Memorandum of Economic and
Financial Policies for the Remainder of FY 2002/03
I. Developments During May-August 2002
1. Despite several adverse external and internal shocks, such as
the continued impact of post September 11 events, drought, high oil
prices, and security problems, economic adjustment and reform have maintained
a strong momentum. Continued private foreign exchange inflows and
steady financial support by the international community have allowed the
banking system to buildup foreign exchange reserves to a level that considerably
reduces the economy's vulnerability to external shocks. All performance
criteria for end-June 2002 and for July and August 2002 have been met,
except-for reasons detailed below-the Central Board of Revenue (CBR) revenue
target; the structural performance criterion on bringing Karachi Electric
Supply Corporation (KESC) to the point of sale (Tables 1(a)
and 2(a)); and the continuous performance criterion
on the non-introduction of new tax exemptions. However, regional tensions
and isolated domestic terrorist acts remain impediments to a faster recovery
of private investment and growth. Technical assistance has in some cases
slowed down because of travel advisories. Recent constitutional amendments
aim to ensure the continuity of core reforms of recent years, while parliamentary
elections planned for October 2002 provide an opportunity to strengthen
involvement of the political forces in the formulation and implementation
of the reform program, and to deepen program ownership.
2. Macroeconomic developments remain broadly in line with the program.
The consumer price index (CPI) increased by 3.7 percent
over the year through August 2002, consistent with program assumptions.
Preliminary data indicate that real GDP growth (at factor cost) for the
fiscal year that ended in June 2002 reached 3.6 percent, slightly
better than expected at the time of the last review. Driven by the surge
in workers' remittances, real GNP grew even faster, at an estimated 5.4 percent.
Regarding poverty developments, quantitative evidence will become available
only once the planned strengthening of the monitoring of social sector
developments is implemented (see below). However, we believe that devolution
has gotten off to a good start in strengthening the delivery of social
services.
3. The balance of payments position has continued to improve.
Available trade data (on a customs basis) through August 2002 confirm
the strong recovery in trade since March, and the other trends described
in the June 2002 MEFP also remain intact, including strong remittances
and private capital inflows. Thus, official reserves reached US$5.3 billion
at end-August 2002, the Pakistani rupee has remained broadly stable vis-à-vis
the U.S. dollar, and the spread between the kerb and interbank markets
has remained virtually nil. Since June 1, 2002, foreign exchange
purchases of the State Bank of Pakistan (SBP) have been confined to the
interbank market.
4. Broad money grew strongly through June 2002, despite considerable
efforts at sterilization. The end-June 2002 ceiling for net domestic
assets (NDA) of the central bank and the floor on net foreign assets (NFA)
were respected with wide margins, and the ceiling on public enterprise
borrowing was also observed. However, broad money growth accelerated to
15.9 percent in the year through June 2002 (from 13.8 percent
through March), driven by large foreign exchange inflows. Given the stable
exchange rate and low, albeit slightly rising, inflation, we continue
to view this monetary expansion as mainly a structural shift to higher
money demand reflecting increased confidence in the domestic currency.
In response to a modest pickup of year-on-year inflation from 1.8 percent
in December 2001 to 3.2 percent in June 2002, to counter the risk
of a reemergence of inflationary pressures, we moved toward a more active
absorption of liquidity in recent months, and have kept the discount rate
stable at 9 percent since February 2002. This helped to slow
reserve money growth to 9.7 percent in the year to June 2002, from
14.3 percent in December 2001.
5. The end-June 2002 fiscal deficit performance criterion was
observed, despite a shortfall in CBR tax collection. The budget deficit
(excluding grants and one-off capitalization outlays) was contained to
PRs 189 billion (5.1 percent of GDP), 0.6 percent
of GDP lower than programmed. Cumulative CBR revenue through June 2002
fell short of the program target by about PRs 10 billion (or 2.5 percent).
Although better than anticipated during the second review, the acceleration
of CBR revenue growth since March 2002 proved insufficient to make up
the shortfall carried over from the preceding quarter. Nonetheless, this
better-than-expected outcome confirms the basis for this fiscal year's
targets, and with a strong performance in July-August (where CBR revenue
rose by 14 percent over last year), these targets appear attainable.
