## Public Information Notice: IMF Executive Board Concludes 2007 Article IV Consultation with Pakistan

_IMF News, December 20, 2007_

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## Bibliographic details
- Published: December 20, 2007

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### Background
- On December 17, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the 2007 Article IV consultation with Pakistan.
- Since 2001/02 Pakistan experienced a turnaround: sound macroeconomic management and wide-ranging structural reforms contributed to high real GDP growth, a reduction in the debt burden, and an improved business climate.
- Adherence to pro-poor policies helped lower poverty rates.
- Increasingly, Foreign Direct Investment (FDI) and portfolio flows became an important source of external financing.

### Economic developments during fiscal year ending June 2007
- Real GDP growth increased to 7 percent, with a recovery in agriculture and strong performance of large-scale manufacturing and services.
- Average inflation persisted near 8 percent; the disinflation process slowed somewhat.
- The current account deficit widened for the third consecutive year, reaching 4.9 percent of GDP (US$7 billion) in 2006/07.
- Overall, gross official reserves increased by US$3.5 billion, to US$14.3 billion by end-June 2007.
- Net details and market indicators:
  - The rupee fluctuated within a narrow band against the U.S. dollar; the real effective exchange rate remained broadly stable.
  - The stock market recovered from losses suffered in early November 2007.
  - The J.P. Morgan Emerging Markets Bonds Index Global spread for Pakistani international bonds over 10-year U.S. Treasuries was 400 basis points as of December 14, compared with 214 basis points at end-June.

### Monetary, financial, and fiscal developments
- Monetary:
  - Lending to the government by the State Bank of Pakistan (SBP) ceased in 2006/07.
  - Reserve money and broad money grew by about 20 percent, driven by accumulation of international reserves and lending to commercial banks for subsidized credit to the textile industry.
  - SBP offloaded some holdings of treasury bills to commercial banks for the first time in four years.
  - Commercial banks' credit to government picked up, offsetting a deceleration in credit to the private sector to 17 percent, from 23 percent a year earlier.
- Fiscal:
  - The fiscal stance was broadly unchanged in 2006/07; the fiscal deficit (excluding grants) was estimated at 4.3 percent of GDP, the same as in 2005/06.
  - Current expenditure overruns were fully offset by a strong performance of revenues (especially nontax) and underspending on investment projects.
  - The deficit was financed roughly equally from external and domestic sources.
  - The public debt ratio declined by an additional 3 percentage points to about 55 percent of GDP.
- Structural and sectoral reforms:
  - Privatization progress was mixed; sale of Pakistan Steel Mills was annulled by the Supreme Court in June 2006, but placements of Global Depository Receipts proceeded.
  - Electricity tariffs were adjusted by 10 percent in February 2007, unlocking World Bank loans and paving the way for greater private participation in electricity generation.
  - Regulations regarding broker financing of share trades were strengthened.
  - Authorities were working on their second Poverty Reduction Strategy Paper, expected to be completed by the spring of 2008.

### Developments and outlook for 2007/08 (authorities' program and early indicators)
- Authorities' program envisages:
  - Real GDP growth of 7.2 percent for 2007/08.
  - Budget deficit target set at 4 percent of GDP.
  - SBP announced tighter monetary conditions to slow broad money growth to 13.7 percent by end-2007/08 (in its July Monetary Policy Statement).
- Early 2007/08 indicators:
  - Provisional data showed continued strong growth in large-scale manufacturing in Q1 2007/08.
  - The 12-month rate of inflation was 8.7 percent in November 2007, owing mainly to increase in food prices.
  - Preliminary SBP data for July-October 2007 suggested the current account deficit narrowed relative to the same period of last year, with export growth recovering and remittances showing a strong increase.
  - Net international reserves fell by US$1 billion since end-June 2007, to US$13.3 billion as of December 14, 2007; decline concentrated in November due to large oil and debt payments and some portfolio outflows.
  - The fiscal position deteriorated in Q1 2007/08 relative to Q1 2006/07, due mainly to strong growth of development spending and higher than envisaged interest payments and energy subsidies.
  - During July-September 2007 domestic financing of the government was provided mainly by commercial banks; starting in October SBP's financing of the government increased markedly as commercial banks reduced their demand for treasury bills.

