital adequacy, declining NPLs.
- Remaining vulnerabilities:
  - GIR remained below comfortable levels (76 percent of the ARA metric).
  - Pronounced real appreciation of the rupee over the program period negatively affected trade competitiveness.
  - Public debt remained high at about 65 percent of GDP (430 percent of revenue) as of end-June 2016; public debt increased by about 2 ½ percent of GDP over the course of the program.
  - Exports small relative to GDP and declining; private investment and FDI too low.
  - Unemployment 6 percent (10½ percent among the youth and 9½ percent among women); informal economy large; 30 percent of the population lives below the poverty line.

### Fiscal policy and public finances
- Consolidation and composition:
  - Overall budget deficit (excluding foreign grants) narrowed by 3.9 percent of GDP under the three-year program.
  - Structural primary balance turned into surplus.
  - Tax-to-GDP increased from 10.0 to 12.4 (percent).
  - Capital expenditure increased by about 0.5 percent of GDP.
  - Targeted cash transfers under BISP increased by about 0.1 percent of GDP.
  - Energy subsidies reduced by about 1½ percent of GDP.
- FY 2016/17 framework:
  - Authorities committed to budget deficit target of 3.8 percent of GDP (excluding foreign grants) in FY 2016/17.
  - Composition of adjustment (authorities’ commitments): boost tax revenue by ½ percent of GDP (to about 13 percent of GDP); rationalize noncritical current expenditures by 0.1 percent of GDP; create room for increase of 0.2 percent of GDP in development spending.
  - Amended FRDL Act: federal budget deficit limit of 4 percent of GDP excluding foreign grants for FY 2017/18–FY 2019/20, and 3½ percent of GDP thereafter; limit of 60 percent of GDP on general government debt until FY 2017/18, and a 15-year transition path toward 50 percent of GDP.
- Fiscal risks and staff recommendations:
  - Further revenue mobilization and tax administration reforms needed.
  - Contain wage bill growth, untargeted subsidies, non-priority transfers; modernize agriculture taxation; improve property tax collection; improve sales tax collection on services.
  - Strengthen fiscal accounts compilation and consider an expenditure rule and independent fiscal council.

### Monetary policy, SBP safeguards, and reserves
- Inflation and reserves:
  - Headline inflation declined to 2.9 percent (on average) in FY 2015/16 from about 7½ percent in FY 2012/13.
  - Gross international reserves rose from US$6 billion in FY 2012/13 to US$18.1 billion at end-June 2016 (covering more than four months of prospective imports).
- SBP reforms and safeguards:
  - Amendments to the SBP law, administrative measures to increase autonomy, independent Monetary Policy Committee, improved interest rate corridor and internal operations.
  - Some 2013 Safeguard Assessment recommendations remain to be addressed; SBP developed a time-bound legislative action plan in August 2016.
- Program performance metrics:
  - End-June performance: NIR PC met by a large margin after SBP spot purchases of US$1.4 billion.
  - Government borrowing from SBP remained below the end-June 2016 ceiling by PRs 388 billion.
  - End-June PC on Net Domestic Assets (NDA) missed by PRs 6 billion (0.2 percent of NDA); NDA stock subsequently brought below PRs 3,100 billion by end-August 2016 (prior action), met with a margin of PRs 288 billion.

### Financial sector reforms and stability
- System condition and reforms:
  - Banking system profitable and well-capitalized; Capital Adequacy Ratio improved to 16.1.
  - Deposit Protection Corporation Act enacted (end-August 2016 SB); plan to make new deposit insurance operational by end-2016.
  - Phased implementation of Basel III capital and liquidity requirements by 2019; SBP issued industry-wide instructions on eligible capital, capital conservation buffer, LCR and NSFR.
  - Corporate Restructuring Companies (CRC) Act enacted; amendments to recovery framework and Financial Institutions (Recovery of Finances) Ordinance advanced.
- Remaining tasks and vulnerabilities:
  - Ensure three undercapitalized small banks brought into regulatory compliance (one bank partial capital injection and rights issue; one publicly-owned bank divestment; one bank seeking merger).
  - NPLs remain high though declining: Non-performing Loans to gross loans improved from 14.8 to 11.1.
  - Strengthen debt enforcement, insolvency framework, and market infrastructure for distressed debt.
  - Ensure Pakistan Development Fund operates on a commercial basis to avoid quasi-fiscal risks.

### Structural reforms and sectoral progress — Energy, PSEs, Business climate
- Power sector:
  - Electricity outages reduced: power outages for industry fell from 9 to 1 (hours/day); for urban consumers fell from 8 to 5 (hours/day).
  - Notified electricity tariff (PRs per kWh) increased (values in source: ↑ 8.8 11.9).
  - Stock of power sector arrears (excluding PHCL transfer) at end-June 2016: 1.2 percent of GDP (PRs 321 billion); stock held in PHCL PRs 335 billion.
  - Distribution losses reduced to 17.9 percent in FY 2015/16 from 18.9 percent in FY 2012/13; collection rates increased to 92.6 percent in FY 2015/16 from 87.2 percent in FY 2012/13.
  - Updated power sector arrears reduction plan (July 15, 2016 SB); plan to use IPO proceeds of FESCO, IESCO and LESCO to reduce arrears.
  - Missed structural benchmark: notification of multi-year tariffs for FESCO, LESCO and IESCO (missed due to dispute with regulator).
- Gas sector:
  - Gas producer price increased (in source: ↑ 2.8-3.0 6-10); consumer gas tariff adjusted (in source: ↑ 540.26 46.9).
  - LNG imports started March 2015; contract for 2nd LNG terminal awarded June 2016.
  - Unaccounted gas losses remain significant: unaccounted gas losses (percent) ↑ 10.1 11.5.
  - Gas (Theft Control and Recovery) Act passed March 2016.
- Public Sector Enterprises (PSEs):
  - Some capital market transactions and one strategic sale completed; corporatization of PIA advanced.
  - PSEs' annual losses (percent of GDP) declined from 0.4 to 0.2; PSEs' accumulated losses (percent of GDP) increased from 1.7 to 2.3.
  - Privatization and restructuring progressed but some privatizations scaled back in early 2016; loss-making PSEs continue to pose fiscal risks.
- Business climate and governance:
  - New comprehensive country-wide strategy adopted February 2016 after slip in Doing Business ranking.
  - Measures: Virtual One-Stop-Shop, ADR, reduced procedures for paying taxes, simplified import tariff slabs (from five to four).
  - Further measures recommended to automate OSS, amend Companies Ordinance, roll out electronic tax filing, enhance credit bureaus, digitalize land records, expand ADR and strengthen bankruptcy framework.

### Performance under the twelfth review (end-June 2016)
- Most Performance Criteria (PCs) met; PCs on the budget deficit and SBP NDA missed by small margins.
- All program Indicative Targets (ITs) were met.
- Structural Benchmarks (SBs): three of four SBs met:
  - Deposit Protection Corporation Act enacted (end-August 2016 SB).
  - Solicitation of expressions of interest for divestment of Kot Addu Power Company (KAPCO) (July 15, 2016 SB).
  - Updated plan to limit accumulation of new payables and eliminate outstanding stock of power sector arrears (July 15, 2016 SB).
  - Missed SB: notification of multi-year tariffs for FESCO, LESCO and IESCO due to unresolved dispute with regulator.

### Outlook, CPEC impact, and risks
- Growth and inflation outlook:
  - Growth estimated at 4.7 percent in FY 2015/16; staff projects growth to increase to 5 percent in FY 2016/17; authorities project 5.7 percent in FY 2016/17.
  - Headline inflation averaged 2.9 percent in last fiscal year and expected to be contained at 5.2–5.3 percent in FY 2016/17 (source materials cite both 5.2 percent and 5.3 percent expectations).
- External sector and reserves:
  - Current account deficit contained at 0.9 percent of GDP in FY 2015/16; expected to widen to about 1.5 percent of GDP in FY 2016/17.
  - Foreign reserves increased to about 4.2 months of imports (76 percent of the ARA metric) at end-June 2016; expected to accumulate further to about 4.5–4.6 months of imports in FY 2016/17.
- CPEC (China-Pakistan Economic Corridor):
  - Total size of CPEC estimated at around US$44½ billion (about 16 percent of FY 2015/16 GDP).
  - Early harvest projects: US$28 billion including US$18,000 million (Energy FDI) and total early harvest financing US$27,819 million (breakdown: Energy FDI 18,000; Transportation total 9,332; Other infrastructure total 487).
  - Staff projects CPEC-related capital inflows to reach about 2.2 percent of projected GDP in FY 2019/20; CPEC-related imports to about 11 percent of total projected imports in FY 2019/20.
  - Longer-term combined CPEC-related outflows (profit repatriation and debt service) could reach about 0.4 percent of GDP per year.
  - CPEC could raise potential output if accompanied by pro-growth and export-supporting reforms; requires sound project management, transparency, and fiscal prudence.
- Risks to the outlook:
  - External/global: lower growth in advanced economies (including Brexit risks), weaker exports/remittances/FDI, continued REER appreciation, tighter global financial conditions.
  - Domestic/medium-term: CPEC-related repayment/profit repatriation risks, lower remittances if GCC slowdown persists, recovery of oil prices, policy slippages, delays in PSE restructuring/privatization, legal challenges to electricity surcharges and revenue measures, political uncertainty, security risks.