Nontax revenue for FY 2001/02, including compensation for services
to the coalition in the fight against terrorism, was well above expectations,
mostly on account of higher dividends from public sector enterprises (PSE),
and despite lower-than-expected interest payments from the Water and Power
Development Authority (WAPDA). WAPDA's financial difficulties also led
to its inability to make principal repayments on outstanding government
loans to the budget. All in all, budgetary support for WAPDA in FY 2001/02
reached PRs 18.5 billion (0.5 percent of GDP). Defense
expenditures were contained slightly below the anticipated levels. Interim
Poverty Reduction Strategy Paper (I-PRSP) expenditure accelerated strongly
in the last months of the fiscal year as the newly elected local governments
became fully operational, indicating that their ability to spend on social
services while respecting proper accounting standards has improved sharply.
According to preliminary (non-reconciled) data, Interim Poverty Reduction
Strategy Paper expenditure rose by 9.1 percent above the levels of
the preceding year, reaching PRs 133.5 billion for the year
ending June 2002 (3.6 percent of GDP), only marginally lower
than the programmed levels and compared to a shortfall of 25 percent
during July-December 2001. Education spending, which accounts for nearly
half of the total I-PRSP outlays, was up 17 percent over last year,
health spending was up 10 percent. However, reconciliation of the
district accounts will take a few months and only then will fully reliable
data on the exact composition of actual cash expenditure become available.
6. Structural reforms are broadly on track, as detailed in the attached
Table 2(a). All structural performance
criteria for July 1 were met. As specified in the November 2001 MEFP,
the cabinet approved a privatization plan for KESC in February 2002. KESC
filed a tariff petition with the National Electricity Power Regulatory
Authority (NEPRA) in May 2002 for a multi-year tariff to provide long-term
comfort to prospective investors. The Privatization Commission started
transaction procedures in March 2002 with advertisements and direct contacts
by the financial advisor and called for expressions of interest (EOI)
and statements of qualifications (SOQ) from prospective investors with
closing date on June 24, 2002. In May 2002, a marketing conference
(road show) was held in Karachi. Despite travel advisories, global corporate
uncertainties, and the post-September 11, 2001 scenario, two
investors submitted their EOIs. One of them also submitted the SOQ in
June 2002. None of the investors who expressed interest has yet initiated
due diligence, although all data are ready from our side. While all the
critical steps toward privatization that were under our control were taken,
the performance criterion on bringing KESC to the point of sale by end-July,
as specified in the November 2001 MEFP, was thus missed for reasons related
to third parties outside our control. Nonetheless, a number of privatizations
in the oil and gas sectors and of United Bank Limited (UBL) were concluded,
and the process of privatizing other major enterprises is gathering momentum.
With the presentation of the budget, we published a draft fiscal responsibility
law, inviting comments from the general public by July 15, several
of which are now being incorporated. The law prescribes the budget statements
that the federal government has to provide on a regular basis, and sets
a number of rules and targets for fiscal policy to ensure fiscal transparency
and sound fiscal management.
7. The reorganization of WAPDA has made progress. The financial
improvement plan (FIP) for WAPDA recently agreed upon with the World Bank,
which covers the period July 2002 through June 2004, is broadly on track,
since a structural average tariff increase was recently granted by NEPRA
and became effective on August 13, 2002. The increase (9.2 percent
on average) is somewhat below the Financial Improvement Plan (FIP) target
(12.8 percent) in order to protect the most vulnerable consumers
through low increases in the low-consumption slabs. With offsetting savings
expected from greater availability of hydroelectrical power and assuming
full implementation of the FIP, WAPDA should need only a small amount
of budgetary support in this fiscal year (see below). National Electricity
Power Regulatory Authority also issued licenses to the new distribution
companies (DISCOs) and generation companies (GENCOs), and the transfer
of assets and liabilities to the new companies is now largely complete.
A request for a tariff increase was filed by KESC, and following approval
by NEPRA, a 6.5 percent average structural increase became effective
September 13, 2002.
8. The Supreme Court of Pakistan on June 24, 2002 set aside its earlier
judgment of December 1999 on "riba" and remitted all the cases
to the Federal Shariat Court, the court of first instance, for determination
anew. In late September 2002, the cabinet adopted amendments to the SBP
Act that increase the SPB's independence, in particular in the area of
reserve management, and in line with Fund Safeguards Assessment recommendations.
