Pakistan and the IMF

News Brief: IMF Completes First Review of Pakistan's PRGF Supported Program, Approves US$107 Million Disbursement

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PakistanLetter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding

March 12, 2002

The following item is a Letter of Intent of the government of Pakistan, which describes the policies that Pakistan intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Pakistan, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

The Pakistan authorities held discussions with Fund staff during February 2002 for the first review under the PRGF Arrangement. Based on these discussions, the attached Memorandum on Economic and Financial Policies (MEFP) reviews economic developments and policy implementation in the first three months under the arrangement, updates the macroeconomic framework, and discusses the financial policies and structural reform program for the remainder of the fiscal year 2001/02. It supplements the MEFP dated November 22, 2001.

All performance criteria for end-December 2001 were met, except for (a) the performance criterion on Central Board of Revenue (CBR) revenue; and (b) the performance criterion on net credit to public enterprises. As detailed in the MEFP, the CBR revenue shortfall reflects essentially lower-than-expected growth, imports and inflation in the aftermath of the September 2001 events. These factors have also affected CBR revenue collection in the quarter to March 2002, and, on this ground, we request a modification of the related performance criterion for end-March 2002. The breach of the credit ceiling reflects weaknesses in monitoring a large number of smaller public enterprises. We are currently taking corrective actions to improve the monitoring of access to credit by public corporations and believe that we will be able to respect the previously agreed ceiling on net credit to public enterprises for end-March. As detailed in the MEFP, we have taken various difficult tax measures to contain the revenue shortfall. On this basis, we request waivers for non-observance of the quantitative performance criteria on revenue of the CBR and on net credit to public enterprises at end-December 2001.

We also request modifications of two structural performance criteria. The first, regarding the injunction against any new tax exemptions, is requested to be modified to allow certain time-bound tax privileges for shipping, in response to the virtual disappearance of our shipping sector as ship owners have moved to register ships in tax havens around the world. Second, we request modification of the performance criterion regarding the timetable for the phasing out of the GST subsidy on electricity. Such a timetable has been adopted, as set out in the MEFP, but would phase-out the subsidy more gradually than originally envisaged, and would furthermore maintain the subsidy for a small life-line consumption to protect the poor.

On the basis of the performance up to end-2001 and the policies set out in the attached memorandum, the government requests the completion of the first review.

We expect to conclude the second and third reviews under the arrangement by June and September 2002, respectively, as originally scheduled.

The Government of Pakistan will provide the Fund with such information as the Fund may request in connection with Pakistan's progress in implementing the economic and financial policies, and achieving the objectives of the program. The government believes that the policies set out in the attached memorandum are adequate to achieve the objectives of the program. However, it stands ready to take any additional measures appropriate for this purpose, and will consult with the Fund in accordance with the policies of the Fund on such consultations.


Shaukat Aziz
Minister of Finance and Economic Affairs



Ishrat Husain
State Bank of Pakistan

Memorandum of Economic and Financial Policies
for 2001/02-2003/04

I. Developments During October 2001-January 2002

1. Over the recent months, the political and economic fallout from developments in Afghanistan has been aggravated by the uncertainties related to the tensions with India. The establishment at end-2001 of an interim government in Afghanistan slowed the flow of refugees into Pakistan, and the winding down of military operations was followed by the partial reversal in the large increases in freight and insurance premium on merchandise trade, the restoration of international flights by some foreign carriers and the return of the staff of foreign businesses operating in Pakistan. While these developments boded well for the projected economic recovery in the second half of the fiscal year (i.e., January-June 2002), the recent standoff with India, including the build up of large military forces along the border, has created additional and unexpected uncertainties for Pakistan's short-term economic outlook, as well as considerable fiscal cost, although the booming stock market and a stable foreign exchange market indicate growing investor confidence in the economic outlook.

2. Given the regional security environment, we consider Pakistan's economic performance during the period October 2001-January 2002 quite satisfactory, although growth was lower than projected and tax revenue fell short of the target. Inflation has been lower than anticipated. Data on international trade suggest that the combined impact of the conflict in Afghanistan and the slowdown in world demand has affected Pakistan's exports broadly as expected so far. Official reserves in the quarter to December 2001 reached US$3.1 billion, and rose further to US$3.4 billion at end-February 2002. All quantitative performance criteria for end-December 2001 have been met, except (as discussed below) for net bank borrowing by public enterprises and for CBR revenue (Table 1).

3. Output developments over the first half of FY 2001/02 were weaker than projected, reflecting the slowdown in the world economy, the continuation of drought, problems with cotton production, and possibly a stronger-than-anticipated combined impact of the post-September 11 events. While manufacturing production was already slowing down over the summer of 2001, following the September 11 events this trend accelerated, driven by slowing export growth. For the period July-December 2001 output of large-scale manufacturing rose only by 2.9 percent over the corresponding period in the previous year, compared to growth rates of close to 8 percent in early 2001. Agricultural production is expected to underperform with respect to the program projections because of the effect of widespread cotton pests in Punjab, and worsening water availability that has particularly affected rice production.

4. Inflation has been lower than expected. Benefiting from the recent appreciation of the rupee and from a decline in international commodity prices, particularly for oil products, as well as continued large stocks of wheat and sugar and a prudent monetary policy, inflation in the year through January 2002 (as measured by the CPI) declined to 2.3 percent.

5. A lower-than-programmed external current account deficit and higher capital inflows helped strengthen Pakistan's official reserves and resulted in a nominal appreciation of the rupee against the U.S. dollar of about 6 percent during October 2001-January 2002. The current account improvement mainly reflects the substantial slowdown in imports, which for the first half of the fiscal year declined in dollar terms by 9.4 percent, compared with the same period of last fiscal year. The sharp decline in import payments is largely explained by lower oil prices, but reflects also a large decline in the volume of hydrocarbon imports. To some extent, this may reflect a one-off adjustment as importers reduced inventories accumulated in the past because of an expected depreciation of the rupee. Exports in U.S. dollar-terms during July-December 2001 rose by only 1.9 percent over last year and growth in January was flat. 1 On a brighter side, official transfers were broadly as programmed. Over the last few months we also witnessed increased capital inflows as nonresident Pakistanis, mainly in the U.S. and U.A.E., repatriated funds to Pakistan. This could be a one-off portfolio shift, motivated on the one hand by fears of tighter scrutiny and controls over bank accounts, in particular those held by residents from the Middle East, and tighter immigration controls, and on the other hand by increased confidence in Pakistan's economic outlook. These inflows helped reduce the spread between the interbank and the kerb market exchange rates to less than 1 percent during most of the period, and at the same time triggered an appreciation of the rupee, despite the SBP's aggressive buying of foreign exchange, virtually all in the interbank market. As a result, and reinforced by an active encouragement of Pakistani banks to compete with moneychangers in the Gulf for providing remittance services, a larger share of remittances from Pakistani workers abroad is now being channeled through the banking system—and this is expected to be a permanent shift.

