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Pakistan and the IMF Press Release: IMF Completes Fourth Review of Pakistan's PRGF-Supported Program, Approves US$118 Million Disbursement to Pakistan Country's Policy Intentions Documents |
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Pakistan—Letter of Intent, Memorandum of Economic and Financial Policies, and Amendments to the Technical Memorandum of Understanding
Mr. Horst Köhler Dear Mr. Köhler: As you know, a new federal government was formed on November 23, 2002, following the general elections on October 10, 2002. The government fully supports the broad economic strategy set out in the Interim Poverty Reduction Strategy Paper (I-PRSP) and the Poverty Reduction and Growth Facility (PRGF) arrangement, and is working to articulate its longer-term vision for a set of policies aimed to allow higher sustainable growth and job creation, while reducing poverty. This vision will be reflected in the full Poverty Reduction Strategy Paper (PRSP) currently under preparation. The Pakistani authorities held discussions with Fund staff in November 2002-January 2003 for the fourth review under the PRGF Arrangement. Based on these discussions, the attached Memorandum of Economic and Financial Policies (MEFP) reviews economic developments and policy implementation through September 2002 and beyond under the arrangement, updates the macroeconomic framework, and discusses the financial policies and structural reform program for the remainder of the fiscal year 2002/03. It supplements the MEFP dated November 22, 2001 as well as the supplementary MEFPs dated March 12, 2002, June 18, 2002, and October 16, 2002. All performance criteria for end-September 2002 and for October and November 2002 were met, except for the continuous performance criterion on tax exemptions. For the reasons detailed in the MEFP, we extended or reintroduced certain tax and import duty exemptions. The impact of these exemptions on tax revenue will be negligible. On this basis, and in view of the performance up to September 2002 and the policies set out in the attached memorandum, the government requests a waiver for the nonobservance of the continuous performance criterion and the completion of the fourth review. We expect the fifth and sixth reviews under the arrangement to be completed by end-April 2003 and end-June 2003, respectively. The government of Pakistan will provide the Fund with such information as the Fund may request in connection with Pakistan's progress in implementing the economic and financial policies, and achieving the objectives of the program. The government believes that the policies set out in the attached memorandum are adequate to achieve the objectives of the program. However, we stand ready to take any additional measures appropriate for this purpose, and will consult with the Fund in accordance with the policies of the Fund on such consultations. Sincerely yours,
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PAKISTAN February 8, 2003
1. The new federal government, formed on November 23, 2002, fully supports the continuation of the reform program, and is working to articulate its longer-term vision for a set of policies aimed to allow higher sustainable growth and job creation, while reducing poverty. Its vision will be reflected in the full Poverty Reduction Strategy Paper (PRSP) currently under preparation, with intense participation by provincial and local governments, as well as institutions of civil society (see the government's PRSP preparation status report prepared in January 2003). The domestic security situation has improved, and the military forces deployed along the border with India are gradually being reduced on both sides. 2. Macroeconomic developments remain in line with the program, except for a better-than-expected performance of the external accounts. All quantitative end-September performance criteria were observed with comfortable margins (Table 1). Inflation further slowed in recent months, with a Consumer Price Index (CPI) 12-month increase of 3.3 percent through December 2002. November data confirm the pickup in trade flows observed since last spring. Remittances remain strong, and combined with large bilateral and multilateral support, have allowed the State Bank of Pakistan (SBP) to build official reserves to $7.6 billion by end-December 2002, equivalent to about 6.5 months of next year's projected imports of goods and nonfactor services, as well as about $0.9 billion of foreign assets earmarked for the repayment of various expensive debts. The Pakistani rupee has slightly appreciated against the U.S. dollar in recent months. The main stock market index further rose by about 18 percent in November–December 2002. 