II. Economic and Financial Policies for FY 2002/03
A. Macroeconomic Objectives and Policies
9. A new government will emerge from the parliamentary elections
in October 2002. We expect that because the reform package commands
broad consensus across the political spectrum, economic gains are now
beginning to be visible, and recent constitutional changes emphasize the
need to maintain sustainable macroeconomic policies, the momentum of reforms
will continue. We are confident that the thrust of economic policies set
forth below will be implemented as envisaged, and that the next government
will, by early 2003, finalize a full-fledged poverty reduction strategy,
providing the basis for continued support through the Poverty Reduction
and Growth Facility (PRGF) arrangement.
10. Despite concerns about the strength of the international recovery,
recent data confirm the expected upturn in domestic economic activity,
and we remain confident that the original macroeconomic objectives under
the program for FY 2002/03 will be achieved. Real GDP growth
(at factor cost) is still projected to reach 4.5 percent in FY 2002/03.
Provided security concerns subside, we expect an 8 percent increase
in exports (in U.S. dollar terms) over the last fiscal year, consistent
with recent trends. Export growth is expected to be underpinned by some
improvement in unit prices, a shift to higher value-added products in
the textile sector, and the recent improvement in access to major trading
partner markets. Building on recent price developments, and assuming broad
stability of the exchange rate and international oil prices, our objective
to contain inflation at 4 percent remains unchanged. Rising imports
related to the pickup of domestic activity as well as a return of remittances
and official transfers closer to historical trends are expected to move
the external current account (including official transfers) from a surplus
of 2.5 percent of GDP to a balanced one in FY 2002/03. This
change will be partly offset by a lower capital account deficit, largely
because of lower public sector net short-term outflows (including lower
repayment of trade credits and of frozen foreign currency deposits following
higher-than-expected repayments in FY 2001/02). However, we expect
private net inflows to ease off from the exceptionally high levels of
FY 2001/02, which we view partly as a portfolio shift of Pakistani
balances abroad toward the domestic financial system, partly reflecting
a shift of previously unrecorded inflows toward official channels. Net
exceptional financing, notably in the form of rescheduled debt service
payments and program financing from the International Financial Institutions
(IFIs), will be somewhat lower than in FY 2001/02, at about US$2.5 billion.
While reserve accumulation is expected to be less than during 2001/02,
gross official reserves are projected to rise to at least US$5.3 billion
in June 2003, equivalent to almost five months of next year's imports
of goods and nonfactor services.
11. As outlined in the June 2002 MEFP, we will maintain the current
policy mix combining a flexible exchange rate and prudent monetary policy
geared toward achieving the inflation and reserves targets, and further
fiscal consolidation to extricate Pakistan from excessive levels of public
debt. Given that the recent decline in the income velocity of money
may be only a temporary phenomenon, we will continue to closely monitor
inflation indicators as well as monetary aggregates. We have already shifted
toward the pursuit of a more aggressive absorption of liquidity, and have
revised downward the targets for broad money and reserve money growth,
in line with projected nominal GDP growth. In view of the volatility of
monetary aggregates and their unstable relation with inflation, we are
pursuing preparatory work to explore the option of moving to an inflation
targeting framework over the medium term.
12. Fiscal policies aim to reduce the consolidated government cash
budget deficit (excluding grants and with interest on accrual basis) to
4.7 percent of GDP, from 5.1 percent in 2001/02, while substantially
raising social expenditure to reduce Pakistan's "social gap."
The deficit target incorporates the settlement of KESC's debt to banks
and suppliers, in the context of its privatization strategy, of PRs 11 billion,
for which the program provides an adjuster (to the deficit target); the
target remains thus in line with the original program objective of a deficit
of 4.4 percent of GDP. As detailed in the June 2002 MEFP, we expect
the deficit reduction to result mostly from an increased tax effort and
sharply reduced budgetary support for WAPDA and KESC. However, the projected
composition of expenditure has been revised to allow additional support
for public enterprise reform, with offsetting savings in the foreign interest
bill (reflecting some debt data revisions and lower-than-expected interest
rates on debt restructured under the Paris Club agreement), and higher
federal nontax revenue on the expectation that WAPDA will pay in full
its debt service to the budget. The additional subsidies/grants include
additional budgetary support for KESC (PRs 11.5 billion, or 0.3 percent
of GDP), due mainly to a later-than-expected electricity tariff increase
and assuming a delay in KESC privatization to December 2002, including
the settlement of KESC's arrears to suppliers (notably WAPDA). WAPDA will
receive a subsidy to partly compensate for the delayed electricity tariff
increase (PRs 0.7 billion). The fleet renewal of Pakistan International
Airline (PIA) requires an additional grant (PRs 2 billion),
and in the context of a major reform of rural finance institutions, PRs 6 billion
have been allocated to the restructuring of the Agricultural Development
Bank of Pakistan (ADBP) (see below).