6. Data on monetary aggregates through December 2001 point to some continued instability in the composition of money demand over the last quarter, exacerbated by events in Afghanistan where the Pakistani rupee is heavily used. Broad money expanded by 11.8 percent in 2001, mainly on account of increased rupee deposits. Although the rate of increase in the demand for currency slowed down substantially with respect to the peak reached in December 2000, in recent months the currency to deposit ratio increased again, probably reflecting the increased activity of international aid agencies. On the asset side, NFA of the banking system were well above projections in December 2001, reflecting the stronger-than-expected external balances. Credit to the economy rose less than expected, owing to the weakening real economy, continued high real bank lending rates, and the injection of liquidity via increased tax refunds/rebates. However, the performance criterion on credit to the public enterprise sector was missed because, unexpectedly, credit to the large group of small enterprises which are not closely monitored exceeded the target, even while the major nine public enterprises, which account for more than two-thirds of public enterprise credit and which are closely monitored, were well within their targets. Bank credit to the government declined more than expected during calendar 2001 in part because of a lower overall deficit and higher nonbank domestic financing.

7. Reflecting unsterilized foreign exchange inflows during December, reserve money grew by 28 percent in the year through December. The sharp increase is however somewhat misleading as it reflects in part the base effect from the sharp decline in reserve money achieved in December 2000 through the "unorthodox" conversion of some special deposit accounts into treasury bills, as well as the introduction of special reserve requirements on foreign currency accounts in April 2001. Corrected for these operations, reserve money grew by 14 percent. The resulting accumulation of excess reserves held by scheduled banks were mopped up through open market operation in January, reducing reserve money growth year-on-year to 14 percent. NDA of the SBP have declined from the June level, as credit to the budget and to the nongovernment sector fell. Reflecting low inflation, the decline of international interest rates, the slow pace of domestic economic activity, and the lack of pressure on the exchange rate, the yield on six-month treasury bills fell in the mid-February auction to 5.5 percent compared to 12.9 percent at end-June 2001; the SBP's discount rate declined by 5 percentage points over this period. Nevertheless, bank lending rates remain high, at around 14 percent on average.

8. Revenue performance in the first half of the fiscal year has been worse than anticipated, owing to shortfalls in CBR collection of indirect taxes. While income taxes performed marginally stronger than programmed, the combination of much lower-than-projected hydrocarbon imports, a sharper slowdown in domestic economic activity, a more appreciated exchange rate, and the decision to reduce more vigorously than programmed the backlog of outstanding customs duty drawbacks and sales tax refunds to exporters resulted in a shortfall on account of these taxes of PRs 8 billion (0.2 percent of program annual GDP) relative to program projections. The acceleration of refunds, which from July to December 2001 amounted to PRs 38 billion (against only PRs 23 billion in the same period of last year, and PRs 32 billion programmed), reflects both governance concerns, that is, to reduce administrative discretion over refunds, as well as the urgent need to encourage export activity at a time when it was hit by the cancellation of orders and freight and insurance difficulties related to the military operations in Afghanistan. To some extent, the increase in refunds may also reflect a higher incidence of tax evasion. With a view to preserving the budget deficit objective for the year, in early January, concurrently with the fortnightly oil price adjustment by the oil marketing companies, the government increased the petroleum development levy by PRs 0.75 per liter on diesel and by PRs 0.25 per liter on other oil products. These measures, envisaged under the program as a contingency in case of a revenue shortfall, are estimated to produce additional revenue for the second half of the fiscal year of about PRs 5 billion (0.1 percent of GDP).

9. On the expenditure side, outlays were well below projections on account of a number of factors. First, much of the provincial expenditures has been devolved to the new local governments, which were established on August 14 but did not become fully operational before end-2001. As a result, such expenditures (including I-PRSP categories) ran lower than last year, essentially limited to salary payments (see below). Second, defense outlays were lower than programmed, reflecting the use of stocks during the mobilization efforts at the borders with Afghanistan and India, and some increase in arrears to utilities. However, defense outlays have increased sharply in January. PSDP spending remained slightly below the program target due to disruptions related to post September 11 events, and the start-up problems of the devolution initiative. Finally, with domestic interest rates somewhat lower than expected and foreign interest payments also lower due to the more appreciated exchange rate, the interest bill was lower than anticipated. As a result, the fiscal deficit for the first half of the year reached only PRs 98 billion, about PRs 10 billion less than expected, and the relevant performance criterion was met. While external grant disbursements materialized broadly as expected, there were shortfalls in World Bank and AsDB loan disbursements which resulted in larger-than-expected nonbank borrowing.

10. On the structural side, reforms are broadly on track (for details see Table 2). No new tax exemptions have been granted since the start of the program. A first report on the implementation of the poverty reduction strategy was published in early January in the newspapers and on the website of the Ministry of Finance. All planned measures on fiscal transparency and the reform of tax administration have been implemented.

11. The CBR reform project is proceeding as scheduled. The President approved the establishment of a supervisory council, constituted as a Cabinet Committee and chaired by the Finance Minister, to oversee the CBR reforms. At end-February 2002, we completed the organizational restructuring of CBR headquarters by filling the five senior positions in charge of human resource management, IT, taxpayer facilitation, audit, legal affairs, and administration. The preparations for other important milestones, including the establishment of a Large Taxpayer Unit in Karachi by July 1 this year, are underway.

