Press Release No. 03/26

Press Release: IMF Completes Fourth Review of Pakistan's PRGF-Supported Program, Approves US$118 Million Disbursement to Pakistan

February 28, 2003

The Executive Board of the International Monetary Fund (IMF) completed today the fourth review of Pakistan's performance under a three-year, SDR 1.03 billion (about US$1.41 billion) Poverty Reduction and Growth Facility (PRGF) arrangement. This decision entitles Pakistan to the release of a further SDR 86.14 million (about US$118 million), which will bring total disbursements under the program (see Press Release No. 01/51) to SDR 430.72 million (about US$591 million).

In approving the disbursement, the Executive Board granted a waiver of Pakistan's nonobservance of the continuous structural performance criterion regarding tax exemptions and regulatory import duties.

The Poverty Reduction and Growth Facility is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies, to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years with a 5½ -year grace period on principal payments.

Following the Executive Board's review of Pakistan, Mr. Eduardo Aninat, Deputy Managing Director and Acting Chairman, made the following statement:

"The Fund commends the authorities for making further progress on stabilization, in a difficult economic and political environment. All quantitative performance criteria for end-September 2002 were met. Continued implementation of cautious fiscal and monetary policies under the Fund-supported program has paved the way for the recovery observed since last spring, which is gathering momentum while inflation remains low. Tax revenue during the first half of the fiscal year were in line with projections. High remittances and private capital inflows contributed to a strong increase in official reserves and strengthened the Pakistani rupee. Pro-poor expenditures, while lower than expected, rose significantly during the first half of fiscal year 2002/03 compared to the same period of 2001/02. A full Poverty Reduction Strategy Paper is being prepared and is expected to be finalized by mid-2003.

"Progress on the structural front was uneven. Though the performance of the large public enterprises through September was generally in line with their respective financial improvement plan targets, the financial situation of the Water and Power Development Authority (WAPDA) fell far short of the objectives, reflecting insufficient adjustment of tariffs to surging costs, difficulties in collecting bills in certain regions of Pakistan, and too little progress in reducing line losses. Also disappointing was the restoration of a few tax exemptions in recent months.

"Looking ahead, the authorities need to reinforce efforts to implement their poverty reduction strategy by consolidating macroeconomic stability and strengthening governance. On the fiscal side, achieving the programmed budget deficit targets will require a reduction of nonpriority expenditures and the implementation of measures aimed at containing WAPDA's losses and offsetting the lower-than-expected profit transfer from the State Bank of Pakistan (SBP) resulting from high sterilization costs. A slowdown in the pace of the SBP's foreign exchange purchases should contribute to containing money growth and reducing the need for costly sterilization.

"Implementation of a broad range of structural reforms will be essential to create a more investor-friendly environment and reduce poverty. The completion of the unbundling of WAPDA into smaller and privatizable corporate entities, along with other measures aimed at improving its operational performance, should contribute to reducing its need for government subsidies, thereby freeing resources for priority social and capital expenditures. The removal of a significant number of tax exemptions with the next budget should lead towards a tax system where the burden is more fairly distributed across income earners. Adoption of a draft fiscal responsibility law should enhance transparency in public finances. Finally, the planned privatization of Habib Bank and reform of the National Savings Schemes will allow the financial sector to better support investment and growth in Pakistan," Mr. Aninat stated.