13. Should unforeseen developments threaten the fiscal deficit target,
we plan to reduce nonpriority expenditures, while striving to protect
the budgeted increase in I-PRSP expenditures. One main risk would
be a prolongation or escalation of tension on the eastern border that
could constrain our ability to achieve the fiscal targets. Barring such
developments, we intend to reduce the share of defense expenditure in
relation to GDP to about 3.6 percent, from 4.0 percent in 2001/02.
Another risk is that for various reasons, KESC and/or WAPDA may not achieve
the planned efficiency gains, such as the envisaged reduction in theft
and technical losses or improvements in bill collection from FATA. For
example, additional budgetary outlays of up to PRs 5 billion
would be required if KESC were not privatized during this fiscal year.
Furthermore, as set out in the June 2002 MEFP, an excess in external
budgetary cash grants plus capital grants over programmed levels may be
used for additional expenditure on I-PRSP categories, for up to 0.5 percent
of GDP.
B. Structural Policies
Tax policy and tax administration
14. As described in the June 2002 MEFP, a substantive tax reform
package has become effective with the FY 2002/03 budget, and is being
complemented by revamping business procedures within the CBR. As a
first step, the large taxpayer unit (LTU) in Karachi has become operational
and is now treating the files of major taxpayers on the basis of greater
functional integration of the administration of all taxes. Specific recommendations
on how to revamp CBR's human resource management (recruitment procedures,
a move to more merit-based promotion and remuneration rules) and how to
make better use of modern information technology will be prepared with
the help of World Bank-financed consultants by November 2002. Effective
August 23, 2002, we eliminated the GST on medicines introduced in
March 2002 for two reasons: First, it became evident that the tax did
not command sufficient social or political consensus and contributed to
a weakening of public support for the entire adjustment program. Second,
following the exemption of a large number of "life saving" drugs,
the administration of the tax became extremely complex. To offset the
revenue losses from the elimination of the GST on medicines (about PRs 2.5 billion
on an annual basis), we will adjust taxation of various petroleum products,
to yield about PRs 2.5 billion additional revenue on an annual
basis. We look forward to review shortly with planned Fiscal Affairs Department
(FAD) technical assistance missions progress to date on the various tax
reforms, and formulate specific actions for the second half of the fiscal
year, with focus on customs reform (where a draft reform plan has been
prepared), refund procedures, and other administrative reform.
I-PRSP implementation, public expenditure management, and fiscal transparency
15. I-PRSP implementation and reforms on improving fiscal transparency
and data quality are proceeding as detailed in the June 2002 MEFP.
The recently established I-PRSP secretariat has intensified the monitoring
of pro-poor (that is, I-PRSP) expenditures, which are now reported to
the public on a quarterly basis. The secretariat will work with the provincial
governments to improve their capacity to conduct qualitative analysis
of expenditure patterns and take remedial policy action as needed. Specific
proposals for setting up mechanisms to monitor intermediate poverty indicators
have been worked out with the World Bank and the U.K. Department for International
Development (DFID), and will become operational by end-2002. We will continue
to implement fiscal transparency and data quality measures in line with
establishing an Accountable Fiscal Management Framework (AFMF) and in
the context of the Pakistan Improvement of Financial Reporting and Accounting
(PIFRA) project. At the provincial level, fiscal transparency and data
work are being supported through World Bank provincial structural adjustment
loans. The main challenge will be to ensure timely and reliable reporting
and reconciliation of expenditure data at the district level, through
capacity building at the local government level (supported by the AsDB
(Asia Development Bank)) and other international organizations; and strengthening
the comptroller general of accounts (CGA) as planned under Pakistan Improvement
of Financial Reporting and Accounting (PIFRA).
Other governance reforms
16. Improving governance remains at the center of our economic strategy
and informs the ongoing reforms in the areas of devolution, civil service,
tax policy and administration, and public financial management, as well
as our ambitious privatization program. An international workshop
in August discussed a National Anti-Corruption Strategy, prepared by the
National Accountability Bureau, which will be taken to the cabinet for
further consideration, with specific actions to be planned on this basis.