12. Despite the difficult environment, the privatization process has regained momentum; however, the public utilities (WAPDA and KESC) continue to face severe financial difficulties. Following the successful divestment of 10 percent of the National Bank of Pakistan (NBP) through the stock market (the issue was heavily over-subscribed), the cabinet committee on privatization recently approved the partial divestment of government shares in a large number of companies (see below). The stock of WAPDA's receivables from the government declined during July-December 2001 by about PRs 3 billion, reflecting in particular the payment of arrears by the Sindh government, and even while defense-sector receivables rose slightly. Arrears on priority connections declined (Table 1). However, an increase by around PRs 3 billion in receivables from private clients in the federally administered tribal areas (FATA), where WAPDA remains unable to enforce collection or cut off supply, has aggravated the financial difficulties of the already financially distressed company. Both WAPDA and KESC have filed for a structural tariff increase to absorb the run-up in fuel prices during 1999-2000. Multi-year restructuring plans for major public enterprises (except WAPDA) have been approved by the President, setting out performance targets and reporting requirements, with regular monitoring by a committee chaired by the Ministry of Finance.

13. Reform of the financial sector continued at a rapid pace. The SBP has increased minimum capital requirements for scheduled banks (PRs 750 million to be reached by end-2001, PRs 1 billion by end-2002). As a result, a few smaller banks are likely to consolidate. The PRs 1 billion requirement already applies to new banks. The noncore functions of the SBP, mainly treasury functions on behalf of the government, have become the responsibility of a separate public corporation, fully owned by the SBP. A first exclusively Islamic Bank (largely foreign-owned) was recently licensed to operate in Pakistan. Meeting a structural benchmark several months ahead of schedule, the SBP issued in January 2002 a new foreign exchange manual that streamlines and clarifies Pakistan's foreign exchange regulations while ensuring full compliance with Article VIII obligations.

II. Economic and Financial Policies for the remainder of FY 2001/02

A. Macroeconomic Objectives and Policies for 2001/02

14. The macroeconomic framework for 2001/02 has been revised in light of recent developments, with lower growth and inflation targets. On the basis of updated estimates of the cotton and rice crops, and recent information on manufacturing activity, we now expect real GDP (at factor cost) to grow by only 3.3 percent for this fiscal year, compared to 3.7 percent originally programmed. Downside risks to this projection continue to arise mainly from uncertainties in the prospects for manufactured exports in light of global economic weakness and regional security risks, and the vulnerability of the wheat and other winter crops due to a 60 percent shortfall in water availability. Given price developments to date, as well as the impact of the recent exchange rate appreciation, and assuming stable international oil prices, we have lowered our inflation target (in terms of the annual average CPI increase) to 3 percent.

15. On the external side, we now expect better-than-programmed outturns for the current and capital accounts. We expect a modest recovery in export growth to begin in the months ahead, reflecting both some stabilization of the global economy, the easing of regional tensions, and increased access for our textile exports in the EU, although we remain concerned that export orders have yet to recover. On imports, the decline experienced in the first half of FY 2001/02 is expected to gradually wind up, which would also support the programmed recovery in custom duty and sales tax collection for the remainder of the fiscal year. Regarding the capital account, we continue to view recent inflows of private capital as mostly reflecting one-off portfolio adjustments, rather than a permanent increase in flows, but we will keep that issue under close scrutiny. Official flows are expected to be as programmed, with shortfalls in AsDB disbursements offset by lower-than-expected amortization payments. All in all, we now target a somewhat larger build-up of official reserves than originally envisaged.

16. We will continue to keep monetary developments under close review, given the instability in the composition of money demand that was again evident in recent months, and the recent surge in reserve money. For FY 2001/02, we will maintain projected growth in broad money at 9.1 percent, and reserve money growth at 10 percent, broadly in line with original program targets. On the asset side, we now target a somewhat higher accumulation of net international reserves, and a lower expansion of private credit in light of the injection of liquidity through the increase in tax refunds. We will, through close coordination between the Ministry of Finance and the SBP, strengthen the monitoring of the public enterprises sector beyond the major nine enterprises, to ensure that the credit limit will be strictly enforced. Similarly, in the context of the government's disengagement from agricultural marketing, credit for commodity operations (especially wheat purchases) will be carefully monitored. However, reflecting continued large carry-over of wheat stocks from the last crop, an expected good wheat harvest in the coming months, and the timid pace at which the private sector is getting involved in wheat marketing, such commodity credits will remain higher than originally planned. We will ensure that our interest rate policy as well as the pace of SBP purchases of foreign exchange is consistent with the inflation objective and the monetary/reserves targets, within the framework of a fully flexible exchange rate. In particular, while we plan to step up our open market operations as needed to bring reserve money growth towards the program path over the coming months, we will keep monetary developments under close review given the uncertainty about money demand, including the possibility of sustained higher money demand reflecting lower inflation and increased confidence. In this context, to further deepen the foreign exchange markets, following the enactment of the legal and regulatory framework for the transformation of moneychangers into foreign exchange companies (planned for August 2002), we will allow banks to purchase foreign exchange from moneychangers at freely negotiated rates, thus moving further towards unification of the interbank and the kerb market.

17. Fiscal adjustment remains the linchpin of our strategy to extricate Pakistan from the debt trap. Accordingly, we will make every effort to contain this year's budget deficit (excluding grants) at or below 5.7 percent of GDP (or 6.1 percent on the assumption of maximum use of foreign grants to increase I-PRSP expenditure), despite pressures on both revenues and expenditure from the regional tensions and other exogenous factors. This would imply a deterioration by 0.4 percent of GDP compared to the original program target. The deficit will be defined to exclude any issuance of bonds in the context of the recapitalization of KESC and to banks on account of outstanding claims on CBR (see below).

18. On the revenue side, we believe that under current circumstances it was imperative to support the export sector by reducing the backlog of (recorded and unrecorded) tax refunds. This objective was achieved by end-January 2002, and from now on the level of outstanding refunds is expected to remain broadly at current levels. Also, we will carefully monitor and report on fresh applications for refunding custom duties and GST on inputs, as well as the stock of approved refund requests not yet paid. Refund procedures will henceforth be strictly applied while additional safeguards against fraudulent refund requests will be put in place, based on recent consultation with Fund (FAD) and World Bank experts. Deadlines within which applications for refunds must be received and paid (e.g., 72 hours for exports with a good track record in tax compliance—so called gold card holders) will be strictly enforced. Given the larger-than-programmed refunds, sluggish GDP growth, and lower imports, we expect CBR revenue to fall short from the original program target by PRs 16 billion for the year. On this basis, we request to modify the end-March 2002 performance criterion for CBR revenue to PRs 277 billion, and propose to set the end-June performance criterion for CBR revenue accordingly (Table 1). On the other hand, revenue from petroleum taxation will be higher than originally programmed due to the recent increase in tax rates. On this basis we expect overall tax revenue to fall short of the program target by only PRs 11 billion. To underpin the revenue effort, prior to the Board discussion of this review, the government will approve elimination of the GST exemptions on pharmaceuticals, effective from April 1, 2002, which will generate an estimated revenue gain of PRs 6 billion (on an annual basis). Nontax revenue will be boosted by larger-than-budgeted dividends and higher defense services receipts.