3. Broad money growth remained strong, with a 12-month increase of about 19 percent through September 2002, as well as through November. While net foreign assets (NFA) of the banking system continued to grow at a rapid pace, net domestic assets (NDA) contracted on account of weak private credit growth and further reduction of bank credit to the government. Reserve money growth was held to 12 percent in the year through September, and increased to 14 percent through November. In early November, we lowered the discount rate to 7.5 percent; subsequently 6-month treasury bill yields fell to about 4 percent by end-December. 4. The end-September fiscal deficit target was met, and the Central Board of Revenue (CBR) met its revenue target for end-September 2002, as well as for end-December 2002, reflecting a relatively buoyant economy, strong imports, and high oil prices. Nontax revenue overperformed relative to the program, owing to larger payments by the coalition against terrorism. Petroleum surcharges through September were slightly below target, reflecting the impact of a temporary cut in rates in late September, as well as lower-than-expected consumption. Total expenditure was somewhat lower than expected, largely on account of current expenditures, while Public Sector Development Program (PSDP) spending was slightly higher than projected. However, net lending was much higher than programmed on account of nonpayment by public sector enterprises. Even though I-PRSP expenditure increased by about 39 percent over the same period last year, based on preliminary and unreconciled data, the outcome was below the indicative target for the quarter by 17 percent, reflecting some lingering teething problems at the local government level (especially in Balochistan) and unexpected seasonal factors; however, the target for the year (a 21 percent increase over 2001/02) appears still achievable. External financing was lower than projected, and domestic financing was curtailed on account of the reduced financing needs. As more nonbank financing was available than programmed, bank debt could be reduced further than envisaged. 5. Most structural measures were taken as programmed. New rules and procedures on General Sales Tax (GST) and customs duties refunds were implemented in late September, with a view to closing loopholes and reducing scope for abuse. A model income tax office for small and medium taxpayers in Lahore started operations in late October to experiment with greater functional specialization within income tax administration. Amendments to the SBP Act increasing central bank independence were promulgated on October 31, 2002. A financial improvement plan (FIP) for the Karachi Electricity Supply Corporation (KESC) was adopted in September, aiming to limit KESC's cash deficit in 2002/03 to about PRs 13 billion, to be entirely covered by the budget. The plan calls for reducing theft/losses through investment in metering equipment, better enforcement of bill payments, and lower cost through greater use of natural gas. Various complementary reforms have been implemented: the monopoly law has been amended to clarify the respective responsibility between the National Electric Power Regulatory Authority (NEPRA) and the Monopoly Control Authority (MCA) regarding KESC, and the government's capital in KESC has been written down as planned to allow privatization. So far, only one large foreign company maintains interest to buy KESC, but has not yet initiated due diligence. As privatization had been expected by October 2002, we had made a net budgetary provision of PRs 4.5 billion to meet the cash shortfall of KESC and we settled in July KESC's arrears to the Water and Power Development Authority (WAPDA) (PRs 8 billion). It was also decided that to make it more responsible, in both operational and financial management, KESC would raise its cash requirement from the commercial banks and pay interest thereon until it was privatized, when the government of Pakistan would repay any bank loans raised by KESC during the current fiscal year. Now that the privatization of KESC is not likely in the near future, the entire cash shortfall of KESC will be met out of the budget and a loan of PRs 4 billion earlier taken by KESC from the banks will be repaid by the government of Pakistan during the current fiscal year. The end-June 2003 floor for the budget balance will be adjusted upward for any outstanding amount of such borrowing. 