IMF Executive Board Concludes 2011 Article IV Consultation and Proposal for Post-Program Monitoring with Pakistan

Public Information Notice (PIN) No. 12/10
February 6, 2012

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On February 3, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation and Proposal for Post-Program Monitoring with Pakistan.1


Pakistan has faced difficult challenges in the past few years, including external and domestic economic shocks, political uncertainty, and security problems. Despite these challenges, the economic policymakers have taken policy actions and implemented several reforms, including those under the recently expired Stand-By Arrangement, which helped the economy avoid a full-blown crisis in 2008/09. These actions and reforms include establishment of an interest rate corridor, implementation of a more market-based exchange rate regime, and a strengthening of the enforcement powers of the State Bank of Pakistan (SBP). In addition, the authorities substantially raised electricity tariffs and domestic prices of the main petroleum products, and the Benazir Income Support Program (BISP) provided basic income support to the poor during the various shocks that have hit Pakistan.

More recently, however, unresolved structural problems (especially in the energy sector), two major floods, difficulties in implementing key policy reforms, and a more challenging global environment have combined to limit growth and employment creation and made the economy highly vulnerable, with few buffers to absorb shocks. Indeed, economic performance has weakened and external pressures are mounting. In 2010/11,2 real GDP expanded by 2.4 percent—far below the estimated 7 percent required to absorb the two million new labor market entrants annually—with inflation persistently in double digits. Unemployment is high when underemployment and unpaid employment are taken into account, while poverty incidence and measures of human development are at worrisome levels. Efforts to boost revenue mobilization were once again frustrated by a lack of political support, and the fiscal deficit widened to 6.6 percent of GDP in 2010/11. Monetary policy has become more accommodative, with the SBP directly or indirectly (through liquidity injections via open market operations) financing fiscal deficits. While the economy is recovering from the floods, the external position, until recently a source of strength on booming exports and workers’ remittances, is deteriorating. The rupee has come under some pressure, prompting SBP exchange market intervention. The SBP’s foreign exchange reserves have declined by about $2 billion in the last six months.

On current policies, Pakistan’s near- and medium-term prospects are challenging. Growth would remain too low to absorb the large number of new entrants into the labor force, inflation would remain high, and the external position would weaken further. In 2011/12, real GDP growth is projected at 3.4 percent and average CPI inflation at 12 percent. A deterioration in the current account balance due to lower cotton/textile prices and a sharp slowdown in remittances growth, continued difficulties in attracting external financing, and the beginning of repayments to the IMF will likely put further pressure on the balance of payments this year, with reserves projected at $12.1 billion by end 2011/12. In the absence of corrective measures, the fiscal deficit is likely to reach 7 percent of GDP, much higher than the government’s revised budget target of 4.7 percent. Moreover, there are considerable downside risks to this already difficult baseline, particularly in the context of an increasingly difficult global environment and concerns about policy weakening ahead of senate elections in 2012 and parliamentary elections in 2013.

Executive Board Assessment

Executive Directors noted that Pakistan continues to fall short of its economic potential, and called for a reorientation of macroeconomic and structural policies to stem near-term risks to macroeconomic stability, and to lay the foundation for durable and inclusive growth over the medium term.

Directors welcomed the authorities’ intention to reduce the fiscal deficit in order to preserve macroeconomic stability and reconstitute policy buffers. They encouraged the authorities to take more resolute action to mobilize revenues and rationalize public expenditure. In particular, Directors saw merit in further broadening the tax base, restructuring public enterprises, eliminating poorly targeted subsidies, and phasing out commodity procurement operations. They also recommended strengthening the framework for fiscal devolution and the incentives for provincial governments to raise revenue.

Directors stressed that monetary and exchange rate policies need to better focus on containing inflation and external risks. Monetary policy is now too accommodative, and should be tightened if inflation or external pressures increase. Central bank financing of the budget needs to be curtailed, and greater operational independence of the central bank needs to be secured. Directors also called for more exchange rate flexibility to facilitate external adjustment and safeguard foreign reserves.

Directors noted the adequate capitalization of banks, but considered that rising non-performing loan ratios and other weaknesses in banks’ balance sheets present risks to financial stability. Accordingly, they called for stronger supervisory oversight, improved mechanisms for resolving problem banks, and the prompt establishment of a bank-financed deposit insurance scheme. Directors also urged the authorities to address long-standing deficiencies in the regulatory regimes against money laundering and terrorism financing.

