Press Release No. 03/88

Press Release: IMF Completes Fifth Review of Pakistan's PRGF-Supported Program, Approves US$123 Million Disbursement

June 18, 2003

The Executive Board of the International Monetary Fund (IMF) completed today the fifth review of Pakistan's performance under a three-year, SDR 1.03 billion (about US$1.47 billion) Poverty Reduction and Growth Facility (PRGF) arrangement (see Press Release No. 01/51). The completion of this review enables Pakistan to draw a further SDR 86 million (about US$123 million) under the arrangement, which would bring total disbursements thus far under the arrangement to SDR 517 million (about US$738 million).

In approving the disbursement, the Executive Board granted a waiver for Pakistan's non-observance of a structural performance criterion regarding the preparation by April 15, 2003 of a revised Financial Improvement Plan (FIP) for the nation's main power utility, the Water and Power Development Authority.

The PRGF 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, or 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 5 ½-year grace period on principal payments.

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

"The Fund commends the authorities for Pakistan's strong macroeconomic performance, in a context of global economic weaknesses and a difficult regional security environment. All quantitative performance criteria for end-December 2002 were met. Available data indicate that GDP growth remains strong, inflation low, and Central Board of Revenue (CBR) tax collections are in line with projections. The external current account and the overall balance of payments continue to overperform, with the value of the Pakistani rupee stable in U.S. dollar terms. Poverty-related spending rose significantly during the first half of fiscal year 2002/03 compared to the same period of 2001/02.

"Most structural reforms planned through April were broadly on track except for limited progress on privatization owing largely to regional security concerns that resulted in a lack of investor interest, and for setbacks in energy sector reforms. Further progress was made toward the completion of a full Poverty Reduction Strategy Paper and in strengthening the monitoring of intermediate social outcomes to ensure that higher human development expenditure translates into better public service delivery. However, the financial performance of the power utilities remains disappointing, owing to high line losses, nonpayment of bills in certain areas, electricity tariffs that do not cover cost, and delays in implementing the unbundling of the Water and Power Development Authority.

"Looking ahead, to strengthen further the foundation of higher sustainable growth and job creation the authorities need to persevere with the current macroeconomic policy mix, based on a flexible exchange rate, a monetary policy aimed at maintaining low inflation, and a fiscal policy aimed at further reducing the public debt burden while raising effective spending for human development. The submission to parliament of a draft budget for the next fiscal year that provides for a further reduction of the overall deficit while raising social and poverty-related expenditures is a significant step in that direction.

"Macroeconomic policy will have to be supplemented by a broad range of structural reforms to create an environment more conducive to private investment. This will require forceful pursuit of reforms aimed at simplifying the tax system and broadening the tax base, including through the elimination of a number of tax exemptions, to reduce distortions and the potential for corruption. Vigorous implementation of plans to improve the performance of the power utilities is needed to limit their drain on the budget as well as free resources for priority social and development expenditures. The planned better remuneration of civil servants needs to be part of a comprehensive civil service and pension system reform. The planned privatization of Habib Bank Ltd., the financial restructuring of insolvent banks, and the reform of the National Savings Schemes should improve the financial sector's ability to support investment and growth," Mr. Aninat stated.