### Policy discussions, staff appraisal, and recommendations
- Overall macro-policy stance:
  - Preserve macroeconomic stability gains; continue gradual fiscal consolidation while expanding tax revenue and priority spending.
  - Further bolster external buffers with adequate exchange rate flexibility; maintain prudent monetary stance with clearly positive real interest rates.
  - Strengthen financial sector resilience; complete SBP safeguards recommendations and make deposit insurance operational.
  - Accelerate structural reforms: restructure and seek private participation in PSEs, complete power and gas sector reforms, implement multi-year tariff frameworks, and implement business climate reforms to foster private-sector-led growth and job creation.
- Specific staff recommendations:
  - Fiscal: enhance revenue mobilization by broadening tax base; contain nonpriority spending; strengthen fiscal coordination between federal and provincial governments; reduce share of short-term debt; improve fiscal reporting.
  - Monetary/exchange rate: continue reserve accumulation at steady pace via SBP spot purchases; allow greater downward exchange rate flexibility to contain REER appreciation; be prepared to tighten monetary policy if inflation increases.
  - Financial sector: ensure compliance with regulatory capital requirements; strengthen supervision and macroprudential framework; enhance NPL resolution mechanisms; ensure Pakistan Development Fund operates commercially.
  - Structural reforms: complete DISCO and gas sector reforms; resume regular tariff notifications; privatize/divest PSEs as committed; strengthen project evaluation and transparency for CPEC.

*Source: _cr16325 - EXECUTIVE SUMMARY and associated IMF staff report excerpts, September 13, 2016.*

### EXECUTIVE SUMMARY

### _cr16325 - EXECUTIVE SUMMARY

### Program overview and status
- Extended Arrangement under the Extended Fund Facility (EFF): a 36 month, SDR 4,393 million (216 percent of the new quota) Extended Arrangement under the EFF was approved by the Executive Board on September 4, 2013.
- Total disbursement through the eleventh review: SDR 4.32 billion.
- The thirteenth and final tranche amounting to SDR 73 million will be available upon completion of this review.
- The authorities have not requested a follow-up arrangement. Fund engagement with Pakistan will continue, including through Post-Program Monitoring.
- The authorities intend to: (i) continue pursuing gradual fiscal consolidation while expanding tax revenue and priority spending, (ii) further bolster their external buffers while maintaining an adequate monetary policy stance to keep inflation expectations well-anchored, (iii) strengthen financial sector resilience, and (iv) advance growth-enhancing structural reforms, including restructuring or privatizing ailing PSEs, completing the energy sector reform, and improving the business climate.

### Macroeconomic performance under the program (selected indicators and changes)
- Real GDP growth: from 3.7 to 4.7 (percent).
- CPI inflation (annual average): from 7.4 to 2.9 (percent).
- Overall fiscal balance (excluding grants, percent of GDP): from -8.5 to -4.6.
- Structural primary balance (percent of GDP): from -4.5 to 0.4.
- Public debt (percent of GDP): from 62.3 to 64.8.
- Tax-to-GDP: from 10.0 to 12.4 (percent).
- Energy subsidies (percent of GDP): from 2.0 to 0.6.
- Social Spending under BISP (per beneficiary per quarter, in rupees): from 3,000 to 4,700.
- Coverage of BISP (million beneficiaries): from 3.78 to 5.36.
- Exports (y-o-y growth): from 0.4 to -8.6.
- GIR ($U.S. billions): from 6.0 to 18.1.
- NIR ($U.S. billions): from -2.4 to 7.5.
- REER (2000=100): from 100.7 to 118.3.
- Private sector credit (y-o-y growth): from -0.6 to 11.1.
- Change in borrowing from the SBP (percent of reserve money): from 23.2 to -16.3.
- Capital Adequacy Ratio: from 15.5 to 16.1.
- Non-performing Loans to gross loans: from 14.8 to 11.1.

### Key program achievements and remaining vulnerabilities
- Macroeconomic resilience improved; short-term vulnerabilities declined, aided by lower oil prices and policy discipline.
- Gross international reserves tripled over the program period to cover 4.2 months of imports, but remained below comfortable levels (76 percent of the ARA metric).
- Pronounced real appreciation of the rupee over the program period has negatively affected trade competitiveness despite SBP foreign exchange purchases.
- Public debt remained high at about 65 percent of GDP (430 percent of revenue) as of end-June 2016; public debt increased by about 2 ½ percent of GDP over the course of the program.
- Exports are small in relation to GDP and have been declining; private investment and FDI are too low; unemployment is 6 percent (10½ percent among the youth and 9½ percent among women); informal economy large; 30 percent of the population lives below the poverty line.

### Fiscal policy and public finances
- The overall budget deficit (excluding foreign grants) narrowed by 3.9 percent of GDP under the three-year program; structural primary balance turned into surplus.
- Tax-to-GDP increased by nearly 2½ percentage points of GDP due to reduced tax concessions and exemptions, increased withholding taxes on nonfilers, and improved compliance.
- Energy subsidies reduced by about 1½ percent of GDP.
- Capital expenditure increased by about 0.5 percent of GDP.
- Targeted cash transfers under BISP increased by about 0.1 percent of GDP.
- The FY 2016/17 budget and amendments to the Fiscal Responsibility and Debt Limitation (FRDL) Act strengthen the anchor for near- and medium-term fiscal policy.
- Further fiscal consolidation and reforms of tax policy and administration are needed to mobilize revenues and create fiscal space; prudently managing nonpriority current expenditures is important.

### Monetary policy and reserves
- Headline inflation declined to 2.9 percent (on average) in FY 2015/16 from about 7½ percent in FY 2012/13.
- SBP reforms: amendments to the SBP law, administrative measures to increase autonomy, independent Monetary Policy Committee, improved interest rate corridor and internal operations. Some 2013 Safeguard Assessment recommendations remain to be addressed.
- End-June performance: NIR PC met by a large margin after SBP spot purchases of US$1.4 billion. Government borrowing from SBP remained below the end-June 2016 ceiling by PRs 388 billion. The end-June PC on Net Domestic Assets (NDA) was missed by PRs 6 billion (0.2 percent of NDA) due to higher currency demand linked to the financial transactions tax on nonfilers and precautionary liquidity demand before Eid.

### Financial sector reforms and stability
- Banking sector performance improved: higher profitability, strengthened liquidity, robust capital adequacy, and declining NPLs.
- Deposit Protection Corporation Act enacted (August 2016 SB) to establish deposit insurance.
- Steps taken to strengthen the framework for NPL recovery and phased implementation of Basel III standards.
- Remaining tasks: finalize deposit insurance introduction, ensure all banks comply with regulatory requirements, and address the still high level of NPLs.
- Note: Two small banks (1.5 percent of banking assets) are marginally CAR–noncompliant with an overall capital shortfall less than 0.08 percent of GDP; a third small bank is below the minimum capital requirement (MCR).

### Structural reforms and sectoral progress
- Power sector: electricity outages reduced; untargeted subsidies lowered; accumulation of arrears significantly reduced though a substantial stock remains. Excluding arrears transferred into PHCL, arrears at end-June 2016 were 1.2 percent of GDP (PR 321 billion); about 2/3 of power sector arrears were cleared in June and August.
- Gas sector: shortages reduced through supply/demand measures, increased LNG imports, tariff rationalization, improved regulatory framework, and strengthened legislation to tackle gas theft; further efforts needed to address high gas system losses.
- PSEs: several capital market transactions, one strategic sale, and corporatization of PIA completed; preparatory work for restructuring and private participation advanced but some privatization scaled back in early 2016; loss-making PSEs continue to pose fiscal risks.
- Business climate and governance: new comprehensive country-wide strategy developed in early 2016 after slipping in the 2016 Doing Business ranking; import tariff slabs reduced to simplify trade regime. AML/CFT framework strengthened but needs further enhancement.

### Performance under the twelfth review (end-June 2016)
- Most Performance Criteria (PCs) met; PCs on the budget deficit and SBP NDA missed by small margins.
- All program Indicative Targets (ITs) were met.
- Structural Benchmarks (SBs): three of four SBs met — Deposit Protection Corporation Act enacted (end-August 2016 SB); solicitation of expressions of interest for divestment of Kot Addu Power Company (KAPCO) (July 15, 2016 SB); updated plan to limit accumulation of new payables and eliminate outstanding stock of power sector arrears (July 15, 2016 SB). One SB — notification of multi-year tariffs for FESCO, LESCO and IESCO — was missed due to an unresolved dispute with the regulator over benchmark distribution losses and collection targets.

### Key issues, policy discussions, and near-term priorities
- Focus on near-term fiscal and monetary priorities in light of missed program targets, and on economic and financial policy agenda for the post-program period.
- Authorities reiterated commitment to locking in macroeconomic stability gains and advancing growth-supporting reforms beyond the program.
- Priorities include:
  - Continue gradual fiscal consolidation while expanding tax revenue and priority spending.
  - Further bolster external buffers and maintain an adequate monetary policy stance to keep inflation expectations well-anchored.
  - Strengthen financial sector resilience.
  - Advance growth-enhancing structural reforms: restructuring/privatizing ailing PSEs, completing energy sector reform, and improving the business climate.