### Executive Board Assessment — key findings and recommendations
- Directors' assessment of 2006/07 performance:
  - Welcomed strong performance: increased real GDP growth, strengthened international reserves, and declining debt ratios.
  - Noted persistent vulnerabilities: relatively high inflation, widened external current account deficit, and large external financing needs.
  - Emphasized need for continued vigilance to reduce vulnerabilities and maintain investor confidence given political uncertainties and global credit market developments.
- Policy priorities and recommendations:
  - Main challenge: maintain high growth while lowering inflation and reducing external current account deficit to a more sustainable level.
  - Required policy stance: continued tight fiscal and monetary policies.
  - Fiscal policy:
    - Encourage authorities to strengthen the fiscal program for 2007/08 to complement monetary tightening, particularly by reducing energy subsidies and capital spending.
    - Further fiscal consolidation beyond 2007/08 is needed to reduce inflation and the external current account deficit while lessening pressures on real interest rates.
    - Noted low ratio of tax revenue to GDP; recommended pressing ahead with reforms to increase revenue so the fiscal deficit can be reduced while boosting spending on infrastructure and poverty alleviation.
    - Recommended broadening the tax base, including expanding taxation of the agricultural and services sectors and reducing tax exemptions.
    - Supported use of public-private partnerships in infrastructure, while cautioning that contingent liabilities should be fully identified and incorporated in the budget.
  - Monetary and exchange rate policy:
    - Welcomed monetary tightening since mid-2007.
    - Regretted re-emergence of central bank financing of the budget; stressed need to adjust interest rates in treasury bill auctions as needed so the government's 2007/08 domestic borrowing requirement is fully met through commercial banks or nonbank institutions.
    - Many Directors called for greater exchange rate flexibility to enhance monetary policy effectiveness and absorb external shocks; some Directors preferred exchange rate stability to maintain investor confidence at this juncture.
    - Agreed that real effective exchange rate is broadly in line with Pakistan's fundamentals.
  - Structural reforms and financial sector:
    - Encouraged vigorous implementation of structural reforms to sustain growth and poverty reduction.
    - Urged modernization of the energy sector's regulatory and tariff framework and revival of the privatization process.
    - Recommended reducing subsidized central bank credit to certain sectors and disengaging the central bank from development financing to deepen domestic financial markets and enhance efficiency of financial intermediation.
    - Supported moving from short-term government financing instruments to long-term securities.
    - Urged action to strengthen public financial management.
    - Encouraged resisting pressures to reinstate ad hoc tariff and nontariff barriers and to press ahead with plans for further trade liberalization.
  - Anti–money laundering/terrorism financing:
    - Welcomed recent enactment of regulations governing legislation to combat money laundering and terrorism financing.
    - Underscored need to obtain parliamentary approval of such legislation, make the Financial Monitoring Unit fully operational, and clarify related reporting and accountability issues.