The reform of police and the judiciary under an AsDB-supported program
is off to a good start with improved allocations for police and judicial
reform in this year's provincial budgets; preparation of a draft "Freedom
of Information" Act; and passage of a police ordinance clarifying
the role and powers of the police consistent with devolution, including
the constitution of local citizen boards to enhance oversight over the
local police. Another AsDB-supported program, currently under negotiation,
aims to strengthen corporate governance in the nonbank financial sector
(notably insurance and pension funds). Public procurement reform got under
way in May 2002 with the passage of a law establishing the Public Procurement
Regulatory Authority, which will have the task to ensure enforcement of
clear and transparent procurement rules.
Public enterprises
17. The privatization program has partly overcome the setbacks following
the events of September 11. However, the privatization of Pakistan
Telecommunications Company Limited (PTCL) is being delayed due to limited
investor interest in the context of the weak financial position of the
international telecommunication sector, since so far none of the interested
investors fully complies with the required qualifications. We hope to
complete the privatization of KESC before end-2002. Discussions with at
least one interested investor are being pursued and various complementary
reforms are being put in place to reduce regulatory uncertainty. These
include the write-down of capital and clarification of the respective
responsibilities of NEPRA and the monopoly commission. These steps would
also constitute the basis for an alternative restructuring strategy, should
privatization at this time prove impossible. Various other PSEs are being
prepared for privatization in the near future. In particular, expressions
of interest have been received for the Oil and Gas Development Corporation
(OGDC), Habib Bank Ltd. (HBL), and Pakistan State Oil (PSO). Due diligence
by qualified investors will likely proceed during September-October, with
bidding expected shortly thereafter. To enhance PSE monitoring and accountability,
we have worked out quarterly performance targets for PIA, Pakistan Railways,
Pakistan Steel Mills, and WAPDA/successor companies. The performance of
WAPDA, in particular, is being closely monitored by a ministerial committee
to ensure improvements in line losses and billing/collection as planned.
Given the uncertainty over the timing of its privatization, we have prepared
a similar plan for KESC for this fiscal year, with quarterly public reporting
to start in November and covering the first quarter of FY 2002/03.
The plan provides for cash deficits consistent with the budgetary support
discussed above. We are pleased that strong governance reforms in recent
years have helped to turn around the financial performance of many PSEs,
in particular the national airline (PIA), the railways, and Pakistan Steel.
We have endorsed a business plan prepared by PIA that aims to increase
efficiency further, including greater focus on its core business (by selling
its real estate holdings and outsourcing) and renewal of the fleet. We
are also working, in close consultation with the World Bank, on a plan
to incorporate the railways (currently operated as a government department)
and to involve private sector financing where possible, for a planned
modernization program.
Agriculture and marketing reforms
18. As set forth in a policy statement to be issued shortly, our strategy
in agriculture centers on further improving water management, providing
better extension services to raise yields and reduce vulnerability to
drought and pests, and gradually reducing government involvement in the
marketing of agricultural commodities, as specified in a reform program
supported by an AsDB loan. In order to encourage the private sector to
assume a greater role, especially in investing into wheat storage facilities,
we have put in place an incentive package as detailed in the June 2002
MEFP. We are quite encouraged by initial results, as the private sector
has now, for the first time in recent history, become involved in wheat
marketing, exporting about 0.5 million tons.
Financial sector and exchange system reforms
19. Banking sector reform is continuing in accordance with our
financial sector strategy. At its core is the reform of seven public sector
financial institutions (United Bank Limited, Habib Bank Ltd., National
Bank of Pakistan (NBP), Allied Bank of Pakistan (ABP), National Development
Finance Corporation (NDFC), Agricultural Development Bank of Pakistan,
and Industrial Development Bank of Pakistan (IDBP)), which account for
80 percent of nonperforming loans of the entire banking system. The
reform involves several specific action plans.
- Following extensive restructuring of the branch networks, staffing,
and balance sheets of the three nationalized banks, we are about to
complete the sale of 51 percent of shares in UBL to a strategic
investor. The remainder of the SBP's holdings in UBL will be floated
subsequently in light of market conditions.
- We have invited expressions of interest for the sale of Habib Bank,
which will lead to its eventual sale to the private sector.
- We plan to float another 5-10 percent of NBP shares, reducing
the government's share to about 80 percent.
- The planned disposal of the government's minority holding in Allied
Bank (49 percent) has been delayed since a number of unexpected
legal complications are being resolved, but we remain committed to sell
it to a strategic investor.