19. On the expenditure side, we plan to fully spend the budgeted pro-poor and social allocations, despite the low I-PRSP expenditure in the first half of the fiscal year, and, in addition, to increase grant-financed poverty expenditure to the maximum foreseen under the program. At the federal level, such monies have been fully released. However, the unexpected developments on our Eastern border as well as the need to maintain the intense patrolling of the border with Afghanistan makes sizable overruns of security-related expenditure inevitable. Additional outlays of about PRs 15 billion for this year will be required (and more if the situation on the Eastern border is prolonged). Some savings will be possible on other expenditure programs, including on interest due to lower interest rates and the more appreciated exchange rate. Strict control on non I-PRSP expenditure will be continued, and the timeliness and quality of expenditure data for program monitoring purposes improved, taking into account the findings of the recent FAD mission.

B. Structural Policies

Tax policy and tax administration

20. Tax policy (see above) and tax administration reforms are on track. The new organizational set-up for CBR headquarters has been completed in February, the publication of rules and regulations for record keeping under the new income tax law remains scheduled for March; a proposal for revised income and sales tax appeals and dispute resolution process is under preparation, and the normal penalty regime for GST on retailers will be established by end-March. With Fund and World Bank support, the further work for the CBR reform project will proceed in the months ahead, as outlined in the strategy document prepared in late 2001. We remain committed to granting no new tax exemptions to private operators, except for exempting, for 20 years, the import of ships from import duties and shipping companies registered in Pakistan from income tax. Instead, a tonnage tax (US$1 per ton for ships registered in Pakistan) will be imposed. This approach is consistent with the maritime shipping strategy adopted in mid-2001, designed to reverse the rapid decline of the Pakistani shipping industry over the last decade, as more and more ship owners moved to flying flags of countries with full tax exemption. Since virtually no revenues are currently collected from shipping, the revenue impact of this measure is expected to be positive.

I-PRSP implementation, public expenditure management, and fiscal transparency

21. For the implementation of the I-PRSP, the government has established a federal PRSP cell in the Ministry of Finance and put in place institutional arrangements for executing and monitoring the poverty reduction strategy. The PRSP cell has been mandated with the overall lead in coordinating, monitoring, evaluating, and tracking the implementation of the PRSP strategy; and reporting progress on anti-poverty expenditures, intermediate social indicators, and final outcomes. Furthermore, a high level national PRSP Implementation Committee has also been set up to oversee the work of the cell and ensure the implementation of the PRSP policy reforms, evaluation of their impact, and appropriate adjustment in the policy regime.

22. Regarding I-PRSP expenditure tracking, (unreconciled) expenditure data are being produced on schedule. For the first half of the fiscal year, these data reveal I-PRSP expenditures to be below those in the previous year. The main causes are teething problems associated with the launching of the devolution process; thus spending remained low, largely limited to salaries (which remain under provincial purview) and outlays under the well-established federal/provincial programs. However, with local government accounts now fully operational, we expect I-PRSP spending to pick up rapidly so as to achieve the annual targets.

23. To build consensus on the PRSP intermediate indicators, the government, in collaboration with the DFID and the World Bank, will organize a workshop in March to finalize the selection of intermediate indicators and resolve outstanding issues related to definitions, measurement methodologies, data sets, and sources.

24. Distribution of state land remains a priority commitment of the government. The government of Sindh has distributed recently 25,000 acres of state land to 1,900 landless peasants. In Punjab, 10,000 acres were distributed to 1,300 landless families. The Education Sector Reforms have been accelerated and an additional PRs 2 billion provided for rehabilitation of the existing primary schools as well as teacher training and management. The additional funds have been provided under agreements entered into with each provincial government to ensure performance-based outcomes and well-tracked expenditures and output indicators. A new initiative, namely, Tawana (Nutrition Support Program) Pakistan has been launched by the Ministry of Women Development and Social Welfare to provide a nutrition package for malnourished girls in primary schools in high poverty districts. This program is expected to have a positive impact on the girls' primary school enrollment rate. Under the National Health Program, which includes the national Program for Family Planning and Primary Health Care, TB Control Program, Malaria Control, National Expanded Program of Immunization (EPI), Special Immunization Activities, and HIV Aids Control, have all been strengthened through additional budgetary allocations and close monitoring of output indicators.

25. We have started providing monthly federal expenditure data (unreconciled) for program monitoring purposes in February 2002. Furthermore, we will adopt shortly an Accountable Fiscal Management Framework (AFMF), seeking to improve fiscal reporting, accounting, medium-term budgeting, and a better legal and institutional framework. In addition to those measures already included in the program, we intend to take the following actions:

    (i) Having separated accounting and auditing last year, we are now strengthening the office of the Controller General of Accounts (CGA), including through additional staffing, while continuing the work of the federal Fiscal Monitoring Committee (FMC) and intensifying that of the provincial FMCs (e.g., through more regular meetings and better reporting to the federal FMC), with the objective to further improve and accelerate accounts reconciliation.

    (ii) Fiscal reporting will be further improved through a variety of measures, at the federal and provincial levels. As a first step, Sindh province intends to begin shortly publishing quarterly fiscal data on the web, as is by now a well established practice at the federal level.

    (iii) In the context of the devolution initiative, we will introduce the New Accounting Model (NAM), 2 with the help of the World Bank supported PIFRA project, at local government levels, and ensure that district budgets are prepared according to the instructions procedures laid down by the provincial AGs, and pre-audited by District Accounts Officers (including all transactions related to federal and provincial transfers and local fund revenue and expenditure). The call for the 2003/04 budget will be issued on the basis of the NAM in October 2002.