6. Time-bound sales tax and import duty exemptions for equipment to convert motor vehicles to compressed natural gas (CNG) were partially extended beyond the expiration date on November 1, 2002, as we believe some continued tax incentives are needed to encourage conversion to CNG. Conversion of cars and buses to CNG is a central objective of our environmental and health policies, given the pollution caused by the use of gasoline and diesel, which has led to a rise in respiratory diseases, especially in cities. The customs duty exemption for pump equipment expired as planned, although the GST exemption remains available (as for any capital equipment to be used for producing taxable supplies). We have also decided to reintroduce, effective December 24, 2002, a customs duty exemption for completely knock-down buses that was mistakenly abolished with the 2002/03 budget. The main goal is to encourage assembly in Pakistan. The impact on tax revenue this fiscal year will be marginal (about PRs 60 million). To recreate a level playing field for all oil companies, we have decided to reinstate a customs duty and sales tax exemption for import of machinery and equipment for the White Oil Pipeline project; due to a clerical error, this exemption had been inadvertently dropped in the last budget. Finally, the exemption from customs duty on sports articles imported for the South Asia Games, which had lapsed a year ago, will be extended for 12 months because the Games themselves have been postponed for one year. 7. The financial performance of the large public enterprises1 for the quarter of July–September 2002 was broadly in line with the targets formulated under their respective FIPs, except for WAPDA. WAPDA defaulted on its entire payment obligations of PRs 7.2 billion to the government (debt service and hydel profits) for the quarter, reflecting substantial shortfalls in cash receipts (of PRs 5.4 billion). Supplier arrears were reduced somewhat more than expected. According to WAPDA's accounts, the shortfall in receipts reflects in the main: the nonpayment of bills by customers in the Federally Administered Tribal Areas (FATA); unchanged technical/nontechnical line losses rather than the programmed improvement; shortfalls resulting from the lower-than-expected structural tariff increase effected in August; and an increase in receivables. II. ECONOMIC AND FINANCIAL POLICIES FOR THE SECOND HALF OF FY 2002/03 A. Macroeconomic Framework for 2002/03 8. The new government is firmly committed to pursue the broad economic strategy set out in the I-PRSP and the PRGF arrangement. The preparation of a PRSP is under way, based on provincial PRSPs to be completed by end-February 2003. We expect to finalize the full PRSP by mid-April 2003. 9. Except for some revisions to the monetary/exchange rate policy mix, the macroeconomic framework for 2002/03 remains broadly unchanged from the October MEFP. It aims at continued budget deficit reduction to enhance public debt sustainability, reduce vulnerability to shocks, and create room over the medium term for the needed increase in human development and infrastructure expenditure. 10. The persistence of unexpectedly high private capital/remittances inflows is putting upward pressure on the exchange rate, posing a dilemma for monetary and exchange rate policy. We believe that addressing these inflows, in case they persist, requires somewhat greater exchange rate adjustment and a slowing of the pace of foreign exchange purchases in the interbank market (aimed to build up foreign exchange reserves and contain a real appreciation that could adversely affect nontraditional exports). Continued massive sterilization would entail a further compression of domestic credit as well as significant fiscal cost. A modest appreciation against the U.S. dollar should also help to avoid a perception by the market that the SBP pursues an implicit peg. This shift should contribute to slow the growth of broad money in coming months, even though we have revised upward the broad money target for 2002/03, consistent with the much higher-than-expected NFA accumulated through end-2002. We remain alert to the danger that high broad money growth could eventually translate into higher inflation, and will therefore closely monitor inflation developments and prospects, and tighten monetary policy should signs of inflationary pressures emerge. In case of a reversal of the private capital flows which cannot be excluded if the regional/security environment were to deteriorate, allowing a market-based depreciation and financial tightening will be the first line of defense, with reserves used only to maintain orderly market conditions. 11. Our fiscal stance remains consistent with the programmed deficit for FY 2002/03 of 4.6 percent of GDP (excluding grants and allowing an adjustment of PRs 8 billion for settling KESC supplier arrears). Consistent with recent information, we are confident that the original targets for tax revenue remain achievable, despite the unexpected appreciation of the Pakistani rupee. However, we expect shortfalls in nontax revenue and loan repayments of about PRs 52.3 billion on account of nonpayment of debt service by WAPDA (PRs 16.5 billion for the reasons detailed below), KESC (PRs 6.1 billion erroneously included in the budget), and the National Highway Authority (PRs 9.8 billion), and a lower profit transfer from the SBP (by PRs 20 billion) because of the sterilization cost. On the revenue side, we expect some offset (of altogether PRs 18 billion) through higher-than-expected reimbursements by the coalition against terrorism, some repayment of budget loans to the independent