- We have already liquidated the NDFC and merged its residual functions
with NBP.
- With technical and financial support from the AsDB, we have embarked
on the restructuring of the ADBP which involves downsizing to half the
current staff through a voluntary separation program; appointing a board
drawing on professionals from the private sector; and recapitalization
through conversion of outstanding government loans into equity. We are
aware that maintaining ADBP as a publicly-owned corporation carries
risks, notably that it will prove difficult to turn around the performance
of the staff kept on payroll, or that eventually its lending and staffing
will again become dominated by noncommercial considerations, which in
the past has led to its current insolvency. We believe, however, that
given ADBP's critical role in the rural sector, the immediate liquidation
of ADBP would have had unacceptable social costs. As other rural finance
institutions are being developed under the AsDB program, we will, after
two years, review the possibility of privatizing ADBP or if needed consider
its liquidation.
- We are also considering restructuring and privatization of the IDBP
since it holds a commercial banking license and should be attractive
to private investors.
20. The aforementioned Supreme Court decision has cleared the way for
pursuing an evolutionary approach to Islamic finance, through encouraging
the development of Islamic banking alongside traditional financial institutions,
while adapting regulations for the supervision of chartered Islamic banks.
We remain disappointed that the Fund and the World Bank have again delayed
the planned Financial Sector Assessment Program (FSAP) mission, but we
will seek every opportunity to discuss with the Fund our strategy on (a) protecting
the financial system against illicit use, by bringing anti-money laundering
(AML) rules up to best practices; (b) further modernizing the prudential
framework; and (c) phasing out the remnants of administered credit
allocation (such as prescribed lending to agriculture). A draft AML law
has been prepared and will be promulgated before October 2002. It includes
provisions to criminalize money laundering, to set up a financial intelligence
unit, and to allow freezing and forfeiture of assets and international
cooperation. In order to further strengthen the regulatory and supervisory
framework and promote consumer financing and lending to small-and medium-sized
enterprises (SME), the SBP is formulating separate prudential regulations
for these two types of lending. The SBP has already removed certain impediments
that stood in the way of consumer financing by the nationalized commercial
banks. A study on housing finance has been completed and the commercial
banks are embarking on developing new mortgage products. In the context
of a capital market reform program supported by another AsDB loan,
we plan a number of steps to strengthen stock market supervision, develop
secondary markets for government paper, strengthen corporate governance
in the nonbank financial institutions, and pursue the reform of the National
Saving Schemes (NSS) to reduce remaining distortion and further lower
the budgetary cost of such debt.
21. The legal and regulatory framework for the transformation of moneychangers
into foreign exchange companies (FECs) has been promulgated in July 2002.
Existing moneychangers will have two years to register as FECs and comply
with relevant prudential rules/capital requirements, but no new licenses
for moneychangers will be issued. After the two-year period, no moneychanger
will be allowed to operate unless registered as FECs. The FEC will be
allowed to effect inward transfers. Banks have been allowed, effective
February 1, 2002, to purchase foreign exchange from moneychangers
at freely negotiated rates, thus moving further toward unification of
the interbank and the kerb market. We expect all major moneychangers to
convert within the next few months; commercial banks are also in the process
of setting up FECs as subsidiaries. We expect the FECs will, over time,
also absorb much of the legitimate transfer business currently going through
the Hawala system.
C. Financing Issues
22. While official reserves have been rising much faster than expected
at the launch of the PRGF-supported program, the further accumulation
called for under the revised program is warranted in view of the many
risks to our economy, most notably those related to regional tensions.
We are confident that the revised program remains fully financed for FY 2002/03.
Ongoing discussions with all creditors aim at concluding the bilateral
agreements implementing the recent Paris Club Agreed Minute, and ensuring
treatment of debt due to non-Paris club bilateral creditors on terms comparable
to those agreed with the Paris Club creditors. While these discussions
are well advanced, they could not yet be concluded, in part due to travel
advisories, and Paris Club creditors recently agreed to extend the target
date for conclusion of these agreements to December 31, 2002. Partner
countries and multilateral institutions have voiced strong support for
the reform strategy laid out in the I-PRSP, and we expect to obtain financial
support at least at the levels assumed in the program, sizable debt swaps
(for social expenditure) in the context of the aforementioned bilateral
debt restructuring agreements, and in some cases outright debt cancellation.