*Source: _cr16325 - EXECUTIVE SUMMARY, September 13, 2016.*

### 2013. While arrears have re-accumulated, the pace of

### _cr16325 - 2013. While arrears have re-accumulated, the pace of

### Power sector reform: tariffs, operations, and outages
- Notified Electricity Tariff (in PRs per kWh) ↑ 8.8 11.9
- The electricity tariff was brought closer to cost recovery by increasing the base tariff and introducing surcharges.
- Power sector regulatory reform:
  - Quarterly performance targets have been set for DISCOs and multi-year tariffs have been determined for three DISCOs.
  - Delays in the tariff notification remain, due to DISCOs' ongoing dispute with the regulator over tariff determination.
- Power sector operational reform:
  - Revenue-based load shedding has been strengthened, supply capacity is being increased, and quarterly performance targets for collection and loss reduction have been set for DISCOs.
- Power outages for industry (hours/per day) ↓ 9 1
  - Power outages for industrial consumers were significantly reduced.
- Power outages for urban consumers (hours/per day) ↓ 8 5
  - Power outages for consumers in urban areas were gradually reduced.
- The plan to reduce power sector arrears was updated in July 2016 to take into account the revised strategy to privatize DISCOs.
- While arrears have re-accumulated, the pace of accumulation has been substantially reduced.

### Gas sector reform and infrastructure
- Gas producer price (in PRs per MMBTU) ↑ 2.8-3.0 6-10
  - Gas price for producers was increased to provide incentives for investments and domestic gas production.
  - More than two thirds of existing domestic gas concessions have been converted to the new prices.
- Consumers gas tariff (in PRs per MMBTU) ↑ 540.26 46.9
  - A new gas tariff was notified in August 2015 and semi-annual notification is expected to resume, despite a delay in October 2016.
  - A Gas Infrastructure Development Cess (GIDC) was introduced in 2015 contributing to rationalizing gas prices.
- LNG gas supply (MMCFD) ↑ 0.04 00.0
  - LNG imports started in March 2015 and a long-term import contract was signed in February 2016.
  - The contract for a 2nd LNG terminal was awarded in June 2016 and will facilitate higher LNG imports.
- Unaccounted gas losses (percent) ↑ 10.1 11.5
  - Gas distribution losses remain significant and above international standards.
  - The Gas (Theft Control and Recovery) Act passed in March 2016 strengthens the framework to address gas theft.

### Restructuring and privatization of PSEs
- PSEs restructuring and privatization ↔ ....
  - Some successful capital market transactions.
  - The restructuring and privatization strategy was re-assessed in early 2016.
  - More limited private sector participation in PSEs is being sought while measures have been put in place reduce PSEs' financial losses.
- PSEs' annual losses (percent of GDP) ↓ 0.4 0.2
  - The accumulation of overall annual losses of PIA, PSM and Pakistan Railways declined.
- PSEs' accumulated losses (percent of GDP) ↑ 1.7 2.3
  - Cumulative losses of PIA, PSM and Pakistan Railways have further increased, but at a slower pace.

### Business climate reform
- Improving business climate ↔ ....
  - Pakistan's ranking in the WB's Doing Business declined in 2016.
  - Measures implemented: Virtual One-Stop-Shop for business registration, Alternative Dispute Resolution mechanisms, reducing procedures for paying taxes.
  - A new comprehensive strategy to improve business climate was adopted in February 2016 and is being implemented.

### Outlook and key macroeconomic indicators
- Growth and inflation:
  - Growth is estimated at 4.7 percent in FY 2015/16.
  - Growth will likely increase moderately to 5 percent in FY 2016/17.
  - Headline inflation declined to 2.9 percent (on average) during the last fiscal year and is expected to remain contained at 5.2 percent in FY 2016/17.
- External sector and reserves:
  - The current account deficit remained contained at 0.9 percent of GDP in FY 2015/16.
  - Pakistan’s exports fell by 8.6 percent (y-o-y) in FY 2015/16.
  - Foreign reserves increased to about 4.2 months of imports (76 percent of the ARA metric) at end-June 2016.
  - The current account deficit is expected to widen to about 1.5 percent of GDP in FY 2016/17.
  - Foreign reserves are expected to accumulate further (to about 4.5 months of imports).
- Other indicators and developments:
  - The number of Pakistani workers employed overseas rose by more than 25 percent y-o-y in 2015 and was mostly concentrated in the GCC countries.
  - Real effective exchange rate appreciation: about 17.5 percent over the three-year program period.
  - Contribution to CPI inflation series and reserve accumulation charts noted in source.

### Risks to the outlook
- External/ global risks:
  - Lower growth in advanced countries (UK, possibly EU owing to Brexit) and emerging markets (including China and GCC) could weaken exports, remittances and FDI.
  - Continued appreciation of the real effective exchange rate would further erode export competitiveness and affect remittances.
  - Tighter global financial conditions could adversely impact capital inflows.
  - Lower oil prices and a slower pace of international interest rate increases would be beneficial.
- Medium-to-long-term and domestic risks:
  - CPEC-related repayment obligations and profit repatriation risks.
  - Lower remittances if the slowdown in the GCC lasts longer than expected.
  - A more pronounced recovery of oil prices.
  - Domestic policy slippages, delays in restructuring or privatizing PSEs, legal challenges to electricity surcharges and revenue measures, political uncertainty, and difficult security conditions could affect activity and fiscal consolidation.

### Policy discussions and recommendations
- Overall macro-policy stance:
  - Preserve macroeconomic stability gains and advance growth-supporting structural reforms beyond the program.
  - Continue gradual fiscal consolidation, bolster external buffers with adequate exchange rate flexibility, maintain a prudent monetary policy stance, and strengthen financial sector resilience.
  - Advance structural reforms: restructuring and privatizing PSEs and the energy sector, and business climate reforms.
- Fiscal policy (highlights):
  - Authorities committed to budget deficit target of 3.8 percent of GDP (excluding foreign grants) in FY 2016/17.
  - Composition of adjustment: boost tax revenue by ½ percent of GDP (to about 13 percent of GDP); rationalize noncritical current expenditures by 0.1 percent of GDP; create room for increase of 0.2 percent of GDP in development spending.
  - Authorities agreed to contain public expenditures by an additional 0.3 percent of GDP to achieve the agreed FY 2016/17 fiscal target and to use the Fiscal Coordination Committee (FCC) to monitor budget implementation.
  - Authorities committed to bring the stock of NDA of the SBP below PRs 3,100 billion by end-August 2016 (prior action), met with a margin of PRs 288 billion.
  - Addressed a shortfall of about PRs 100 billion (or 0.3 percent of GDP) in combined collection of the GIDC and federal nontax revenue by cutting nonpriority expenditures.
  - Staff recommendations: strengthen fiscal accounting, contain wage bill growth, untargeted subsidies, non-priority transfers; re-balance revenue/expenditure responsibilities between federal and provincial governments; modernize agriculture taxation; improve property tax collection; improve sales tax collection on services.
  - Statistical discrepancy in fiscal accounts amounted to 0.7 percent of GDP in FY 2015/16.
- Fiscal framework and PPPs:
  - Revised FRDL Act: federal budget deficit limit of 4 percent of GDP excluding foreign grants for FY 2017/18–FY 2019/20, and 3½ percent of GDP thereafter; limit of 60 percent of GDP on general government debt until FY 2017/18, and a 15-year transition path toward 50 percent of GDP.
  - Staff urged improving fiscal accounts compilation, introducing an expenditure rule, strengthening budget preparation and approval, and establishing an independent fiscal council.
  - Draft PPP law under discussion: integrates PPPs into budget process, gives Ministry of Finance a gatekeeper role; staff highlighted need for strong secondary legislation, detailed feasibility and value-for-money analysis, strengthened risk management, inclusion of PPPs in fiscal accounts and debt statistics, a public register of PPP projects, and publication of PPP commitments.
- Debt management:
  - Adopted a medium-term debt management strategy in March 2016 with target ranges for currency, refinancing, and interest rate risk.
  - FY 2016/17 envisages continued borrowing from external sources, including development partners and capital markets.
  - Over the medium term, plan to gradually reduce external borrowing while containing short-term debt share; domestic strategy focused on lengthening average maturity and reducing maturity spikes.
  - Staff noted the share of short-term debt remains elevated and reliance on short-term financing is a vulnerability; recommended diversifying financing sources and lengthening maturity profile.
- Social protection:
  - BISP unconditional cash transfers (UCTs) reached 5.36 million beneficiaries at end-June 2016 (from 3.78 million beneficiaries in FY 2012/13).
  - Stipends have been increased by more than 60 percent.
  - Coverage of education-conditional cash transfers (CCTs) reached 1.3 million children.
  - Authorities plan to further expand UCT and CCT coverage and strengthen targeting and efficiency (LOI ¶13).
- Monetary and exchange rate policy:
  - Authorities committed to further accumulating international reserves through SBP spot purchases and taking advantage of favorable oil prices.
  - Staff emphasized that greater downward exchange rate flexibility would strengthen external buffers and support competitiveness.
  - Monetary stance: following an accommodative policy rate cut in May 2016 (by 25 bps), SBP should be prepared to tighten if inflationary pressures intensify and continue maintaining clearly positive real interest rates.

*Sources: Pakistani authorities; and IMF staff calculations.*

### introduction of a financial transactions tax for nonfilers of income tax returns) would reduce the

### _cr16325 - introduction of a financial transactions tax for nonfilers of income tax returns) would reduce the 

### Central bank autonomy and safeguards
- SBP developed a time-bound legislative action plan in August 2016 to address remaining recommendations of the 2013 Safeguards Assessment.
- Proposed amendments to the SBP law represent progress toward:
  - Clarifying the SBP’s objectives.
  - Enhancing its financial autonomy.
  - Limiting its scope for providing credit to the government.
- Several recommendations remain unaddressed in the action plan in the areas of:
  - Institutional autonomy.
  - Governance.
  - Personal autonomy of SBP board members.
- Staff encouraged the authorities to:
  - Pursue more ambitious reforms in line with recent technical assistance.
  - Move swiftly with implementation.
- An updated safeguards assessment completed in December 2013 concluded legal amendments are needed; authorities implemented 2013 safeguards recommendations except for legal amendments to the SBP Act which were only partially addressed (¶22, ¶35).