power producers, recovery of arrears from the gas companies and a higher-than-budgeted dividend from the Oil and Gas Development Corporation (OGDC). On the expenditure side, some additional expenditure will be needed for KESC (PRs 3.6 billion) on the assumption that it will not be privatized this fiscal year. At the same time, we expect some offsetting savings on domestic and foreign interest payments (PRs 10 billion) reflecting the more appreciated exchange rate and lower-than-expected T-bill rates, and an additional PRs 4 billion saving on exchange-rate-sensitive expenditure (import intensive development projects, foreign travel/representation, etc.). We will also reduce nonpriority expenditure by PRs 24 billion, largely by locking in savings already made under various heads through not allowing any reappropriation to different heads, and if needed by judiciously managing releases to departments during the remainder of the fiscal year. 12. The main risk to the outlook, and in particular to the fiscal objectives, arises from the regional tensions which have not fully wound down by end-2002 as assumed under the program's fiscal projection, even though the recent beginning of a gradual troop withdrawal on the Eastern border is encouraging. An aggravation of tensions in the Middle East could also impact the economy, mostly via a possible surge in oil prices (see below). If any such risks were to materialize, we would seek to protect budget balances by enacting further cuts in low-priority expenditures, while protecting key social spending. Discussions between the federal government and the provinces on the new revenue sharing formula between the federal government, provinces, and districts are ongoing. B. Structural Policies 13. Building on substantial progress to date in liberalizing the economy and improving governance, we will further deepen our structural reform program and we propose additional structural benchmarks and performance criteria for January–June 2003, as outlined in Table 2(b). Domestic energy prices 14. We plan to strictly apply the formula-based pricing for gas and petroleum products and electricity tariffs, as the existing automatic price adjustment mechanisms have gained broad acceptability, and are transparent and widely understood. The delayed automatic adjustment of electricity tariffs to first quarter fuel price developments has been implemented in November 2002, while a reduction reflecting fuel costs during October–December was made effective in December 2002. We will seek to amend the NEPRA act with a view to streamline procedures, by allowing the power companies to adjust tariffs in response to fuel costs increases automatically, subject to ex-post review of compliance with these rules by NEPRA, and eliminating the need for government notification of such adjustments. In the meantime, the government commits to limit its discretion in notifying adjustments as determined by NEPRA with a view to reduce WAPDA's financial imbalances. The implications of the unbundling of WAPDA on electricity tariffs are detailed below. The gas pricing framework-wellhead prices, the gas distribution company's tariff filings, the Oil and Gas Regulatory Authority's (OGRA) determination of the prescribed prices, and notified final tariffs-will be published on the website of the Ministry of Petroleum and Natural Resources from mid-February 2003 and its implementation will be made as per provisions in the law. Tax policy and tax administration 15. The CBR reform process is broadly on track. Recommendations from consultants currently working with us on the modernization of CBR's internal organization in the context of a World Bank-supported project, as well as from FAD technical assistance (TA) missions to review the reform strategy for customs administration and tax administration planned for January/February 2003, will be incorporated as appropriate in the program during the fifth review. Tax policy reform proposals for the next budget will be prepared by March 2003, and will include the abolition of a sizable number of income tax exemptions, as well as of all remaining withholding tax exemptions for income from the National Saving Schemes (NSS) investments. Building on work by the National Accountability Bureau, that identifies the "Benami" practice (whereby one person holds assets under different names) as a main source of governance problems, we will formulate by March 2003 a strategy to contain this practice. I-PRSP issues, public expenditure management, and fiscal transparency 16. We plan to finalize the PRSP by mid-April 2003, incorporating the experience gained from the I-PRSP process. In preparing the PRSP-coordinated by the recently established PRSP secretariat that is being strengthened with World Bank support-we will put additional emphasis on some important institutional causes of poverty, such as lack of assets held by the poor, lack of a functioning justice system, and