We are also firmly determined to meet the conditionality attached to program
loan disbursements with the AsDB and World Bank to ensure the projected
disbursements are on time.
III. Data Issues
23. In the context of the project to revise and change the base year
of the national accounts, the last three studies, including on saving
and investment, were recently completed and sent to Fund staff for comments.
Publication of a producer price index (PPI) is scheduled to commence in
late 2002. Recent steps toward improvement in statistical data dissemination
include the publication of an advance release calendar for selected statistical
data; and dissemination of quarterly balance of payments statistics (with
one quarter lag) and of monthly analytical accounts of the SBP in the
format called for under Special Data Dissemination Standard (with a one-month
lag). We expect to finalize an institutional reform plan for the statistical
system by early 2003, consolidating various existing statistical agencies
into one agency with enhanced autonomy. We are working on the cleaning
up and consolidation of the latest Pakistan Integrated Household Survey
(PIHS) data to allow an updated analysis of social- and poverty-related
developments internally, as well as by international organizations and
researchers, including the delayed social impact assessment for selected
reform under the I-PRSP to be conducted jointly with the World Bank and
the Fund.
IV. Program Monitoring
24. The proposed performance criteria and indicative targets through
end-June 2003 are set out in Tables 1(b)
and 2(b). Table 2(a)
reports on the status of the existing structural performance criteria
and benchmarks; Table 2(b) includes the
additional conditionality proposed as well as the actions we intend to
take prior to the Board discussion of the third review. Further actions
will be developed in the next reviews based, in particular, on input from
the planned technical assistance on CBR reform; formulation of specific
actions emerging from our anti-corruption strategy; and public enterprise
reform once the prospects for some of the more difficult privatizations
have become clearer. This will also allow the new government to take full
ownership of such steps. The attached amendments to the Technical Memorandum
of Understanding (TMU) of June 2002 apply effective January 1, 2003
and clarify the treatment of the privatization accounts at SBP and NBP,
and update the baseline assumptions for external program financing, external
grants, and deposit reserve requirements. We expect the fourth review
to take place as scheduled by end-December 2002. The review will
focus on public enterprise finances and public expenditure monitoring,
especially I-PRSP spending.
Amendments to the Technical Memorandum
of Understanding (TMU)
The TMU dated June 18, 2002 ("June-TMU") will remain valid
for the remainder of FY 2002/03, with the revised baseline assumptions
for net external program financing and external grants as indicated in
Tables 1(a) and 1(b),
and the following amendments to apply from January 1, 2003.
1. The second sentence of para. 6 of the June-TMU should be replaced
by: "For the purposes of this memorandum, claims on government exclude
credit for commodity operations; government deposits exclude outstanding
balances in the Zakat Fund and balances in the various privatization accounts
kept by the government in the banking system."
2. The first sentence in para. 8 of the June-TMU should be replaced
by: "Net external budget financing is defined as net external program
financing excluding privatization receipts (as recorded in the balance
of payments) plus all other external loans for the financing of public
projects or other federal or provincial budget expenditures, and plus
external financing receipts transferred to the budget from the various
privatization accounts."
3. Para. 16 of the June-TMU should be replaced by the following:
"The ceilings on the NDA of the SBP will also be adjusted downward/upward
by the amount of (a) banks' Pakistani rupee reserves freed/seized
by any reduction/increase of the daily CRR relative to the baseline assumption;
(b) banks' reserves freed/seized by any reduction/increase in the
total reserve requirements on foreign currency deposits relative to the
baseline assumption; and (c) any reduction/increase in the reservable
deposit base that is related to definitional changes, as per the following
formula: ∆NDA = ∆rB0 + r0∆B +
∆r∆B, where r0 denotes the reserve requirement
ratio prior to any change; B0 denotes the level of the reservable
deposits in the initial definition; ∆r is the change in the reserve
requirement ratio; and ∆B denotes the change in the reservable deposits
as a result of definitional changes."
4. In para. 19, the following changes should be made:
First, the second bullet should be replaced by: "Deposits into and
withdrawals from the privatization accounts for each quarter, 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)."
Second, items (ii) and (iii) in the 23rd bullet in para. 19
should be replaced by:
(ii) Quarterly contracting or guaranteeing of nonconcessional medium-
and long-term government debt; and
(iii) Information on any rescheduling on public- and publicly-guaranteed
debt reached with creditors, within one month.
