News Brief No. 02/110

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

November 1, 2002

The Executive Board of the International Monetary Fund (IMF) completed today the third review of Pakistan's performance under a three-year, SDR 1.03 billion (about US$1.4 billion) Poverty Reduction and Growth Facility arrangement (see Press Release No. 01/51). The completion of this review enables the release of a further SDR 86 million (about US$114 million) to Pakistan, which will bring total disbursements under the IMF-supported program to SDR 345.64 million (about US$456 million).

In approving the disbursement, the Executive Board granted waivers that addressed Pakistan's non-observance of its quarterly Central Board of Revenue (CBR) revenue target for the period ended June 30, 2002; the absence of bringing the Karachi Electric Supply Corp. to the point of sale by end-July 2002; and for granting new tax exemptions in the review period.

The Poverty Reduction and Growth Facility (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 (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, said:

"The Fund commends the authorities for further consolidating gains in macroeconomic stability and progressing with structural reforms in a difficult economic and political environment. Economic activity is picking up, inflation remains low, and strong private capital inflows and remittances have contributed to a strong building up of official reserves. The fiscal deficit for end-June 2002 was lower than programmed, even though tax revenue collected by the Central Board of Revenue (CBR) regrettably fell again short of target. Encouragingly, the pace of social sector spending is reported to have accelerated and is in line with the program target for the year.

"The reform package for FY 2002/03, centered on further consolidation of macroeconomic stability and on structural reforms aimed at strengthening tax revenue, public expenditure management, and governance in a wide range of areas, remains broadly on track. Assuming an effective implementation, and in the absence of any major exogenous shocks, real GDP is projected to grow by 4.5 percent, which should help reduce the high poverty levels. The envisaged mix of cautious monetary and flexible exchange rate policies and continued fiscal consolidation should help keep inflation low and allow for a further reduction of the public debt burden. Preliminary data indicate that during the quarter to September, exports and imports recovered strongly, and that the CBR revenue target for the quarter was met.

"A continued fiscal effort will be key to reducing public debt further while increasing funding for Pakistan's public social services. This will require strong enforcement of tax collection, a determined reduction of the drain from loss-making public enterprises on the budget, and a better monitoring of social service delivery to ensure efficient use of available resources. In view of the risks to the economic outlook, the authorities need to 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 and providing Pakistan's economy with reliable power at competitive prices. The focus of the reforms needs to be on reducing leakage, fraud, and administrative costs, and better enforcing bill collections as set out in each utility's financial improvement plan. Privatization of KESC and of certain components of WAPDA will be critical to achieve the targeted efficiency gains," Mr. Aninat stated.