    (iv) As per the commitment in our 2001/02 budget, we will continue the preparation of the fiscal responsibility law to be promulgated during 2002. With the 2002/03 budget, we intend to improve our disclosure of fiscal risks and off-budget fiscal activities (e.g., tax expenditures, contingent liabilities), and intensify work towards establishing a medium-term budget framework to better link asset creation with recurrent expenditures. For the latter, we intend to request further technical assistance.

    (v) Civil service reform is proceeding as planned, and the pay and pension reform package was implemented effective December 2001, with virtually all civil servants opting for the higher pay package with streamlined pension benefits. However, the pension system still remains unsustainable over the long term and to prepare the next steps in pension reform, we plan a comprehensive actuarial analysis of the public sector pension liabilities to be ready in early 2003, as an input for a new reform package with the 2003/04 budget.

C. Other Governance Reforms

26. We have started to implement various other reforms aimed at directly improving governance in key areas. In the context of the AsDB-supported "Access to Justice" program, we have issued a policy announcement that we will strengthen the judiciary, including through adequate funding with the objective to provide expeditious and inexpensive justice, empowering legally the poor and vulnerable, improving judicial governance and human resources. We will also take measures to separate the investigative branch of the police from the prosecuting branch as part of our police reform. This should help improve police capacity to investigate, prevent crime, maintain public order, and to improve its transparency and accountability.

Public enterprises

27. Despite the difficult regional environment and an unfavorable climate in world equity markets, our privatization program is on track. We expect to meet the program objectives of bringing a 51 percent share in United Bank Ltd. (UBL) and a major share (up to 26 percent of B-shares, representing a majority of votes, as well as management control) in the telecom company (PTCL) to the point of sale by May 2002. For UBL, we are working with the group of pre-qualified bidders on due diligence, and on finalizing the cleaning up of its balance sheet. The privatization of UBL will be quickly followed by the sale of 49 percent of Allied Bank, after various court challenges (by employees) have recently been decided in favor of the government. We also plan to sell during 2002 the remaining government share (9 percent) in Muslim Commercial Bank, and are in the process of recruiting financial advisors for the privatization of Habib Bank. In the context of the ongoing privatization of the nationalized banks, we will shortly issue government bonds for about PRs 24 billion to banks to extinguish any outstanding claims on CBR for overpayment of income tax during 1992-2000. 3 For PTCL, the privatization process was well advanced in September last year, but various investor groups that had expressed strong interest at the time put their interest on hold after September 11. We will shortly re-open the invitation for expressions of interest in the hope to attract possibly additional investors, while at the same time attempt to revive the already expressed interests and initiate the pre-qualification process. The bidding for government shares in 11 companies operating at different stages in the oil and gas sector will be launched in March/April 2002. In coordination with the AsDB that is providing technical and financial support for KESC privatization, we have elaborated a strategy for the privatization process which has been approved by the cabinet in late February 2002, with a view towards bringing KESC to the point of sale (of up to 75 percent of shares) by July 2002. To allow initiation of the legal procedures needed to recapitalize KESC and change its capital structure, as required for privatization, we will shortly issue government bonds of about PRs 32 billion to commercial banks to repay KESC's debts outstanding as of March 31, 2002.

28. The financial performance of several public sector enterprises, especially in the power sector, remains a major source of macro-financial risk and reform efforts in this area will have to be strengthened. In particular, in the context of the World Bank SAC II currently under negotiation, we will adopt a restructuring strategy aimed at ensuring WAPDA's financial viability. In this context, we will address relevant issues such as the appropriate level of electricity tariffs, which have not yet fully absorbed the structural cost increases during 1999-2000; improving collection of receivables; and clearance of arrears to the federal government, suppliers and banks. In particular, WAPDA is being strongly encouraged to cut off supply to nonpayers of overdue receivables. We will review the legislation governing the independent power sector regulator (NEPRA) to ensure that the fuel adjustment clause is allowed to operate fully automatically. We will also formulate a clear policy regarding the licensing of operators in the power sector, and on this basis move ahead with the corporatization of WAPDA and privatization of some of its generation and distribution units. Monitoring of public enterprises is being strengthened. Beyond closer monitoring of credit (as described above), restructuring plans for PIA, Pakistan Railways, and Pakistan Steel Mills have recently been approved by the President, and are followed by internal monitoring mechanisms (in lieu of the formal memoranda mentioned in our November 2001 MEFP). In addition, we will prepare, by July 2002, a set of key quarterly performance targets for these enterprises and will publish quarterly progress reports, with a two-month lag, on the Ministry of Finance website, starting in November 2002 with data for the quarter July-September.

29. Reforms in the gas sector are also gaining momentum. We are aware that current gas pricing policies imply subsidies to a relatively privileged group of consumers and producers in the fertilizer industry, amounting to nearly 0.6 percent of GDP according to a recent World Bank study. Part of this subsidy is borne by the gas sector where the PPL and Mari gas companies charge less than market prices, part is borne by the industrial sector which cross-subsidizes consumers. Accordingly, before end-March, the government will establish a new pricing framework for the gas sector. The new framework will provide successive, semi-annual adjustments in PPL wellhead prices to bring these to market levels over a period of about five years, according to a pre-determined and announced plan. The first price adjustment under the plan will take place in March 2002. We will also, in March 2002, resume the six-monthly gas tariff adjustments that were suspended last fall in the wake of September 11, to reflect a gradual elimination of industry/consumer cross subsidization over three years. Subsidies will eventually be limited to the poor with consumption levels below a minimum threshold. Feedstock gas prices, under the new fertilizer policy adopted in August 2001, will be gradually brought to the Middle East reference price over a five-year period, with the first adjustment in July 2002. New investments in the sector will however still be granted a 10 percent discount over 10 years on feedstock gas prices (as compared to the Middle East reference price). We are discussing with the World Bank further reforms in this area.