### Financial sector issues and resilience
- Overall system condition:
  - Banking system remains profitable and well-capitalized.
  - Efforts underway to strengthen capitalization of some small banks; SBP actively engaging with three small undercapitalized banks to bring them into regulatory compliance by end-2016.
    - One bank: partial capital injection and raising additional equity.
    - Second, publicly-owned bank: in divestment process.
    - Third bank: seeking to merge with a larger peer.
- Deposit insurance and regulatory reforms:
  - Deposit Protection Corporation Act enacted; authorities plan to make new deposit insurance operational by end-2016.
  - Phased implementation of Basel III capital and liquidity requirements by 2019.
  - SBP issued industry-wide instructions on eligible capital, capital conservation buffer, and liquidity standards of LCR and NSFR.
  - Strengthen supervision of systemically important banks and develop consolidated banking supervision.
- Pakistan Development Fund (PDF):
  - Should operate on a commercial basis with strong governance to mitigate financial risks and avoid quasi-fiscal activities.
- Nonperforming loans (NPLs):
  - Still high; addressing NPLs will support bank lending and private sector-led growth.
  - Needed actions: enhance debt enforcement regime, develop insolvency framework, strengthen market infrastructure for distressed debt.
  - Enactments welcomed: Corporate Restructuring Companies (CRC) Act and amendments to the Financial Institutions (Recovery of Finances) Ordinance.
  - Adoption of an appropriate Corporate Rehabilitation Act remains important.
- AML/CFT:
  - Amendments to AML Act to subject proceeds of serious tax crimes (including income tax) to AML legislation welcomed.
  - Authorities committed to implementation measures to bolster reporting of suspicious transactions related to tax evasion and enhance cooperation between the Financial Monitoring Unit and the FBR.
  - Staff stressed importance of strengthening AML/CFT effectiveness in line with international standards, including tackling proceeds of corruption and implementing relevant UN Security Council Resolutions on terrorism financing.

### Public Sector Enterprises (PSEs) and structural reforms
- Restructuring and private sector participation needed to restore financial viability and reduce fiscal costs.
- Recent setbacks to privatization in early 2016 due to political opposition and strikes; authorities reaffirm commitment to attract private participation and contain financial losses.
- Specific PSE measures:
  - Pakistan International Airlines (PIA):
    - Legislation requires government majority and management control.
    - Authorities committed to attract private participation and finalize transaction structure for minority sale by end-2016.
    - Measures to reduce PIA’s financial and operating costs to continue.
  - Pakistan Steel Mill (PSM):
    - Privatization process resumed in July 2016 after inconclusive provincial discussions; aim to conclude bidding by end-June 2017.
    - Authorities to implement measures to limit PSM's financial losses.
  - Pakistan Railways:
    - Improvements in revenue performance; authorities committed to move forward with restructuring plan.
  - Energy sector:
    - Expressions of interest solicited for divestment of KAPCO (July 15, 2016 SB); plan to finalize transaction by March 2017.
    - Preparatory work started for IPO of FESCO by February 2017, followed by IPOs for IESCO and LESCO by end of FY 2016/17.
    - Authorities committed to seek strategic private participation in DISCOs in the medium term.

### Energy sector performance and arrears
- End-June 2016 target on accumulation of power sector arrears met with a large margin due to:
  - Favorable oil prices.
  - Strengthening in DISCOs’ payment collection.
  - Reduction in distribution losses.
- No new accumulation of arrears in the fourth quarter of FY 2016/17; stock of outstanding arrears declined slightly.
- Authorities updated power sector arrears reduction plan (July 15, 2016 SB) to reflect DISCO privatization strategy changes.
- Measures to contain new arrears:
  - Strengthen DISCO performance by reducing distribution losses and increasing payment collections.
  - Continue setting quarterly performance targets.
  - Revise regulatory benchmarking for tariff determination and resolve issues with regional governments.
  - Use proceeds from planned IPOs of FESCO, IESCO and LESCO to reduce outstanding arrears.
- Tariff framework:
  - Multi-year tariff notification for FESCO, IESCO and LESCO was delayed (missed July 15, 2016 SB) due to litigation with regulator.
  - Staff emphasized establishing multi-year tariff framework to attract investors and preserve regulator independence.
- Gas sector:
  - Authorities committed to finalize delayed notification of FY 2016/17 gas tariff by October 2016 and resume regular gas notification.
  - Strategy to reduce gas shortages by stepping up LNG imports and fully pass through imported LNG price to consumers.
  - Need to reduce distribution losses, strengthen network infrastructure, and tackle gas theft.
  - Plan to restructure and unbundle the gas sector.

### Business climate, trade policy, and governance
- Authorities implemented key short-term measures to:
  - Ease starting new businesses.
  - Ease paying taxes.
  - Facilitate trading across borders.
  - Improve access to credit.
- Sustained implementation beyond program end is important to attract private sector investment.
- Simplification of import tariff structure from five to four slabs in July 2016 welcomed.

### Program modalities, financing, and IMF engagement
- Pakistan’s capacity to repay the Fund remains strong due to supportive macroeconomic policies and rising foreign exchange reserves.
- Pakistan will continue to benefit from disbursements from multilateral and bilateral partners beyond EFF program end and has access to international markets.
- Fund exposure:
  - Purchase upon completion of the eleventh review reached SDR 4.32 billion (about US$6.01 billion).
- External debt outlook:
  - Debt sustainability analysis: external debt remains on a medium-term downward trend under most stress scenarios, with external financing needs below the risk assessment benchmark.
  - Extreme stress scenario: external debt would rise over the medium-term and external financing would peak at 8 percent of GDP, above the medium-vulnerability risk benchmark (though still below the high-vulnerability risk benchmark).
  - Extreme test scenario assumptions: lower remittances, higher profit repatriation, sharp decline in FDI and equity portfolio inflows, higher external financing costs, and lower medium-term growth.
- Post-program engagement:
  - Authorities indicated no request for a follow-up arrangement after EFF expiry on September 30, 2016.
  - Staff supports Pakistan entering Post-Program Monitoring given outstanding credit exceeds 200 percent of quota and SDR 1.5 billion.
  - Pakistan projected to fall below PPM thresholds by 2023.
  - Staff recommends return to 12-month cycle for Article IV Consultations.
  - Planned technical assistance in national accounts and price statistics, fiscal reporting, debt management, and central bank consolidated supervision and contingency planning.

### Staff appraisal and policy recommendations
- Program outcomes and structural progress:
  - Macroeconomic stability restored; vulnerabilities reduced.
  - Growth increased, inflation contained, external buffers strengthened, fiscal deficit reduced, social safety nets strengthened, and financial sector resilience reinforced.
  - Structural advances: tax policy and administration reforms, partial SBP autonomy strengthening, AML/CFT improvements, energy sector reform reduced outages and subsidies, and business climate reform strategy initiated.
- Remaining challenges and required actions:
  - Public debt remains high despite fiscal consolidation.
  - Foreign reserves remain below comfortable levels.
  - Significant appreciation of the real exchange rate affecting competitiveness.
  - Need to complete structural reform agenda.
- Fiscal policy guidance:
  - Support authorities’ objective to reduce overall fiscal deficit (excluding foreign grants) to 3.8 percent of GDP in FY 2016/17 while increasing capital expenditure and strengthening social safety nets.
  - Continue fiscal consolidation beyond the fiscal year by:
    - Enhancing revenue mobilization by broadening the tax base.
    - Containing nonpriority spending.
    - Strengthening fiscal policy coordination between federal and provincial governments.
    - Further reducing the share of short-term debt.
  - Revised fiscal responsibility framework and new PPP framework to help anchor policy and manage fiscal risks.
- Monetary and exchange rate policy guidance:
  - Continue accumulating international reserves at a steady pace.
  - Allow for greater downward exchange rate flexibility to contain real exchange rate appreciation pressures.
  - Maintain a prudent monetary policy stance, clearly positive real interest rates, and be prepared to tighten monetary policy if inflationary pressures intensify.
  - More ambitious steps required to address remaining SBP safeguards recommendations.
- Financial sector policy guidance:
  - Make new deposit insurance operational.
  - Ensure all banks’ compliance with regulatory capital requirements.
  - Strengthen regulatory and supervisory framework.
  - Continue policies to reduce high NPLs.
  - Ensure PDF operates on a commercial basis to limit fiscal risks.
  - Continue enhancing AML/CFT framework in line with international standards.
- Structural reform acceleration:
  - Restructure and seek private participation in PSEs to reduce fiscal costs.
  - Complete power sector reforms to eliminate outages and address arrears.
  - Resume regular tariff notification and establish multi-year tariff frameworks for DISCOs to ensure cost recovery and attract private investors.
  - Swiftly implement business climate reform strategy to foster investment, private-sector-led growth, and job creation.