Directors welcomed the recent adoption of the New Growth Strategy to guide structural and institutional reforms on a variety of fronts. They endorsed the authorities’ objective of further developing private sector’s participation in the economy. They attached high priority to improving the business environment, boosting external competitiveness, and upgrading the power sector to remove its burden on the public finances and provide a reliable electricity supply to support growth. Directors welcomed the authorities’ decision to subscribe to the Fund’s Special Data Dissemination Standard.

Pakistan: Selected Economic Indicators, 2008/09–2011/12 1/
(Population: 173.5 million (2010/11))
(Per capita GDP: US$1,179 (2010/11))
(Poverty rate: 17.2 percent (2007/08))
      Estimate Projection
  2008/09 2009/10 2010/11 2011/12
  (Annual percentage change)

Output and prices


Real GDP at factor cost

1.7 3.8 2.4 3.4

GDP deflator at factor cost

20.0 11.9 18.8 12.0

Consumer prices (period average) 2/

17.6 10.1 13.7 12.0

Consumer prices (end of period) 2/

9.6 11.8 13.3 11.0

Pakistani rupees per U.S. dollar (period average)

25.8 6.7 2.3
  (In percent of GDP)

Saving and investment


Gross saving

12.5 13.1 13.6 11.4


-2.1 -2.4 -3.6 -3.6

Nongovernment (including public sector enterprises)

14.5 15.5 17.2 15.0

Gross capital formation 3/

18.2 15.4 13.4 13.4


3.1 3.5 2.6 3.1

Nongovernment (including public sector enterprises)

15.1 11.9 10.8 10.3

Public finances


Revenue and grants

14.7 14.4 12.8 12.7

Expenditure (including statistical discrepancy)

19.9 20.3 18.9 19.5

Budget balance (including grants)

-5.2 -5.9 -6.1 -6.7

Budget balance (excluding grants)

-5.3 -6.2 -6.6 -6.9

Primary balance

-0.2 -1.6 -2.3 -2.9

Total general government debt 4/

60.7 61.5 60.1 61.7

External general government debt

30.4 30.1 26.8 24.9

Domestic general government debt

30.3 31.4 33.3 36.9
  (Annual changes in percent of initial stock of broad money, unless otherwise indicated

Monetary sector


Net foreign assets

-3.2 0.5 4.1 -3.3

Net domestic assets

12.8 11.9 11.8 18.2

Broad money

9.6 12.5 15.9 14.9

Reserve Money

1.9 11.4 17.1 13.3

Private credit (percentage change)

0.7 3.9 4.0 3.4

Six-month treasury bill rate (period average, in percent)

13.1 12.2 13.7

External sector


Merchandise exports, U.S. dollars (percentage change)

-6.4 2.9 29.3 -1.8

Merchandise imports, U.S. dollars (percentage change)

-10.3 -1.7 14.5 9.2

Current account balance (in percent of GDP)

-5.7 -2.2 0.2 -2.0
  (In percent of exports of goods and services, unless otherwise indicated)

External public and publicly guaranteed debt

182.2 177.3 153.4 158.5

Debt service

21.6 23.0 13.8 18.3

Gross reserves (in millions of U.S. dollars) 5/

9,110 12,958 14,784 12,086

In months of next year's imports of goods and services

2.9 3.6 3.7 2.9

Memorandum items:


Real effective exchange rate (annual average, percentage change)

-2.1 1.0 6.1

Terms of trade (percentage change)

1.9 4.5 -3.2

Real per capita GDP (percentage change)

-2.6 1.6 0.3 1.3

GDP at market prices (in billions of Pakistani rupees)

12,724 14,837 18,063 20,918

GDP at market prices (in billions of U.S. dollars)

161.8 176.9 210.6 233.5

Sources: Pakistani authorities; and IMF staff estimates and projections.

1/ Fiscal year ends June 30.

2/ Inflation after 2009/10 based on new CPI weights, recalculated in September 2011.

3/ Including changes in inventories. Investment data recorded by the Pakistan Federal Bureau of Statistics are said to underreport true activity.

4/ Excludes military debt, and commercial loans.

5/ Excluding gold and foreign currency deposits of commercial banks held with the State Bank of Pakistan.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:

2 The fiscal year runs from July 1 to June 30.


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