Agriculture reforms

30. We are taking further steps to reduce government intervention in agricultural marketing and pricing, while strengthening the institutional support to farmers. In particular, in the context of an AsDB-supported program, the government has announced a policy limiting the government's role in wheat marketing to the management of a strategic security stock, of a size to be determined in March/April each year. Procurement prices for wheat and any other commodities for which the government intervenes (cotton, rice, and sugar) will broadly reflect international prices; issue prices will cover the cost of storage and transportation. Private operators are free to buy or sell any product at freely determined prices. In addition, the federal and provincial governments have abolished all restrictions on inter-provincial or inter-district trade of agricultural commodities and seeds, and confirmed that private operators may freely export and import any agricultural commodity (except edible oil), without any nontariff barriers. In line with this policy change, the provincial food departments and PASSCO will be scaled down over time, and public corporations involved in agricultural marketing are being privatized or liquidated. At the same time, the program will streamline extension services and agricultural research while supporting an ambitious building of feeder-roads to allow farmers better access to markets.

Financial sector reforms

31. Our financial sector reform strategy has made major strides in recent months; we greatly hope for an early opportunity to review and discuss our approach with the long-awaited FSAP mission. The strategy is built on encouraging the development of an Islamic financial system side by side with the traditional financial system. The SBP is currently preparing appropriate rules and regulations for Islamic banking. The restructuring and privatization of the three large nationalized commercial banks will further advance with the closure of additional branches during the second half of FY 2001/02. We are actively pursuing our dialogue with the Fund (MAE) on putting in place best practices against money-laundering, an issue that we hope can be further discussed during the FSAP mission now planned for May/June 2002.

D. Financing Issues

32. We are confident that the program remains fully financed. We hope to conclude the bilateral agreements implementing the recent Paris Club Agreed Minute as scheduled on favorable terms, and have initiated discussions with all creditors. In line with the Paris Club Agreement, we will seek to ensure treatment of our debt due to all bilateral creditors on terms comparable to those agreed with the Paris Club creditors. We are also firmly determined to meet the conditionality attached to AsDB and World Bank program loans to ensure disbursements are fully in line with the revised projections. Official bilateral grants are expected to accrue broadly as originally programmed.

III. Data Issues

33. We have nearly completed the studies for the project for the revision and change of base of the national accounts and 10 studies have been completed as scheduled and sent to STA for comments. Five additional studies had to be outsourced by the Federal Bureau of Statistics and will be ready by the end of March 2002. Three other in-house studies, including one on electricity and gas, will be made available to the staff for comments by end-March. We have discussed with a recent STA technical assistance mission the steps to be undertaken in order to subscribe to the SDDS, examine to what extent Pakistan data and dissemination practices are consistent with SDDS requirements and review the country external sector statistics. On this basis, we have set up an "SDDS committee" chaired by the Ministry of finance and involving other relevant ministries, the FBS, and the SBP, which will formulate by end-April 2002 an action plan for strengthening statistics in various areas in order to be able to subscribe to the SDDS in 2003. First steps to be implemented by end-April will include publication of an Advance Release calendar for SDDS data categories, where data are available, dissemination of quarterly balance of payments statistics (with one-quarter lag), and dissemination of monthly analytical accounts of the SBP in the degree of detail called for under the SDDS, with a two-week lag. The data ROSC mission, which was cancelled because of the military operations in Afghanistan, has now been rescheduled for August 2002.

IV. Program Monitoring

34. The proposed quantitative performance criteria and indicative targets for end-June 2002 and modifications for end-March 2002 are set out in Table 1. Table 2 reports on the status of the structural performance criteria and benchmarks and includes the actions we intend to take prior to the Board discussion of the first review. The modifications of the original structural performance criteria and benchmarks proposed involve the performance criterion on tax exemptions, to be effective from April 1 onwards, and the timetable for phasing out the GST subsidy on electricity. To clarify the definition of program targets and to extend the reporting requirements under the program to additional variables considered essential for appropriate monitoring, the existing TMU has been amended. Starting April 1, 2002, the attached TMU will fully replace the existing one for the definition of performance criteria and for program monitoring purposes. We expect the second review to take place as scheduled; it should focus on the preparation of the 2002/03 budget.

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Technical Memorandum of Understanding (TMU) on the Program
Supported under the Poverty Reduction and Growth Facility (PRGF)

(March 2002)

1. With effect from April 1, 2002, this memorandum replaces the Technical Memorandum of Understanding (TMU) between the Pakistan authorities and the Fund staff relating to the monitoring of the first year under the PRGF-supported program (October 2001-September 2002), dated November 2001. The revised TMU will apply to the definitions of variables and the monitoring requirements of the program. The main changes from the original TMU are that the revised TMU clarifies the definitions of "debt" and "government" in the context of the external debt performance criteria, specifies the treatment of bond issues in the context of the KESC and nationalized commercial banks' privatization, clarifies reporting requirements on receivables and arrears to WAPDA, and adds reporting requirements for commodity operations, for expenditure categories earmarked for additional grant financing, and for contracting of short-term debt. Throughout, "government" is meant to comprise the federal and provincial governments, except in relation to the external debt ceiling performance criteria, where it also comprises all local governments, as well as companies and banks that are majority-owned by the government; "public sector enterprises" and "government-owned banks" refer to enterprises or banks in which the government holds a majority ownership interest.

I. Adjustors

2. The floors on the net foreign assets (NFA) of the SBP will be adjusted (a) upward/downward by the cumulative excess/shortfall in net external program financing (as defined below; Table 1(a)), downward adjustments will be capped at US$250 million; and (b) upward/downward by the cumulative excess/shortfall in external cash budget grants (as defined below; Table 1(b)).

3. The ceilings on the net domestic assets (NDA) of the SBP and on net bank borrowing by the government will be adjusted downward/upward by the cumulative excess/shortfall in net external program financing (as defined below) evaluated at the exchange rate as of end-June 2001 (PRs 63.98 per U.S. dollar). The upward adjustment will be capped, however, at US$250 million.

4. The ceilings on the NDA of the SBP will also be adjusted downward/upward by the amount of (a) any cumulative excess/shortfall in external cash budget grants above program levels; (b) banks' rupee reserves freed/seized by any reduction/increase of the daily CRR of 4 percent; (c) banks' reserves freed/seized by any reduction/increase in the total reserve requirements on foreign currency deposits of 25 percent; and (d) any reduction/increase in the reservable deposit base that is related to definitional changes, as per the following formula: deltaNDA = deltarB0 + r0deltaB + deltardeltaB, where r0 denotes the reserve requirement ratio prior to any change; B0 denotes the level of the reservable deposits in the initial definition; deltar is the change in the reserve requirement ratio; and deltaB denotes the change in the reservable deposits as a result of definitional changes.

