Press Release No. 04/124

Press Release: IMF Executive Board Completes Eighth Review Under Pakistan's PRGF-Supported Program and Approves Disbursement Amounting to US$253 Million

June 23, 2004

The Executive Board of the International Monetary Fund (IMF) today completed the eighth review of Pakistan's performance under a three-year, SDR 1.034 billion (about US$1.52 billion) Poverty Reduction and Growth Facility (PRGF) arrangement. Completion of the review enables the release of a further SDR 172.28 million (about US$252.60 million) under the arrangement, which would bring total disbursements to SDR 861.42 million (about US$1.263 billion).

In completing the review, the Executive Board also approved Pakistan's request for waivers for the non-observance of certain structural performance criteria and for the modification of one of the end-June 2004 quantitative performance criteria.

Following the Executive Board's discussion of Pakistan's economic performance, Agustín Carstens, Deputy Managing Director and Acting Chair, stated:

"Pakistan has come a long way in a short period of time in the context of the three-year arrangement under the PRGF, and there was strong macroeconomic performance during the first nine months of 2003/04. GDP growth accelerated further, inflation remained within target, and significant surpluses in the external balance were achieved. In addition, the fiscal deficit was lower than expected, and tax collections were slightly higher than projected. Poverty-related expenditures grew by 28 percent over the same period in the previous fiscal year.

"Structural reforms were further advanced. Financial and tax administration reforms were implemented broadly as envisaged, and energy prices and tariffs were adjusted in line with international prices.

"Far-reaching reforms have also resulted in a more efficient and competitive financial system. In particular, the predominantly state-owned banking system has been transformed into one that is predominantly under the control of the private sector. The legislative framework and the State Bank of Pakistan's supervisory capacity have been improved substantially. As a result, the financial sector is sounder and exhibits an increased resilience to shocks. Looking ahead, it will be important to continue to restructure the banking system, and to implement the recommendations of the recent assessment of the financial sector under the FSAP.

"The macroeconomic policy framework for 2004/05 is broadly appropriate. Fiscal policy aims to further increase poverty-related expenditures while reducing the public debt burden. Accordingly, the 2004/05 budget envisages a consolidated fiscal deficit of 4.0 percent of GDP and an increase in poverty-related expenditures. Monetary policy will continue to be geared toward reining in inflationary pressures, and the exchange rate will continue to be managed flexibly.

"Continued prudent debt management remains a key priority. The early repayment of some relatively expensive external debt is commendable, as well as Pakistan's successful return to international capital markets in early 2004.

"To maintain or accelerate the current growth momentum and make continued progress on poverty reduction, the authorities need to steadfastly pursue their reform agenda to further improve the environment for private sector investment, along the lines envisaged in Pakistan's Poverty Reduction Strategy Paper. It will be essential to press ahead with the ongoing reforms to simplify the tax system and broaden the tax base. In the energy sector, measures should be implemented to contain demands on the budget while improving service delivery and putting power utilities on a sound financial footing over the medium term. This will require close collaboration with the World Bank," Mr. Carstens said.

The PRGF is the IMF's concessional facility for low-income countries. PRGF loans carry an annual interest rate of 0.5 percent, and are payable over 10 years with a 5 1/2 -year grace period on principal payments. Pakistan's PRGF arrangement (see Press Release No. 01/51) was approved on December 6, 2001 and is due to expire in December 2004. The Pakistani authorities have stated that they do not intend to request a successor arrangement.