Press Release No. 07/205

Press Release No. 07/205

An International Monetary Fund (IMF) mission held discussions with the Pakistani authorities on recent economic developments, prospects, and policies under the annual Article IV Consultations and issued the following statement in Islamabad at the conclusion of the mission on September 20, 2007:

"Pakistan's economy continued to perform well in 2006/07, with real GDP growth increasing to 7 percent. Average inflation remained near 8 percent, but the 12-month rate has declined to 6½ percent in recent months. This outcome has been made possible by continued prudent macroeconomic management and structural reforms that have encouraged a strong pick-up in domestic and foreign investment.

"The mission noted that despite lower import growth, the external current account deficit had increased to 4.9 percent of GDP in 2006/07, owing to slower export growth. A surge in foreign direct investment and portfolio inflows had more than covered the external current account deficit, allowing for a significant strengthening of the international reserves position in 2006/07.

"The prospects for sustained high growth in 2007/08 and over the medium term remain favorable, as macroeconomic stability and market-oriented reforms further take hold. Against this background, the discussions with the authorities focused on the policies needed to lower the external current account deficit and the associated vulnerabilities. In light of current uncertainties in global financial markets, the mission stressed the need for very prudent macroeconomic policies in 2007/08.

"The mission welcomed the measures announced in the recent Monetary Policy Statement of the State Bank of Pakistan, including the stated intention to reduce the role of the central bank in financing the government and providing export refinance. It recommended a flexible approach to the determination of interest rates to help achieve the inflation objective and reduce import growth. The mission also noted the objective of reducing the budget deficit to 4 percent of GDP in 2007/08, which would be consistent with the requirements of the Fiscal Responsibility Law. It supported the revenue target for the year and the government's intention to contain current expenditure to make room for higher development outlays.

"At the same time, the mission underscored the need for an appropriate policy mix between monetary and fiscal policies in bringing down the external current deficit. In particular, it stressed that further fiscal consolidation, starting in 2007/08, would contribute significantly to reducing the external current deficit while lessening pressures on real interest rates. The authorities agreed that a substantial revenue mobilization effort was necessary over the medium term to reduce the fiscal deficit while allowing for additional spending on infrastructure and poverty alleviation."