5. The ceilings on the consolidated government fiscal deficit (excluding grants) will be adjusted upward for external cash budget grants in excess of PRs 25 billion. The upward adjustment will be capped at PRs 5 billion at end-December 2001, PRs 10 billion at end-March 2002, and PRs 15 billion at end-June 2002. Upward adjustments in the deficit will have to be matched by identical increases in actual budgetary expenditures above the program levels for the categories listed in Table 2 (with the restriction that additional spending for federal police and civil armed forces will be limited to PRs 1 billion).

6. The ceiling on net credit to public sector enterprises will be adjusted downward for the amount of government bonds issued to banks against outstanding credit to KESC, in the context of the financial restructuring of KESC, prior to KESC privatization.

II. Financial Program Reporting Requirements

7. The following information, including any revisions to historical data, will be provided to the Middle Eastern Department of the Fund through the office of the Senior Resident Representative of the IMF in Pakistan, within the delays indicated:

  • Monthly provisional statements on federal tax and nontax revenue, within one month.

  • Deposits into and withdrawals from the privatization accounts for each quarter of 2001/02, within one month. Withdrawals will be reported with the following breakdown (a) those which constitute budgetary use of privatization proceeds; (b) those which constitute costs of privatization; and (c) other (with explanation of the purpose of other withdrawals).

  • Quarterly statements on budgetary capital receipts and disbursements, including repayments of bonds, recovery of loans from provinces and "others", within two months.

  • Monthly (unreconciled) provisional data on federal expenditure, within one month.

  • Quarterly statement on consolidated budgetary expenditure, with federal data approved by the AGPR, within two months.

  • Quarterly provisional data (from AGPR and AG) on social sector and poverty-related budgetary expenditures, as defined below (Table 3), as well as on the subcategories eligible for additional grant-financed expenditure, as defined in Table 2, within six weeks.

  • Quarterly data on the stock of domestic government debt, broken down by instrument, within two months.

  • Quarterly data on WAPDA receivables, and arrears from priority connections (see Table 4 below), within one month.

  • Monthly provisional data on external budget financing and net external program financing proceeds from the Saudi oil facility, and cash external grants for budget support (as defined below), within one month.

  • Quarterly data on the revenues and expenditures of the five public enterprises as per Tables 5(a) to 5(e), within two months (WAPDA, KESC, PIA, Pakistan Steel Mill Corporation, Pakistan Railways).

  • The following monthly monetary data on a last-Saturday basis, both at current and program exchange rates, within four weeks:

    (i) monetary survey;

    (ii) accounts of the SBP;

    (iii) consolidated accounts of the scheduled banks; and

    (iv) banks' lending to the government;

  • The same tables as in the preceding item, but on an end-quarter basis (last business day), both at current and program exchange rates, within six weeks.

  • Daily data on SBP's sales and purchases in the kerb and interbank foreign exchange markets, swaps and forward outright sales, within two business days.

  • Monthly data on the outstanding stock of the SBP's forward foreign currency operations, including swaps and outright forward sales and purchases, within one month. The terms of any new transactions (including rollover/renewal of existing ones) will also be provided.

  • Monthly data on the SBP's foreign exchange reserves, with details on the currencies, instruments, and institutions in which the reserves are held, within one month.

  • Quarterly data on bank credit to the nine major public enterprises (with breakdown), and on SBP bridge loans to nationalized banks in the context of the BSAC and any other quasi-fiscal operations undertaken by the SBP, within six weeks.

  • Quarterly data on credit for commodity operations, with separate subcategories for PASSCO and TCP operations.

  • The following quarterly data on external debt, within six weeks:

    (i) Stock of public and publicly-guaranteed external debt (including deferred payments arrangements), by maturity (initial maturities of up to and including one year, and over one year), by creditor and by debtor (central government Table 4 and publicly guaranteed), and for Paris Club debt, with breakdown in pre- and post-cutoff date stock.

    (ii) Loan-by-loan detail of the contraction of short-term debt as well as of nonconcessional medium- and long-term public and publicly-guaranteed external debt, with separate identification of the contraction of debt with an initial maturity of over one year and up to and including five years; grace periods and scheduled repayments; currency denominations; and interest rates.

    (iii) Monthly statements on rescheduling agreements on public- and publicly-guaranteed debt reached with creditors;

  • Monthly data on external payments arrears on public- and publicly-guaranteed debt with details as in (i) of the preceding item, within one month.

  • Copies of new or revised ordinances/circulars regarding changes in: tax policy, tax administration, foreign exchange market regulations, and banking regulations no later than three days after official issuance, or notification that ordinances have been posted on the CBR and SBP website.

  • Monthly data on the import parity prices as well as central depot prices of the six major oil products, within one month.

III. Definitions of Monitoring Variables

Valuation of Foreign Exchange Denominated Assets and Liabilities

8. For the purposes of monitoring under the program, all assets and liabilities as well as debt contracted, denominated in SDRs or in currencies other than the U.S. dollar, will be converted into U.S. dollars at their rates prevailing as of June 30, 2001, as published in the IFS. The U.S. dollar value of all foreign assets and liabilities will be converted into Pakistan rupees at the end-June 2001 exchange rate of PRs 63.98 per U.S. dollar.

Reserve money

9. Reserve money (RM) is defined as the sum of: currency outside scheduled banks (deposit money banks); scheduled banks' domestic cash in vaults; scheduled banks' required and excess rupee as well as foreign exchange deposits with the SBP; and deposits of the rest of the economy with the SBP excluding those held by the federal and the provincial governments.

Net foreign assets (NFA) of the SBP

10. The NFA of the SBP are defined as the difference between its foreign assets and foreign liabilities. Foreign assets of the SBP consist of gold, foreign exchange, balances held outside Pakistan, foreign securities, foreign bills purchased and discounted, net IMF position and SDR holdings. The definition of foreign assets of the SBP will be fully consistent with the Data Template on International Reserves and Foreign Currency Liquidity. Gold will be valued at SDR 35 per fine troy ounce. Foreign liabilities of the SBP include deposits with the SBP of foreign governments, foreign central banks, foreign deposit money banks, and international organizations. 4

Net domestic assets of the SBP

11. The NDA of the SBP are defined as the difference between RM and the NFA of the SBP.

Net borrowing from the banking system by the government

12. Net borrowing from the banking system by the government is defined as the difference between the banking system's claims on the central and provincial governments and the deposits of the central and provincial governments with the banking system. For purposes of this memorandum, claims on government exclude credit for commodity operations; government deposits exclude Zakat deposits. Government bonds issued to banks after April 1, 2002 in the context of the recapitalization of KESC and to clear claims on CBR arising from over-payment of income tax on book profits accrued on nonperforming loans between 1992 and 2000 will be excluded from net borrowing from the banking system, for the purposes of program monitoring.