deep-rooted gender issues; include a first costing of the health and education targets; and adopt a broader participatory approach, including consultation with the national and provincial parliaments and institutions of civil society. Building on recent progress in developing systems to monitor 12 intermediate social outcomes, we will prepare a first report on such outcomes by March 31, 2003, spelling out the underlying baselines, the data collection mechanisms and the format of publication, and quarterly developments (to the extent data are available). The mechanisms for collecting data will include a combination of (a) the existing administrative reporting systems that are being strengthened with support from the U.K. Department for International Development (DFID); (b) the full Pakistan Integrated Household Survey (PIHS) conducted every three years; and (c) an annual core welfare indicator survey being developed with assistance from the World Bank that could be evaluated very quickly and will be timed to provide input in the formulation of local, provincial, and federal budgets, with a pilot to be initiated in February 2003. We will firmly implement expenditure and outcome controls at the local level to ensure that the devolution process actually improves social service delivery, and does not lead to setbacks in terms of fiscal transparency. At the same time, we are preparing a sizable expansion of a cash transfer program to the most destitute to reach about 2 million beneficiaries at an annual cost of PRs 5 billion. With the reconstitution of parliament, the traditional practice of allowing each member of the National Assembly to propose development projects in his constituency (for up to PRs 5 million this fiscal year, and PRs 10 million, thereafter) has been restored. The proposals will be vetted through the normal budgetary mechanisms to ensure they fit the overall development strategy; approved projects will be funded from the PSDP and implementation and accounting will be through normal channels. We are also working on an assessment of the poverty and social impact of energy pricing reforms with assistance from the World Bank. 17. The government will submit to parliament the draft fiscal responsibility law by June 1, 2003. The implementation of other elements of the Accountable Fiscal Management Framework is proceeding as planned. The FY 2003/04 budget call for the federal government and the North West Frontier Province (NWFP) was issued on the basis of the New Accounting Model (NAM) for a parallel run with the existing accounting model. This will serve as a pilot for the move of all federal and provincial budgets to the NAM standard with the FY 2004/05 budget. Progress is also being made via the Pakistan Improvement of Financial Reporting and Accounting (PIFRA) project in strengthening the Controller General of Accounts and ensuring uniform expenditure tracking by districts, and pre-auditing of all transactions through the District Accounts Offices. Various actions are being taken toward establishing a medium-term budget framework. Specifically, as an annex to the FY 2003/04 budget, we will (a) establish overall indicative resource envelopes for the two subsequent years, and specify the underlying macroeconomic and technical assumptions; (b) compare in the Economic Survey actual outcomes with original budget estimates for revenue and expenditures for three previous years; and (c) produce a statement of financial assets in FY 2002/03 of the Federal Government, indicating the underlying valuation principles. We intend to work during the next fiscal year with provincial governments to extend relevant provisions of the fiscal responsibility law to the provinces. A contributory pension scheme for new recruits in the civil service is being prepared as part of a third phase public pension reform package, in collaboration with the World Bank and to be launched in the course of the next fiscal year. In this context, an actuarial cell has been established in the Ministry of Finance, and will become fully functional within a few months. Public enterprises and privatization 18. The privatization drive is proceeding, with Habib Bank and major public enterprises in the oil and gas sector (Pakistan State Oil (PSO) and OGDC) to be sold in the coming months. Regarding KESC, we remain open for discussing a negotiated sale with the only remaining qualified investor (who has however put discussion on hold for the time being). In the meantime, we will continue to forcefully implement the FIP developed in September. In this context, we will further modernize and streamline human resource management, and seek multilateral or bilateral assistance for the restructuring program. A plan to revamp the railways through corporatization, downsizing, and partial privatization is being prepared, with any government financial support to be part of the FY 2003/04 budget, after consultation with the World Bank on the quality of the program. PIA plans to renew its fleet in the next few years, and planned government cash transfers and loan guarantees are consistent with the financial program. We will prepare a strategy for privatization of PIA by 2004, starting with the divestiture of non-core activities (hotels, etc.) in 2003. 