*Source: _cr16325 - introduction of a financial transactions tax for nonfilers of income tax returns) would reduce the*

### 42.      On the basis of Pakistan’s performance under the extended arrangement and

### On the basis of Pakistan’s performance under the extended arrangement and

### Review, staff assessment, and consultations
- Staff supports the authorities’ request for completion of the twelfth review under the arrangement.
- Staff supports waivers for nonobservance of the end-June PCs on the budget deficit and NDA.
- Staff supports Pakistan entering into PPM.
- Staff recommends a return to the 12-month cycle for Article IV Consultations.

### Strengthening the Business Climate — summary of constraints and reform progress
- Key constraints noted:
  - Lengthy procedures and high costs for opening a new business.
  - Limited access to credit, notably for small and medium enterprises (SMEs).
  - Complex border trading requirements.
  - Constraints in accessing electricity.
  - Weak contract enforcement.
  - Pakistan’s World Bank Doing Business ranking slipped to 138 in 2016 (out of 189 economies) from 136 in 2015.
- Reforms implemented under the 2014 Action Plan and 2014–15 program:
  - Launched an integrated virtual One-Stop-Shop (VOSS) for investors; physical OSSs became operative in Lahore and Islamabad.
  - Reduced number of procedures for paying taxes via an integrated web-based platform (IRIS) covering the full spectrum of business processes; tax filing for traders simplified.
  - Introduced pilot Alternative Dispute Resolution (ADR) mechanisms to facilitate commercial dispute resolution.
  - Adopted a new National Financial Inclusion Strategy; strengthened the credit information system.
  - Launched a web-based portal (WeBOC) to facilitate processing of export/import documents; introduced an electronic export form.
- 2016 country-wide reform strategy adopted in February 2016:
  - Defines specific time-bound measures (short-term, medium-term, longer-term) at federal and provincial level targeting the ten areas covered by the World Bank’s Doing Business indicator.
  - Short-term focus: ease procedures to start a new business and paying taxes, facilitate access to credit and trading across borders, strengthen the regulatory framework.
- Key short-term measures implemented in 2016:
  - Enhanced utilization and accessibility of VOSS; fee structure rationalized to reduce costs to open a new business.
  - Strengthened capacity of the IRIS web portal; developed a new electronic tax filing procedure.
  - Secured Transaction Act (use movable property as collateral) and amendments to the Credit Bureau Act 2015 approved by the National Assembly; regulations for credit bureaus issued.
  - Corporate Restructuring Companies Act enacted; Corporate Rehabilitation Act submitted to parliament.
  - Rolled out an electronic form for imports; Real Time Electronic Data Exchange to facilitate trade with China became operational.
- Further reform priorities (recommended/complementary actions):
  - Complete automation of VOSS and expand physical OSSs.
  - Amend the 1984 Companies Ordinance to reduce start-up procedures for small-sized companies.
  - Consolidate payments at the provincial level and facilitate use of digital signatures.
  - Complete roll-out of electronic tax filing, new simplified tax forms, and implement an associated electronic payment system.
  - Enact amendments to the Credit Bureau Act 2015, license private credit bureaus under the new Bureau Act, and develop secondary regulations to implement the Secured Transaction Act.
  - Expedite execution and registration of deeds, digitalize maps, and provide online access to land records to facilitate property registration.
  - Expand use of ADR mechanisms, roll out case management systems in district courts, establish specialized commercial courts, and enact the Corporate Rehabilitation Act to strengthen the bankruptcy framework.
  - Complete roll-out of WeBOC, strengthen IT infrastructure, implement an integrated platform for clearance of goods, and rationalize physical inspections to ease cross border trading.

### Improving Living Standards and Inclusiveness — developments and indicators
- Growth and income:
  - GDP growth averaged 4.3 percent during 2000–15.
  - Pakistan’s per capita income increased by 40 percent during 2000–15 (remains below the South Asia average).
- Poverty and unemployment:
  - Poverty headcount dropped by more than 40 percent over the period noted.
  - Unemployment remains high at nearly 6 percent.
  - About 30 percent of the population is still below the poverty line.
- Education, health, and public spending:
  - During 2000–14, primary gross enrollment ratio reached 94 percent and the youth literacy rate reached 73 percent.
  - Infant mortality decreased to 66 per 1,000 live births.
  - Life expectancy increased to 66.4 years.
  - Public expenditure on education increased from 1.8 to 2.5 percent of GDP.
  - Public expenditure on health increased from 0.6 to 0.9 percent of GDP.
  - Access to improved water sanitation facilities increased to about 60 percent of the population; access to improved water sources reached about 90 percent.
  - Pakistan ranks 147 out of 188 countries on the Human Development Index in 2015 (unchanged from 2009).
- Gender and labor market:
  - Pakistan ranks 144 out of 145 countries in 2015 on the Gender Gap Index.
  - Gaps between male and female labor force participation and unemployment remain substantial; participation and unemployment slightly decreased to 58 percent and 5 percent, respectively, in 2014.
  - Primary gross enrollment ratio differential is high at 15 percent.
- Social safety nets — BISP:
  - BISP (Benazir Income Support Programme) provides unconditional cash transfers (UCTs) and conditional education cash transfers (CCTs).
  - During the EFF-supported program:
    - UCTs were increased by more than 60 percent.
    - UCT coverage broadened to 5.36 million beneficiaries.
    - CCT coverage increased to 1.3 million children.
  - Impact evaluation: UCTs contributed to reduce poverty among BISP beneficiaries (20 percent reduction in the proportion of beneficiaries living below the poverty line from 2011 to 2014 in the sample) and strengthened women’s empowerment by providing the cash transfer to any ever-married woman in a BISP-eligible household.
  - Impact of CCTs on education remains more limited since the size of the transfer is low compared to the cost of schooling (Oxford Policy Management, 2015).

- Selected indicator values (as presented)
  - GDP growth (% at constant factor costs): 3.9 9.0 2.6 3.6 3.8 3.7 4.1 6.9 4.0
  - GNI per capita (in 2005 US dollars): 612 729 790 800 815 833 858 1,496 ..
  - Unemployment (% of total labor force): 7.8 7.7 5.6 6.0 6.0 6.2 6.0 3.9 5.9
  - Employment to population ratio (%): 47.3 48.8 51.2 51.3 51.5 51.6 51.7 54.0 ..
  - Infant mortality rate (per 1,000 live births): 87.7 80.0 73.5 72.1 70.6 69.1 67.4 42.0 65.8
  - Poverty headcount ratio (% of population): .. 50.4 36.8 36.3 .. 29.5 ......
  - GINI index: .. 32.7 29.6 ........ 31.4 ..

### The Macroeconomic Impact of the China-Pakistan Economic Corridor (CPEC)
- Scale and composition:
  - Total size of CPEC is estimated at around US$44½ billion (about 16 percent of FY 2015/16 GDP).
  - More than half (US$28 billion) is allocated to “early harvest” projects over the next few years; the remainder expected to materialize up to 2030 and beyond.
  - Of the early harvest projects, about $10 billion allocated to road, rail, and port infrastructure (to be executed within the government’s regular development spending envelope).
  - The remaining $18 billion (6 percent of GDP) will largely cover energy projects provided through FDI.
- Financing modalities:
  - Energy sector: power plant projects funded through FDI by Chinese firms with commercial loans borrowed from Chinese banks; firms operate as Independent Power Producers (IPPs) with electricity sales guaranteed through pre-negotiated power purchase agreements including guaranteed tariffs.
  - Transport sector: financing provided by the Chinese government and state banks mostly as concessional loans.
  - Other smaller infrastructure projects: mix of concessional loans and grants.
- Short- to medium-term external balance effects:
  - Early harvest projects contributed to a pickup in FDI, imports of machinery and industrial materials, and the government’s external financing in FY 2015/16.
  - Staff projects CPEC-related capital inflows (FDI and external borrowing) to reach about 2.2 percent of the projected GDP in FY 2019/20.
  - Staff projects CPEC-related imports to about 11 percent of the total projected imports in FY 2019/20.
  - Current account deficit expected to widen during the investment phase; manageable net inflows into the balance of payments are anticipated.
- Broader economic impacts:
  - CPEC could alleviate long-standing supply-side bottlenecks and lift long-term potential output if implemented as envisaged.
  - Priority energy projects expected to add significant power-generation capacity within the next few years; subsequent projects could further expand capacity.
  - Transport infrastructure projects (roads, railways, port upgrades) would reduce costs and improve access to domestic and overseas markets, promoting merchandise trade and service exports.
  - CPEC projects could catalyze private business investment and boost productivity by facilitating more efficient allocation of productive inputs across regions.
- Longer-term fiscal and external outflows:
  - Profit repatriation by Chinese IPPs expected to rise as operations commence; magnitude depends on timing and terms of power purchase agreements.
  - Repayment obligations to CPEC-related government borrowing (amortization and interest) expected to rise after FY 2020/21.
  - Combined CPEC-related outflows could reach about 0.4 percent of GDP per year over the longer run.
- Estimated financing for "Early Harvest" Projects (US$, millions):
  - Energy: FDI 18,000; Concessional loan 0; Commercial loan 0; Grant 0; Total 18,000
  - Transportation: FDI 1,247; Concessional loan 6,465; Commercial loan 1,620; Grant 0; Total 9,332
  - Other infrastructure: FDI 0; Concessional loan 259; Commercial loan 0; Grant 228; Total 487
  - Total (early harvest): FDI 19,247; Concessional loan 6,724; Commercial loan 1,620; Grant 228; Total 27,819

*International Monetary Fund staff report on Pakistan (content unit).*

### Box 3. The Macroeconomic Impact of the China-Pakistan Economic Corridor (Concluded)

### Box 3. The Macroeconomic Impact of the China-Pakistan Economic Corridor (Concluded)

### CPEC potential and macroeconomic policy priorities
- Supported by increased energy supply and transportation capacity, CPEC has the potential to catalyze higher private investment and exports, which would help cover the CPEC-related outflows that are expected over the longer term.
- Reaping the full potential benefits of CPEC will require forceful pro-growth and export-supporting reforms. These include improvements in the business climate, and strengthening governance and security.
- Real effective exchange rate appreciation should be contained by allowing greater downward exchange rate flexibility and keeping inflation well anchored.
- Fiscal policy should remain prudent and debt management should be strengthened to keep the long-term public debt path sustainable.
- The authorities noted that additional Chinese investment over the longer term, building on CPEC as a platform, could also help cover the projected CPEC-related outflows.
- Baseline projection assumption: the completion of “early harvest” projects would extend up to FY 2020/21, given large uncertainties and Pakistan’s absorptive capacity.