Overall budget deficit (excluding grants)

13. The definition of the budget deficit under the program will be the consolidated budget deficit excluding grants. It will be measured from below the line by the sum of (a) the total net financing to the federal and provincial governments; and (b) the total external grants to the federal and provincial governments. The former is defined as the sum of net external budget financing (defined below), net borrowing from the banking system (as defined above), and net domestic nonbank financing (defined below). The latter is defined as the sum of project grants, the rupee counterpart of the Saudi Oil Facility, and the cash external grants for budgetary support.

14. Net external budget financing is defined as net external program financing plus all other external loans for the financing of public projects or other federal or provincial budget expenditures. Net external program financing is defined to include external privatization receipts; budget support loans from multilateral (other than the Fund), bilateral, and private sector sources; and rescheduled government debt service and debt service arrears net of government debt amortization due on foreign loans. It includes foreign loans onlent to financial institutions and companies (public or private), emergency relief lending, and the World Bank's BSAC. Program financing excludes all external financing counted as reserve liabilities of the SBP (defined to include all net deposits of foreign banks and agencies with the SBP, and net purchases and disbursements from the IMF). Amounts assumed for net external program financing and external grants are provided in Tables 1(a) and 1(b).

Net domestic nonbank financing of the budget

15. Net domestic nonbank financing is defined as domestic privatization receipts plus the change, during each fiscal year, in the stock of (a) permanent debt, which consists of non-bank holdings of prize bonds, all federal bonds and securities (including the new Pakistan Investment Bonds); plus (b) floating debt held by nonbanks; plus (c) public account (or unfunded debt), which consists of National Savings Scheme (NSS) debt, Postal Life Insurance, and the Provident Fund; plus (d) stock of deposits and reserves received by the government; plus (e) suspense account; plus (f) any other government borrowing from domestic nonbank sources net of repayments; minus (g) government deposits with nonbank financial institutions (NBFIs). Government bonds issued after April 1, 2002 in the context of the recapitalization of KESC and to clear claims on CBR arising from over-payment of income tax on book profits accrued on nonperforming loans between 1992 and 2000 will be excluded from domestic nonbank financing for the purposes of program monitoring.

16. Nonbank holdings of permanent and floating debt is defined as total debt outstanding, as reported by the SBP, minus holdings of banks as per the monetary survey. Total treasury bill and other relevant government debt is valued at discount value.

Net credit to public sector enterprises

17. Net credit to public sector enterprises comprises the banking system's credits to all public sector enterprises, net of outstanding deposits on the special account with the SBP for payments on public enterprises' rescheduled debt.

External debt

18. The performance criteria on contracting or guaranteeing of external debt by the government or the SBP apply not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (adopted by the IMF Executive Board on August 24, 2000), but also to commitments contracted or guaranteed for which value has not been received. 5 Excluded from these performance criteria are (a) foreign currency deposit liabilities of the SBP; and (b) the outstanding stock of debt of Foreign Exchange Bearer Certificates (FEBCs), Deposit Bearer Certificates (DBCs) and Foreign Currency Bearer Certificates (FCBCs). Short-term external debt comprises debt with original maturity of up to and including one year. Medium- and long-term external debt comprises debt with initial maturity of over one year. The external debt will be expressed in U.S. dollar terms, with debts in currencies other than the U.S. dollar converted into U.S. dollars at the market rates of the respective currencies prevailing on June 30, 2001 as published in International Financial Statistics (IFS).

Nonconcessional borrowing

19. Nonconcessional borrowing is defined as borrowing with a grant-element of less than 35 percent, following the methodology set out in the staff report SM/96/86 and approved by the IMF Executive Board on April 5, 1996. The discount rates used to calculate the grant element will be the six-month and ten-year Commercial Interest Reference Rates (CIRRs) averages, as computed by the Policy Development and Review Department of the Fund. Six-month CIRRS are updated mid-February and mid-August (covering the six-month period preceding the date of update) and the ten-year CIRRS averages are updated mid-December (covering a period of 10 years preceding the date of the update). Six-month CIRRs averages are to be used for loans whose maturity is less than 15 years, while ten-year CIRRs averages are to be used for loans whose maturity is equal or more than 15 years.

Arrears to WAPDA by Priority Connections

20. Arrears to WAPDA by priority connections are defined as electricity bills overdue by more than 30 days and will be reported by WAPDA as part of its reporting of receivables (Table 4). Priority connections comprise: President Secretariat/President House, Chief Justice of Pakistan (office/residence), Chairman's Senate (office/residence), provincial Governors (office/residence), and federal and provincial government hospitals.

21. Poverty-related and social public spending ("I-PRSP expenditure") consists of central provincial and district government spending under the current budget and the Public Sector Development Program, as defined in Table 2.

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1 On a shipment basis, exports declined by 0.5 percent during July-December and by 8 percent in January, compared to last year, a better indication of the impact of September 11 given that exports on a payment basis tend to lag shipments by 1-2 months on average.
2 It would deliver fiscal data in GFS format, and allow an economic classification of expenditure which under current accounting is difficult.
3 Based on a 1997 circular, CBR collected tax on accrued book profits on nonperforming loans until 2000, including backward to 1992. In 2000, the courts ruled against this circular and the practice stopped; banks could claim back those taxes by offsetting them against current tax liabilities. As a result, banks paid little corporate tax in 2000-2001.
4 The definition of NFA of the SBP used here implies that, for program monitoring purposes, disbursements and/or purchases from the Fund are to be recorded in the monetary accounts as external liabilities of the SBP, rather than deposits of the government.
5 The definition of debt set forth in No. 9 of the guidelines reads as follows: "(a) For the purpose of this guideline, the term "debt" will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property. (b) Under the definition of debt set out in point 9(a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt."