News Brief No. 02/59

News Brief: IMF Completes Second Review of Pakistan's PRGF-Supported Program, Approves US$114 Million Disbursement

July 3, 2002

The Executive Board of the International Monetary Fund (IMF) completed today the second review of Pakistan's performance under a three-year, SDR 1.03 billion (about US$1.37 billion) Poverty Reduction and Growth Facility (PRGF) arrangement. This decision entitles Pakistan to the release of a further SDR 86.14 million (about US$114 million), which will bring total disbursements under the program (see Press Release No. 01/51) to SDR 258.44 million (about US$343 million).

In approving the disbursement, the Executive Board granted a waiver of Pakistan's non-observance of the quarterly revenue target for the period that ended March 31, 2002. The shortfall in revenue essentially reflected continued lower-than-expected imports in the aftermath of September 2001 events.

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs will in time be 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 5 ½-year grace period on principal payments.

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

"The Fund commends the authorities for consolidating gains in macroeconomic stability and progressing with structural reforms in a difficult economic and political environment. Inflation remains low and strong private capital inflows and remittances have allowed a build up of official reserves well above program targets. The fiscal deficit for end-March 2002 was lower than programmed. Disappointingly, tax revenue collected by the Central Board of Revenue (CBR) as well as social sector spending were lower than targeted, although recent developments point to improved performance in these areas.

"The authorities' economic program for FY 2002/03 aims at tangible progress toward consolidating macroeconomic stability, reducing poverty, and strengthening governance in a wide range of areas. Barring a further deterioration of the regional security situation or other adverse shocks, real GDP is projected to grow by 4.5 percent, supported by a notable pick up in exports. Cautious monetary and exchange rate policies and continued fiscal consolidation will help keep inflation low and allow for a further accumulation of international reserves.

"Implementation of the budget for FY 2002/03 will help reduce public debt while increasing funding for social services, especially health and education expenditures. This will, however, require strong determination in enforcing tax collection, the continued timely implementation of reforms to enhance tax administration, and improved tracking and effective monitoring of social expenditure and related outcomes. The authorities should also stand ready to undertake appropriate corrective fiscal measures, if needed, to achieve the budgetary targets.

"Forceful implementation of the restructuring strategy for the two power utilities, the Water and Power Development Authority (WAPDA) and Karachi Electric Supply Corporation (KESC), is essential for putting an end to their persistent drain on budgetary resources. Electricity tariff adjustments are needed to correct past increases in input costs, while appropriate safety-net measures should protect the poorest consumers. Moreover, both public utilities need to be held more clearly accountable for their performance in reducing leakage, theft, administrative costs, and enforcing bill collections. The implementation of the financial improvement plan for WAPDA, agreed with the World Bank, will be monitored closely and results reported to the public. Regarding KESC, the challenge will be to complete the required financial restructuring, while establishing sufficient regulatory certainty for potential investors, in order to allow its privatization in a transparent and timely manner. Sustained implementation of the government's wide ranging governance agenda will help support private sector activity and investor confidence," Mr. Aninat said.