Press Release No. 03/177

Press Release: IMF Executive Board Completes Sixth and Seventh Reviews of Pakistan's PRGF-Supported Program, Grants Waivers and Approves Disbursements Amounting to US$247.54 Million

October 27, 2003

The waivers related to a short delay in the submission of the fiscal responsibility law to Parliament, the approval of some minor new tax exemptions, and the nonremoval of the exemption from withholding tax for National Savings Scheme (NSS) instruments of less than Pakistani rupees 150,000. Given the strong improvement in Pakistan's external and fiscal prospects, the Board supported a move to semiannual reviews of the PRGF arrangement.

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.

Pakistan's PRGF arrangement (see Press Release No. 01/51) was approved on December 7, 2001 and is due to expire in December 2004. The Pakistani authorities have stated that they do not intend to request a successor arrangement when the current PRGF expires in December 2004. The authorities, however, have stated that they intend to stay closely involved with the IMF after the arrangement expires, and to engage actively with the Fund in dialogue on how economic growth can be strengthened in the medium term.

Following the Executive Board's discussion of Pakistan's current PRGF-supported economic program, Agustin Carstens, Deputy Managing Director and Acting Chairman, made the following statement:

"The continued strengthening of Pakistan's macroeconomic performance is commendable. GDP growth picked up in 2002/03, inflation remained subdued, and large external current account and overall balance of payments surpluses were recorded. The fiscal deficit was lower than expected, tax collection exceeded its target by a small margin, and social- and poverty-related expenditure grew only slightly less than targeted.

"Structural reforms also advanced. Financial and tax administration reforms proceeded largely according to schedule. In the energy sector, there were adjustments of most controlled prices and tariffs. However, there were some minor delays and setbacks in fiscal reform, and three structural performance criteria were breached.

"The macroeconomic policy mix for 2003/04 is appropriate. Key elements include a fiscal policy that envisages further fiscal consolidation that will continue to reduce the public debt burden. Measures will broaden the tax base and improve tax administrative efficiency, as well as maintain wage restraint, reduce public subsidies, increase poverty-related expenditures, and improve management of public expenditures at the central and local level. Strong fiscal policies are combined with a monetary policy aimed at maintaining low inflation and a flexible exchange rate.

"To further accelerate growth and reduce poverty, the authorities need to pursue forcefully the planned structural reforms intended to create an environment more supportive of private sector investment. This will require further reforms to improve governance and reduce corruption, including through the enactment of effective anti-money laundering and bankruptcy legislation. In the fiscal area, this will include efforts to broaden the tax base through an expansion of the general sales tax to services, a reduction of tax exemptions, and an improvement in the capacity of local governments, which administer most poverty-related expenditures. The early repayment of some relatively expensive external debts is welcome. The placement of a Eurobond merits consideration as a means to diversify financing sources, especially after a major rating agency recently raised the rating on Pakistan's foreign and domestic currency debt.

"In addition, it is essential to advance reform of public institutions, including the public energy sector, which should be undertaken with World Bank assistance. Finally, the National Savings Scheme should be transformed into a modern savings institution to improve the financial sector's ability to support investment and growth," Mr. Carstens stated.