19. As indicated above, WAPDA's financial situation remains unsustainable and will require further reform. Assuming world oil prices at their mid-November levels, continuation of the trends observed during the first quarter would result in a cash deficit in the order of PRs 34 billion (0.8 percent of GDP) for the year, compared to broad balance targeted under the FIP. Accordingly, the following measures will be taken to contain WAPDA's losses and their impact on the budget: First, electricity supply to FATA will be streamlined and all efforts made to improve bill collection, including by initiating the metering of individual users, to reduce losses on account of FATA. WAPDA will furthermore delay PRs 4.7 billion of nonessential investments. More generally, by mid-April, we will prepare a revised FIP for FY 2002/03 and an FIP for FY 2003/04 for WAPDA (power wing) and its corporate successors, in consultation with the World Bank and Fund staff (structural performance criterion). The FIPs will be based on the assumption of a strict application of the formula-based fuel cost adjustment of electricity tariffs and lay out explicitly assumptions regarding the baseline fuel cost and tariff structure. The FIPs will include: (a) specific steps and targets toward a reduction of line losses, and improvement in the collection of bills from FATA; (b) the settlement of WAPDA's arrears vis-à-vis its main suppliers in FY 2003/04; and (c) a strong commitment to reduce receivables from the public sector. The FIPs will include quarterly financial targets, a detailed timetable regarding WAPDA's restructuring process, and contingency measures (such as cuts in administrative cost or tariff increase) to be enacted if needed to achieve the financial targets. The revised FIP for FY 2002/03 will aim at limiting WAPDA's cash deficit (after payment of all current obligations and postponement of some investments) to PRs 30 billion, limit government-guaranteed domestic borrowing to PRs 13 billion, and contain the stock of supplier arrears at the level at end-June 2002; the remaining cash shortfall will be absorbed by the budget. The FIP for FY 2003/04 will aim at a substantially reduced deficit, which would be entirely covered by budget subsidies. On the structural front, we will review, by end-March 2003, the electricity tariff brackets to better focus the subsidy on the most vulnerable, and thereby achieve additional revenue. The legal transfer of WAPDA's assets and liabilities to its corporate successors will be effected by end-June 2003. By end-April 2003, power purchase agreements between the regional distribution companies (DISCOs) and the recently licensed national transmission and dispatch company (NTDC) will be concluded, as well as between the various generation companies (GENCOs) and the NTDC. By end-June, the DISCOs, GENCOs, and NTDC would file with NEPRA for determination of tariffs, based on a policy decision taken in early 2002 that differentiated tariffs should reflect the cost structure of the various units. In 2003 we plan to privatize one GENCO and one DISCO (expressions of interest have already been invited for the latter). Financial sector reforms 20. We will pursue the implementation of the financial sector reform strategy, regrettably without any input from the Financial Sector Assessment Program mission that continues to be delayed. The restructuring of the National Bank of Pakistan (NBP)will continue, with further gradual increases in the private sector share in equity. By June 2003, a decision will be taken on the strategy vis-à-vis disposal of the 49 percent government stake in Allied Bank. We will seek to privatize the Industrial Development Bank of Pakistan. The potential cost of the required balance sheet clean up will be included in the FY 2003/04 budget. The bank has been disallowed to take any new high-cost deposits or make new loans. The Agricultural Development Bank of Pakistan has been corporatized and is being restructured in the context of the Asian Development Bank (AsDB)-supported rural finance development project. Given the growing involvement of the private sector in wheat marketing, the stock of outstanding commodity operations (government-guaranteed bank credit extended to various public commodity boards) will be reduced to at most PRs 95 billion by June 2003 and PRs 85 billion by June 2004. In the context of an AsDB-supported reform project, by mid-2003 we will prepare a detailed action plan for transforming the NSS into a modern savings institution, with instruments tailored to the targeted market segments and returns closely aligned with market yield curves. Given