### Project evaluation, management, and transparency
- Sound project management and monitoring system should be in place to ensure timely implementation and mitigate risks.
- There is a need to ensure sound project evaluation and prioritization mechanisms based on effective cost-benefit analysis and realistic forecasts of macroeconomic and financing conditions.
- The procurement process should be transparent and competitive.
- There is a need to ensure transparency and accountability in project management and monitoring.

### Power sector arrangements and infrastructure needs
- Power purchase agreements with Chinese IPPs should be negotiated with terms that would adequately incentivize investment while ensuring that the cost of generated power remains favorable for the distribution system and consumers.
- Capacity improvements in the power transmission network will be needed to keep up with the increasing supply.

*Source: IMF staff box text.*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Program performance and recent reforms
- Over the past three years, the program "rebuilt our external buffers, contained inflation, and reduced fiscal imbalances while strengthening social safety nets."
- Structural and institutional reforms implemented:
  - Strengthened monetary policy framework and SBP autonomy (including amending the SBP law and establishing an independent monetary policy committee).
  - Improved resilience of the financial sector; enacted the Deposit Protection Corporation Act and Corporate Restructuring Companies (CRC) Act; amended the Financial Institutions (Recovery of Finances) Ordinance.
  - Strengthened public financial management and tax administration; reduced tax concessions and exemptions and untargeted energy subsidies.
  - Reduced accumulation of power sector arrears and updated the power sector arrears reduction plan.
  - Simplified trade regime and initiated a strategy to improve the business climate.
  - Began work on restructuring and divestment of ailing public sector enterprises (PSEs); solicited expressions of interest for disinvestment of KAPCO.
- Twelfth and last review under the three-year EFF-supported program:
  - Most end-June 2016 quantitative performance criteria (PCs) were met; the PCs on the budget deficit and Net Domestic Assets (NDA) of the SBP were missed by small margins.
  - Indicative targets at end-June 2016 on tax revenue, social spending under BISP, and accumulation of power sector arrears were met.
  - Requesting waivers of nonobservance for the two missed PCs, citing budgetary adjustments and measures to ensure monetary expansion within safe limits.
  - Most structural benchmarks for the twelfth review were met; notification of multi-year tariffs for three power distribution companies was further delayed due to dispute with the regulator over FY2015/16 determined tariffs.

### Macroeconomic near-term outlook
- Real economic growth:
  - Increased to 4.7 percent in FY2015/16.
  - Expected to accelerate to 5.7 percent in FY2016/17, supported by construction, private sector credit growth, and CPEC-related investment.
  - In the context of the program, the government maintains a growth projection of 5 percent.
- Inflation and current account:
  - Expected end-year inflation: 5.3 percent in FY2016/17.
  - Current account deficit: 0.9 percent of GDP in FY2015/16; expected to increase to 1.5 percent of GDP.
- Reserves and external buffers:
  - Gross international reserves reached US$18.1 billion at end-June 2016.
  - Expected to increase to $20.8 billion in FY2016/17 (covering 4.5 months of prospective imports).

### Fiscal policy: objectives, outcomes, and measures
- FY2015/16 fiscal performance:
  - FY2015/16 deficit target: 4.4 percent of GDP (including adjustor of 0.3 percent of GDP for exceptional spending).
  - Missed by PRs 57 billion (or 0.2 percent of GDP) due to lower-than-expected provincial surpluses; federal government contained federal spending to partly compensate.
  - Over the last three years, achieved fiscal adjustment of 3.9 percent of GDP (or 4.2 percent of GDP after excluding exceptional expenditures of 0.3 percent of GDP).
- FY2016/17 fiscal strategy:
  - Target deficit: 3.8 percent of GDP (excluding foreign grants), reflecting baseline deficit of 3½ percent of GDP and extraordinary spending of 0.3 percent of GDP on security and resettlement of internally-displaced persons.
  - Will manage budgetary spending prudently; reduce noncritical current and capital expenditures as necessary; take additional measures if deviations occur.
- Revenue mobilization and tax reforms:
  - Tax revenue-to-GDP ratio increased by 2.4 percent of GDP to 12.4 percent in FY2015/16—the highest level since 1999.
  - Number of tax filers increased by 30 percent over the last three years to more than 1 million.
  - Eliminated tax concessions and exemptions and restricted SRO-based concessions.
  - Recent measures: differential tax rates for filers and nonfilers; sending more than 300,000 first notices to nonfilers; rationalized valuation for real estate taxes.
  - Commitments: refrain from granting concessions, exemptions, or amnesties; enhance tax policy measures; accelerate administrative reforms to broaden the tax base and modernize the tax system.
  - Tax policy measures planned:
    - (i) Broadening the tax base;
    - (ii) modernizing the General Sales Tax (GST) regime on goods and services with few exceptions in close coordination with the provinces;
    - (iii) establishing a tax policy research and analysis unit outside the FBR.
  - Tax administration reforms planned:
    - (i) Improving FBR's access to third-party information;
    - (ii) ensuring data matching between domestic taxes and customs;
    - (iii) accelerating implementation of risk-based auditing focused on high net worth individuals and large companies;
    - (iv) building a centralized fiscal cadastre;
    - (v) putting in place additional governance and anti-corruption measures at the FBR;
    - (vi) seeking parliamentary approval of legislation against "benami" transactions by December 2016;
    - (vii) reducing outstanding stock of tax refund claims to no more than a three-month flow.
- Expenditure composition and public financial management:
  - Reduced poorly targeted energy subsidies by about 1 percentage point to 0.6 percent of GDP in FY2015/16.
  - Expanded cash transfers to low-income households by 0.12 percentage points to 0.4 percent of GDP.
  - Increased capital spending by 0.5 percent of GDP.
  - FY2016/17 budget intends to lower energy subsidies to 0.4 percent of GDP and continue rationalizing current expenditures while increasing targeted social assistance in real terms and improving the share of development spending.
  - Amended the Fiscal Responsibility and Debt Limitation (FRDL) Act with a limit on the federal government budget deficit and a gradual reduction in the general government debt ratio.
  - Submitted a new public-private partnership (PPP) law to parliament; PPP law integrates PPPs into the budget process and grants the Ministry of Finance a gatekeeper role.
  - Continue to enhance medium-term budget framework and fiscal accounts across all levels of government.
- Intergovernmental fiscal coordination:
  - Established the Fiscal Coordination Committee (FCC) of provincial and federal finance secretaries to hold quarterly meetings.
  - Encouraging provincial governments to enhance their own revenue mobilization, bringing agriculture, services, and property into the tax net and improving taxpayer compliance.
- Debt management:
  - Created the Debt Policy Coordination Office (DPCO) integrated in the Ministry of Finance as a middle office.
  - Adopted a medium-term debt strategy and prepare quarterly risk reports.
  - Lengthened average maturity of domestic debt and continue to diversify domestic and international financing sources; will further lengthen maturity and increase DPCO staffing.

### Social protection (BISP)
- Coverage and spending:
  - Expanded unconditional cash transfers (UCTs) from 3.78 million beneficiaries in June 2013 to 5.36 million at end-August 2016.
  - Increased cash transfers from PRs 3,000 (per beneficiary, per quarter) in June 2013 to PRs 4,700 in FY2015/16.
  - Increased annual budget allocation to BISP from PRs 75 billion in FY2013/14 to PRs 115 in FY2016/17.
  - Target to expand UCT coverage to 5.45 million beneficiaries by end-March 2017.
  - Piloting biometrics-based transaction system; updating National Socio Economic Registry by mid-2018.
  - Rolled out education-conditional cash transfers in 32 districts and expanded coverage to reach 1.3 million children at end-June 2016; will extend CCT coverage to 1.6 million children in FY2016/17.
- Objective: strengthen targeting and efficiency of BISP and protect the most vulnerable.

### Monetary and exchange rate policies
- Reserve and inflation outcomes:
  - Gross international reserves rose from US$6 billion in FY2012/13 to US$18.1 billion at end-June 2016 (covering more than four months of prospective imports).
  - Inflation reduced to less than 3 percent (on average) in FY2015/16 from more than 7 percent in FY2012/13.
- Policy stance and commitments:
  - Aim to build reserves further while supporting exchange rate flexibility and improving trade competitiveness (addressing real effective exchange rate appreciation).
  - Maintain a prudent monetary policy stance to preserve low inflation and positive real interest rates by setting the policy rate on a forward-looking basis.
  - Following a minor overrun in NDA relative to end-June PC, brought the stock of NDA to below PRs 3100 billion by end-August 2016 (subject to program adjustors; prior action).
  - Will implement remaining recommendations of the 2013 Safeguards Assessment to strengthen SBP autonomy; SBP remains autonomous in profit appropriation decisions (delegated to SBP Board in March 2016).
  - Aim to implement an inflation targeting framework over the medium-term; will strengthen SBP's analytical capabilities, improve transparency, and disseminate information on inflation expectations and forecasts.