### Pakistan: Selected Economic Indicators, 2002/03–2006/07 (highlights)
- Output and prices:
  - Real GDP at factor cost (percentage change): 2002/03: 4.7; 2003/04: 7.5; 2004/05: 9.0; 2005/06: 6.6; 2006/07: 7.0
  - Consumer prices (period average; percentage change): 2002/03: 3.1; 2003/04: 4.6; 2004/05: 9.3; 2005/06: 7.9; 2006/07: 7.8
  - Consumer prices (end of period; percentage change): 2002/03: 1.9; 2003/04: 8.5; 2004/05: 8.7; 2005/06: 7.6; 2006/07: (not reported)
  - Gross national saving (percent of GDP): 2002/03: 21.6; 2003/04: 18.4; 2004/05: 17.7; 2005/06: 18.0; 2006/07: (not reported)
  - Gross capital formation (including changes in inventories; percent of GDP): 2002/03: 16.8; 2003/04: 16.6; 2004/05: 19.1; 2005/06: 21.7; 2006/07: 23.0
  - GDP at market prices (in billions of Pakistani rupees): 2002/03: 4,876; 2003/04: 5,641; 2004/05: 6,500; 2005/06: 7,594; 2006/07: 8,707
- Public finances:
  - Revenue (including grants, percent of GDP): 2002/03: 17.2; 2003/04: 14.6; 2004/05: 14.1; 2005/06: 14.8; 2006/07: 15.2
  - Expenditure (including statistical discrepancy, percent of GDP): 2002/03: 18.5; 2003/04: 16.4; 2004/05: 19.2; 2005/06: (not reported); 2006/07: (not reported)
  - Budget balance (excluding grants, percent of GDP): 2002/03: -3.8; 2003/04: -2.3; 2004/05: -3.3; 2005/06: -4.3; 2006/07: (not reported)
  - Primary balance (including grants, percent of GDP): 2002/03: 2.9; 2003/04: 1.7; 2004/05: 0.2; 2005/06: -0.6; 2006/07: (not reported)
  - Total government debt (percent of GDP): 2002/03: 74.5; 2003/04: 67.8; 2004/05: 62.9; 2005/06: 57.3; 2006/07: 54.6
- Monetary sector:
  - Net foreign assets (change in percent of broad money): 2002/03: 17.5; 2003/04: 2.1; 2004/05: 2.2; 2005/06: 2.5; 2006/07: 8.1
  - Net domestic assets (change in percent of broad money): 2002/03: 0.5; 2003/04: 17.1; 2004/05: 12.4; 2005/06: 11.3; 2006/07: (not reported)
  - Broad money (annual change; in percent): 2002/03: 19.6; 2003/04: 19.3; 2004/05: 14.9; 2005/06: (not reported); 2006/07: (not reported)
  - Private credit (annual change; in percent): 2002/03: 18.9; 2003/04: 29.8; 2004/05: 33.2; 2005/06: 23.2; 2006/07: (not reported)
  - Six-month treasury bill rate (period average; in percent): 2002/03: 4.1; 2003/04: 8.2; 2004/05: 8.8; 2005/06: (not reported); 2006/07: (not reported)
- External sector:
  - Merchandise exports, U.S. dollars (growth rate; in percent): 2002/03: 20.1; 2003/04: 13.5; 2004/05: 16.2; 2005/06: 14.3; 2006/07: 3.2
  - Merchandise imports, U.S. dollars (growth rate; in percent): 2002/03: 21.2; 2003/04: 38.3; 2004/05: 31.7; 2005/06: 8.0; 2006/07: (not reported)
  - Current account including official current transfers (percent of GDP): 2002/03: 4.9; 2003/04: 1.8; 2004/05: -1.4; 2005/06: -3.9; 2006/07: -4.9
  - External public and publicly guaranteed debt (in percent of exports of goods and services): 2002/03: 229.0; 2003/04: 209.5; 2004/05: 183.7; 2005/06: 167.8; 2006/07: 169.2
  - Gross reserves (in millions of U.S. dollars): 2002/03: 9,529; 2003/04: 10,564; 2004/05: 9,805; 2005/06: 10,760; 2006/07: 14,287
  - Gross reserves (in months of next year's imports of goods and services): 2002/03: 6.5; 2003/04: 5.0; 2004/05: 3.5; 2005/06: 3.7; 2006/07: 4.5
  - Pakistani rupees per U.S. dollar (period average): 2002/03: -4.7; 2003/04: -1.5; 2004/05: 0.8; 2005/06: 1.3; 2006/07: (not reported)
  - Real effective exchange rate (annual average, percentage change): 2002/03: -0.1; 2003/04: -1.8; 2004/05: 0.3; 2005/06: 5.3

*Public Information Notice (PIN) No. 07/143 — IMF Executive Board Concludes 2007 Article IV Consultation with Pakistan*

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## References

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