the traditional importance of the NSS as saving vehicle for government pensioners, with a strong social safety net element, we have established a new saving instrument exclusively for pensioners who can invest up to PRs 1 million under the scheme. This will allow to accelerate the elimination of subsidies under the other instruments. Effective from end-2002, we have adjusted rates in line with the existing formula, to reflect lower PIB yields, and we will complete computerization of one of the NSS districts, as a pilot for the whole country, by mid-2003. We will also more closely align the rate of return paid on the General Provident Fund with market rates, and prepare better targeting of access to this subsidized form of saving in the context of the next pay and pension reform. We plan to finalize a draft anti-money laundering law by mid-March 2003 for submission to parliament. III. OTHER ISSUES Program financing 21. The program remains fully financed in FY 2002/03.We will ensure that conditions attached to expected loan disbursements of the World Bank and AsDB are met. Most bilateral agreements with the Paris Club creditors have been signed, a few remaining ones are expected to be concluded in early 2003. Debt swaps for social expenditure and outright debt cancellation are being discussed with some creditors and we will ensure that implementation of any such swaps will be consistent with the financial program. A $100 million loan from the foreign branches of one of the nationalized banks has been restructured, as part of the planned private sector involvement. Data issues 22. The remaining steps needed to participate in the General Data Dissemination Standard (GDDS) will be taken soon, with statistical metadata to be posted on the IMF's data dissemination board by June 2003. To improve data dissemination and move closer to subscribing to the Special Data Dissemination Standard (SDDS), we plan to meet by end- 2003 the requirements of quarterly national accounts and of a regular survey on wage earning. We have now released the data (as per original sample) from the latest PIHS. Because we had strong reservations about the quality of these data, we have reviewed the data thoroughly, inconsistencies regarding data collection and presentation have been removed, and revised data published along with the original report. The proposal to create the Pakistan Bureau of Statistics (PBS) is under consideration, consolidating various existing agencies. PBS will be granted greater autonomy to enhance the quality and credibility of our statistics. Program monitoring 23. Given the current level of uncertainty in the macroeconomic outlook, we propose to continue monitoring of the program through quarterly reviews. The fifth review will focus on preparation of the 2003/04 budget. The proposed additional structural performance criteria/benchmarks for January–June 2003 and the proposed end-June 2003 quantitative performance criteria and indicative targets are listed in Tables 1 and 2(b), respectively. 1Water and Power Development Authority (WAPDA), KESC, Pakistan International Airlines (PIA), Pakistan Railways, and Pakistan Steel Mills.
Amendments to the Technical Memorandum of Understanding (TMU) The TMU dated June 18, 2002 ("June TMU"), as amended during the third review on November 1, 2002, 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 amendment to apply from April 1, 2003. 1. The following sentence will be added to para. 17 of the TMU: "The floor for end-June 2003 will be adjusted upward for any bank borrowing or bonds issued by KESC during FY 2003 and outstanding as of end-June 2003." 2. The first sentence in para. 8 will be replaced by: "Net external budget financing is defined as net external program financing plus all other external loans for the financing of public projects or other federal or provincial budget expenditures, minus accelerated amortization of government external debt." 3. The following sentence will be added at the end of para. 14: "In case of accelerated amortization of government external debt, the floor on the NFA of the SBP and the ceiling on the NDA of the SBP for end-June 2003 will also be adjusted downward/upward to the extent of such accelerated amortization." 4. The following sentence will be added at the end of para. 15: "In case of accelerated amortization of government external debt, the ceiling on net bank borrowing by the government for end-June 2003 will adjusted upward to the extent of such accelerated amortization." 5. The following reporting requirement will be added to para. 19 of the TMU: "Quarterly data on KESC loans and debt outstanding, within one month." 6. The following reporting requirement will be added to para. 19 of the TMU: "Quarterly data on the number of government pensioners, the number of accounts, and the total amount invested in the new pensioners' benefit accounts, within two months."
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