### Financial sector: reforms and ongoing actions
- Achievements over the last three years:
  - Banking system indicators improved: higher profitability, robust capital adequacy, strengthened liquidity indicators, declining ratios and better provisioning of NPLs, and revival of private sector credit.
  - Enacted Deposit Protection Corporation Act (establish deposit protection scheme; end-August 2016 SB).
  - Enacted CRC Act and amended recovery framework to improve NPL resolution.
  - Phased implementation of Basel III capital and liquidity requirements underway.
- Ongoing and planned actions:
  - Implement "SBP Vision 2020" strategic plan to improve banking sector resilience, supervisory vigilance, and risk management.
  - Ensure three remaining undercapitalized banks are brought into regulatory compliance:
    - One bank injected part of required capital and is raising additional equity through a rights issue by end-September.
    - Another publicly owned bank is in divestment process, expected to be completed by end-2016.
    - One small bank seeking to merge with a larger peer, expected to be completed by end-September 2016.
  - Strengthen legal and regulatory framework and macroprudential measures; strengthen supervision of systemically important banks and develop consolidated banking supervision.
  - Continue phased implementation of Basel III norms and efforts to resolve NPLs; work towards early enactment of the Corporate Rehabilitation Act.
  - Make new deposit insurance operational by end-December 2016.
  - Operate the Pakistan Development Fund to finance infrastructure projects on a commercial basis and mobilize international development partner participation for technical expertise, financing, and governance.

*Appendix I. Letter of Intent, September 9, 2016.*

### 19.      We will continue enhancing the effectiveness of the anti-money laundering and

### _cr16325 - 19.      We will continue enhancing the effectiveness of the anti-money laundering and

### Anti‑Money Laundering and Combating the Financing of Terrorism (AML/CFT)
- Amended the AML Act to subject the proceeds of serious tax crimes to AML legislation.
- Implementation measures to be developed to:
  - Bolster the reporting of suspicious transactions related to tax evasion by financial and nonfinancial institutions.
  - Enhance the proper use of financial intelligence and sharing of information and cooperation between the Financial Monitoring Unit and the FBR to address tax evasion while improving the enforcement of revenue collection.
- Commitment to continue strengthening the AML/CFT framework in line with international standards to prepare for the Asia Pacific Group mutual evaluation in 2018, including:
  - Tackling the proceeds of corruption.
  - Strengthening effective implementation of relevant United Nations Security Council Resolutions related to terrorism and terrorist financing.

### Reforming Public Sector Enterprises (PSEs)
- Divestment and restructuring progress:
  - Resumed divestment program after a gap and raised PRs 173 billion from divestments, including over US$ 1.1 billion from foreign investors.
  - Transactions included sale of minority stakes in United Bank Limited (UBL), Allied Bank Limited (ABL), Habib Bank Limited (HBL), Pakistan Petroleum Limited (PPL), and strategic sale of National Power Construction Co. (NPCC).
  - Solicited expressions of interest (EOIs) for disinvestment of government residual stake in Kot Addu Power Company (KAPCO) (July 15, 2016 SB).
  - Solicited EOIs for strategic private participation in SME Bank; bill to corporatize State Life Insurance Corporation (SLIC) passed by the National Assembly.
  - Implementing comprehensive restructuring plan for Pakistan Railways; improved revenues via freight service improvements, tariff rationalization, expenditure controls, and governance strengthening.
- Policy commitments and timelines:
  - Pakistan International Airlines (PIA):
    - Government to maintain majority shares and management control while attracting private participation.
    - Separate core and noncore activities; approve transaction structure for offering a minority stake to strategic partner and/or general public by end-December 2016; complete bidding by August 2017.
    - Continue measures to contain financial losses: (i) route rationalization and fleet modernization/expansion, (ii) reduce financial and operational costs, (iii) improve services to regain customer confidence.
  - Pakistan Steel Mills (PSM):
    - Resume process to attract strategic private participation (resumed July 2016).
    - Finalize transaction structure by September 2016; conclude bidding by end-June 2017.
    - Continue to limit PSM's financial losses.
  - Pakistan Railways:
    - Continue restructuring: improve freight and passenger services, diversify revenues through new ventures, strengthen internal organization, improve financial accounting practices to converge toward IFRS.
  - Energy sector:
    - Finalize divestment in KAPCO by March 2017.
    - Conduct IPO for FESCO by February 2017; IPOs for IESCO and LESCO by end of FY 2016/17.
    - Utilize IPO proceeds to reduce stock of outstanding circular debt in power sector.
    - Continue to improve DISCOs' performance, reduce system financial losses, and divest stakes in DISCOs in the medium term.
  - Other companies:
    - Finalize SME Bank transaction by end-December 2016.
    - Divest government shares in Mari Petroleum Limited (MPCL) to existing shareholders by October 2016.
    - IPO for SLIC by end-March 2017.
- Resolve expressed to restructure and attract private sector participation to reduce fiscal costs, ensure medium-term financial viability, and improve efficiency.

### Energy Sector Reforms — Power Sector
- Achievements over last three years:
  - Reduced unscheduled electricity outages; increased supply by adding new generation capacity and rehabilitating existing plants.
  - Improved demand management, regulatory framework, and governance.
  - Reduced budgetary subsidies and contained accumulation of new payable arrears by: (i) improving DISCOs' performance, (ii) rationalizing tariffs and introducing surcharges toward cost recovery while maintaining a uniform tariff, (iii) reducing delays in tariff determination.
  - Net reduction in payables in fourth quarter led to stock of circular debt declining to PRs 321 billion at end-June 2016.
  - Stock of debt held in PHCL maintained at PRs 335 billion.
  - DISCOs' distribution losses reduced to 17.9 percent in FY 2015/16 from 18.9 percent in FY 2012/13.
  - Collection rates increased to 92.6 percent in FY 2015/16 from 87.2 percent in FY 2012/13.
- Further commitments and actions:
  - Updated circular debt reduction plan (July 15, 2016 SB) to reflect DISCO divestment strategy changes.
  - Continue to improve DISCO performance: further reduce losses and increase recoveries; use IPOs and successive divestment proceeds to reduce outstanding circular debt.
  - Resolve outstanding issues with Azad Jammu and Kashmir (AJK) by September 2016.
  - Continue dialogue with NEPRA to revise regulatory benchmarking for tariff determination in relation to recoveries and losses, while preserving regulatory integrity.
  - Notify delayed FY 2015/16 tariffs at the earliest, including notification of multi-year tariffs for FESCO, IESCO and LESCO (missed July 15, 2016 SB); resume timely and regular tariff notification process thereafter.
  - More than double electricity generation capacity in the medium term, including through CPEC projects; maintain regulatory framework allowing for cost recovery, strong governance and monitoring of CPEC and other generation projects, and manage associated risks.

### Energy Sector Reforms — Gas Sector
- Achievements:
  - Implemented strategy to increase gas supply through imports and encouraging domestic production, leading to 500 MMCFD (or 13 percent) increase.
  - Began importing Liquefied Natural Gas (LNG) in March 2015; launching LNG terminals and expanding transportation network in progress.
  - Passing full cost of LNG imports to end-consumers.
  - Implemented Petroleum Policy 2012 and raised producer prices by 50 percent (on average); awarded new exploration licenses and converted existing ones.
  - Rationalized end-user gas price to bring it closer to cost recovery.
  - Tackled gas system losses by formulating and implementing gas loss reduction plans and enacting the Gas (Theft Control and Recovery) Act.
  - Reviewed rules for third party access to gas network and strengthened governance via periodic monitoring and evaluation reports; completed study on unbundling options.
- Further commitments and actions:
  - Resume regular semi-annual gas tariff notification to ensure cost-recovery and avoid build-up of losses for gas companies.
  - Complete FY 2016/17 tariff determination by early October 2016, followed by notification of revised tariff; continue to fully pass through price of imported LNG to consumers.
  - Continue to increase LNG imports and required transport infrastructure.
  - Ensure appropriate incentives to increase domestic production and revise incentives in nonconventional gas policies.
  - Reduce system gas losses through network investment, managerial, technical and administrative improvements.
  - Amend rules for third party access to gas transmission system by December 2016 to increase competition.
  - Unbundle the gas sector within FY 2017–18.

### Improving the Business Climate and Liberalizing Trade
- Progress made:
  - Implemented measures from 2014 Action Plan and launched a new comprehensive country-wide reform strategy in early 2016 with time-bound federal and provincial measures.
  - Facilitated starting a new business, paying taxes, and getting credit; strengthened regulatory framework and simplified trade across borders.
  - Introduced one-stop-shops and rationalized fee structure for opening new businesses.
  - Reduced procedures for paying taxes; introduced Alternative Dispute Resolution (ADR) mechanisms; adopted National Financial Inclusion Strategy.
  - Improved credit information systems and collateral framework; enacted amendments to the Credit Bureau Act 2015 and issued regulations for credit bureaus.
  - Launched a web-based portal to simplify trade documentation.
- Further actions planned:
  - Complete automation of OSSs and reduce start-up procedures for small-sized companies.
  - Improve electronic payment systems to ease paying taxes.
  - License private credit bureaus under the new Credit Bureau Act and develop regulations to strengthen the collateral framework.
  - Encourage provinces to expedite execution and registration of deeds, digitize maps, and provide online access to land records.
  - Expand ADR mechanisms, increase case management in district courts, and establish specialized commercial courts.
  - Further simplify procedures for trade documentation.
  - Maintain an open trade regime; reduced import tariff slabs from seven to four and phased-out trade-related SROs.
  - Took advantage of Generalized System of Preferences Plus benefits with the European Union from January 2014 and will start negotiations for its extension.

