Press Release: IMF Approves Second Annual ESAF Arrangement, Completes the Second Review under the Extended Arrangement, Approves Financing Under the CCFF for Pakistan

January 15, 1999

The Executive Board of the International Monetary Fund (IMF) approved on January 14, 1999 Pakistan’s second annual program under the Enhanced Structural Adjustment Facility (ESAF)1, completed the second review under the Extended Arrangement2 and approved a purchase under the Compensatory and Contingency Financing Facility (CCFF)3 in respect of a shortfall in export earnings during 1998.

Under these facilities, SDR 409.48 million (about US$575 million) will be disbursed following the Executive Board meeting. Additional assistance of SDR 417.0 million under the ESAF and SDR 379.1 million under the extended arrangement will be made available during the remainder of the program period.

The policies initiated by the current government in early 1997 and supported by the IMF under the ESAF and Extended arrangements were aimed at improving economic growth and reducing macroeconomic imbalances. In 1997/98, Pakistan achieved real GDP growth of 5.4 percent while inflation was contained to less than 8 percent. The external current account deficit narrowed substantially. These developments reflected prudent fiscal and monetary policies, and strong agricultural performance.

After the nuclear explosions of May 1998 and the imposition of economic sanctions, Pakistan’s economy was affected adversely due to an erosion in investor confidence and a decline in private capital flows. In response, the government took several measures to contain the impact on the balance of payments and to sustain domestic economic activity. These included fiscal and exchange rate measures in addition to exchange restrictions. Nevertheless, Pakistan’s economy remained vulnerable, capital outflows were registered, official external reserves declined, and external payments arrears were accumulated.

Program Objectives

To strengthen the balance of payments and lay the basis for sustainable high rates of growth, the government of Pakistan has adopted a program of macroeconomic policies andstructural reforms which are supported by the IMF, the World Bank, and the Asian Development Bank. The macroeconomic objectives for 1998-2001 are:

* Recovery in real GDP annual growth from 3-4 percent to 5-6 percent over the medium term;

* Reduction in annual inflation to about 6 percent in 2001/02;

* Reduction of the external current account deficit from about 3 percent of GDP in 1998/99 to less than 1.5 percent of GDP in 2001/02;

* Stabilization of the total public sector debt-to-GDP ratio;

* Improvement in social indicators.

Macroeconomic Policies and Structural Reforms

A key to achieving these objectives is fiscal consolidation. The budget deficit is targeted to decline from 5.5 percent of GDP in 1997/98 to 4.3 percent of GDP in 1998/99, and to 3.3 percent in 1999/2000. To achieve this target, the government has already taken or intends to take several fiscal measures: an increase in the GST rate to 15 percent from 12.5 percent, reduction in unproductive expenditures and strengthening of the financial position of WAPDA and KESC through a reduction in cross-subsidies, operating costs and tariff adjustments, and a reduction in the federal subsidy for wheat. The monetary policy stance is being geared toward restoring confidence in domestic financial markets and ensuring a steady flow of credit to the private sector consistent with growth and balance of payments objectives. An attempt is being made to integrate the credit markets and limit the scope of directed or subsidized credit. The role of market forces in the determination of the exchange rate has been increased.

Pakistan’s structural reform agenda is largely focused on the budget and on restructuring and strengthening the financial position of public enterprises. The government is in the process of making substantial efforts to broaden the tax base, revamp tax administration, and implement the restructuring plans for the energy sector and other public enterprises. Simultaneously, the government intends to move forward with the privatization of financial institutions, trade liberalization, and make further progress in developing market-based foreign exchange and payments system. The government has initiated efforts to increase transparency, enforce the rule of law and improve governance, including in the fiscal and financial areas and in public enterprises.

External Financing

The financing of the agreed program will involve significant efforts by all of Pakistan’s creditors. In this context, a meeting of the Paris Club is expected late in January to consider a request by Pakistan for a rescheduling of its medium- and long-term debt service paymentsfalling due to Paris Club official creditors during the program period. The Pakistani authorities intend to seek comparable treatment from all its other official, bilateral, commercial, and private creditors.

1 The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years with a 5 ½-year grace period.
2 The Extended Arrangement under the Extended Funding Facility (EFF) is an IMF financing facility that supports medium-term programs that seek to overcome balance of payments difficulties stemming from macroeconomic imbalances and structural problems. The repayment terms are 10 years with a 4 ½-year grace period, and the interest rate, adjusted weekly, is about 3.8 percent per annum.
3 Under the CCFF, the IMF assists members experiencing temporary shortfalls in export earnings. The loans are repayable between 3 1/4 to 5 years. A total amount of SDR 352.7 million was made available to Pakistan under this facility.


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