### Conclusions and Program Closure
- Proposal for completion of the twelfth and last review under the Extended Arrangement, based on successful program performance and remedial actions.
- Commitment to pursue consultation and policy dialogue following conclusion of the EFF program and to follow prudent economic policies to preserve and consolidate macroeconomic stability gains and continue growth-supporting structural reforms.
- Authorization granted to the International Monetary Fund to publish this Letter of Intent and its attachments, and the related staff report.

*Source: _cr16325 - 19.      We will continue enhancing the effectiveness of the anti-money laundering and (IMF staff report content provided).*

### 1.      Stock and flow of payables in the power sector. The stock of payment arrears includes

### Stock and flow of payables in the power sector

### Key stock figures
- The stock of payment arrears includes the payables of PRs 321 billion, and the stock of PHCL of PRs 335 billion at end-June 2016.

### Flow and components (FY 2014/15 and FY 2015/16)
- The evolution of the stock and the flow of payables, including its components, is presented in the source tables (quarterly flows and total stocks by component).
- Selected component figures from the flow table (In Billion PRs):
  - Non-recoveries: 16, 37, 12, (6), 16.00, 3.0, 19, 12, 104, 46 (as reported in the table).
  - Excess Line Losses: 11, 22, (3), (8), 0.40, (2.7), 4, 5, 50, 17.
  - Accrued Markup: 23 (appears in the table for one quarter).
  - Late Payment Surcharge: 1, 1, 1, 8 (as reported).
  - Delay Determinations: 3, -, 3, -, 11 (as reported).
  - Flow (under arrears plan): 31, 59, 13, (13), 16, 0.3, 23, 17, 210, 63.
  - Operational deficit/surplus of the system: 10, 15, 36, 3, (18), n.a., 43.
  - Impact of oil prices: (56), (20), (2), (29), (8), (14), n.a., (119).
  - Others 1/: (4), 18, 12, 19, n.a., 45.
  - Stock clearance: 47, 4, 63, -, -, (14), -, (15), n.a., (25).
  - Total flow (quarterly entries in table): 13, 0, 15, 5, 18, (10), 48, 8.
  - Total (Stock) entries in the table include: 297, 326, 287, 326, 341, 331, 350, 321, 313, 321.
- Note 1/: Includes STFC arrears due to court stay, LNG payment arrears due to delay in tariff determination and other costs not recovered.

### Performance of DISCOs

### Bill collection (Target vs Actual) — selected aggregate figures
- The source provides quarterly target and actual bill collection percentages for each DISCO and aggregates.
- Examples from the tables (In percent):
  - TOTAL DISCOs: Target 86.9, Actual 95.6 (Q1).
  - FY 2015/16 aggregate (TOTAL DISCOs) reported Actual: 94.6 (as shown in the bill collection table).

### Distribution losses (Target vs Actual) — selected aggregate figures
- The source provides quarterly target and actual distribution loss percentages for each DISCO and aggregates.
- Examples from the tables (In percent):
  - TOTAL DISCOs losses: Target 21.1, Actual 12.4 (Q1).
  - TOTAL DISCOs losses — FY 2015/16 aggregate Actual: 17.9 (as shown in the losses table).

### Operational and institutional measures
- In October 2015, quarterly quantitative targets were determined by MWP and each DISCO for distribution losses and collection.
- The tables show significant variation across DISCOs and quarters in both collection and losses, with many DISCOs improving collection above targets in some quarters and reducing losses relative to targets in others.

### Program implementation and macroeconomic performance

### Program design and implementation
- The EFF-supported program addressed macroeconomic imbalances, structural weaknesses, power shortages, and security/political concerns through fiscal consolidation, revenue strengthening, inflation reduction, rebuilding foreign exchange reserves, financial stability, energy-sector reforms, trade liberalization, PSE restructuring/divestment, business climate improvement, and protection of vulnerable groups.
- The program included 47 structural benchmarks (SBs) over three years, including enactment of 18 laws by parliament.
- Performance under the 12th and final review: all end-June 2016 performance criteria (PCs) and indicative targets were met except two PCs on the overall budget deficit and Net Domestic Assets (NDA) of the State Bank of Pakistan (SBP), missed by small margins. Corrective measures were taken to limit NDA by end-August and to cut non-priority expenditures.

### Growth, inflation, and reserves
- Growth reached 4.7 percent in FY 2015/16 (highest in eight years).
- Staff projects growth to increase to 5 percent in FY 2016/17; authorities target 5.7 percent in FY 2016/17.
- Inflation is expected to remain contained at 5.3 percent at end-FY 2016/17.
- Gross international reserves grew from 1.5 months of imports in FY 2012/13 to 4.2 months in FY 2015/16 and are likely to reach 4.6 months of imports in FY 2016/17.
- Pakistan’s equity market MSCI Pakistan index was reclassified to Emerging Markets status, effective May 2017 (as reported).

### Fiscal policy and social protection

### Fiscal consolidation outcomes and targets
- The authorities curtailed the budget deficit by 3.9 percentage points of GDP over the program period to reach 4.6 percent of GDP (excluding grants) in FY 2015/16.
- Target deficit for FY 2016/17: 3.8 percent of GDP.
- Tax-to-GDP ratio improved by 2.4 percentage points over the program period.
- Authorities are targeting an increase in the tax-to-GDP ratio to 14.5 percent by FY 2019/20.

### Public debt and fiscal rules
- Gross public debt: 62 percent of GDP in FY 2014/15; 64.7 percent of GDP in FY 2015/16 (including buildup of government deposits).
- Fiscal Responsibility and Debt Limitation Act amendments proposed to:
  - Cap the federal budget deficit at 4 percent of GDP (excluding grants) for the next three fiscal years and 3.5 percent thereafter.
  - Reduce the debt-to-GDP ratio to 60 percent by FY 2017/18 and to 50 percent over a 15-year transition period.
  - Define escape clauses and establish enforcement procedures and corrective mechanisms.

### Social spending and BISP
- Number of beneficiary households for unconditional cash transfers under BISP increased by 42 percent during the program period.
- Stipends increased by 57 percent.
- Education-related conditional cash transfers have reached 1.3 million school-going children.

### Monetary and exchange rate policy

- Monetary and exchange rate policies aimed at price stability and reserve accumulation, including SBP spot purchases.
- Authorities will maintain exchange rate flexibility and set policy rate in a forward-looking fashion to maintain positive real interest rates and anchor inflation.
- Following a policy rate cut in May 2016, SBP remains prepared to increase the policy rate if inflationary pressures reemerge.
- SBP autonomy and governance strengthened through amendments to the SBP law; an independent Monetary Policy Committee (MPC) now meets regularly and publishes minutes.
- SBP to continue implementing remaining recommendations of the 2013 Safeguards Assessment and to enhance analytical capabilities toward a flexible inflation targeting framework in the medium term.

### Financial sector

- Banking sector: well-capitalized and profitable; liquidity indicators strengthening; NPLs remain high but are declining and well-provisioned.
- Private sector credit growth: 11.1 percent in FY 2015/16 compared to an average growth rate of 5.9 percent during FY 2011/12–2014/15.
- Authorities committed to phased implementation of Basel III regulatory norms with the aim of completing it by 2019.

### Structural reforms and energy sector

### Public sector enterprises (PSEs)
- Authorities prioritized PSE reform, restructuring, and divestment to improve fiscal position and growth.
- Privatization/divestment plans for PIA, Pakistan Steel, and DISCOs were revised due to labor tensions and political opposition; transaction structure for PIA being finalized.
- Pakistan Railways underwent intensive restructuring and showed significant improvement in freight and passenger services and in revenues.

### Energy sector reforms
- Energy subsidies significantly reduced; arrears containment and operational improvements in DISCO performance.
- Measures: stringent monitoring/enforcement, upgraded transmission and distribution network, revenue-based load management, and incentives to collectors.
- Improvements enabled plans to offer DISCOs for sale through IPOs (starting with FESCO, then IESCO and LESCO); proceeds intended to reduce circular debt stock.
- Gas sector reforms: tariff incentives led to a 13 percent increase in domestic gas supply and LNG imports; unbundling of gas transmission designed to improve competition.

### Business climate reforms
- After a two-position slip in Doing Business rankings in 2015, a country-wide reform strategy was adopted with World Bank assistance in February 2016.
- Initial reforms include rationalization of fee structures for starting a business, new electronic tax filing procedures, legislation to allow movable property as collateral, amendments to Credit Bureau Act and related regulations, and enactment of the Corporate Restructuring Companies Act.

### Conclusion and authorities’ request

- Authorities state the program objectives were largely achieved and that macroeconomic performance and resilience strengthened.
- Authorities request completion of the twelfth and last review of the EFF-supported program and waivers for nonobservance of the end-June PCs on the budget deficit and NDA.

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

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16325.pdf_