Pakistan - IMF negotiations on PRGF
Pakistan has met all the conditionalities and
achieved all the bench-marks set by the IMF
From Shamim Ahmed
Sep 03 - 09, 2001
The IMF Mission which held in depth discussion with
economic managers of Pakistan at different levels during its over 10
days stay in Pakistan and granted Pakistan good housekeeping chit.
According to officials Pakistan's prospects have brightened to obtain
the fourth and the last tranche from the IMF under a $ 596 million stand
by arrangement (SBA) next month.
With the successful completion of SBA, Pakistan has
already initiated negotiations with a joint IMF-World Bank team for a
multi billion dollars poverty reduction and growth facility (PRGF) programme.
The third review of Pakistan's economy was completed
on Thursday last. Pakistan has met all the conditionalities and achieved
all the bench-marks set by the IMF under the SBA except a slight
downward variation in revenue collection. This lapse was ignored in view
of overall performance, a source revealed to this correspondent. The IMF
Mission, lead by Klause Andres, will file its report on Pakistan's
economic housekeeping during April-June 2001 period along with its
recommendations. The report will form the basis for the IMF Board of
Directors to approve the last tranche of about $ 133 million. This will
be the first time that Pakistan, known as single-tranche country, comes
to a full cycle with an IMF programme.
On Friday, Pakistan presented a detailed three-year
programme spelling out its priorities to continue structural reforms,
and, at the same time stimulate the depressed economic growth. The set
of proposals called Interim Poverty Reduction Strategy Papers (IPRSP)
will shape the future of talks between the two sides for a medium-term
package that includes about $ 2.5 billion cash from the International
Financial Institutions in addition to about $ 3 billion debt
rescheduling by the Paris Club.
"The IPRSP is a home-grown package", a
senior official claimed. He said the IPRSP carries a complete picture of
Pakistan's economy for the next three years, the measures that the
government plans to stabilise its economy and reduce poverty.
Finance Minister Shaukat Aziz who led Pakistan in
negotiations may grow at 4 per cent during current and 5 per cent in
next two years, owing to recovery in agriculture and continued
large-scale manufacturing, particularly the textile sector. Other
factors to support growth are ongoing investment, especially in high
value-added textile sectors, declining real interest rates as crowding
out and risk prima are reduced, expected export proliferation due to
opening up in industrialized countries and lagging impact of the recent
real depreciation of the rupee.
For the year 2001-02 and beyond, the government is
planning to target an annual average inflation rate of around 5 per cent
and external current account deficits at around 2 per cent of GDP.
However, the government expects a gradual return of foreign investors'
confidence and, accordingly, aims at a build-up of reserves to $ 2.3
billion (equivalent of 9 weeks of imports) by end-June, 2002 with the
aim to reach $ 3.6 billion at end-June, 2004.
The macroeconomic policy mix will remain broadly
unchanged, with the focus on continued fiscal adjustment to reduce the
debt overhang, a flexible exchange rate system and a monetary policy
geared towards ensuring that inflation targets are met.
The budget 2001-02 aims at balancing the debt
reduction and create long-term fiscal space through debt and
debt-service reduction and need to finance critical structural reforms
and investment in infrastructure and social sectors. The budget calls
for reducing the overall fiscal deficit, excluding grants, to 4.9 per
cent of GDP (from 5.3 per cent this year).
The deficit of the government reflects the cost of
restructuring of the Nationalized Commercial Banks (NCBs). Furthermore,
any privatization receipts (net of the cost of financing the
privatisation process itself) will b used to reduce public debt.
Non-tax revenue is expected to rise to 3.1 per cent
of GDP, mostly on account of higher SBP profits as one-time charges
related to less provisioning in the current year go out of the base and
higher interest rates earned on treasury bills.
The increase in expenditures of the government are
explained as: one-off expenditure related to the drought emergency
package (0.3 per cent of GDP), the cost of establishing and making local
government functional under the devolution plan (0.1 per cent of GDP),
and a golden handshake package for nationalised banks in preparation for
their privatisation (0.3 per cent of the GDP).
The current standby arrangement will come to an end
in Sep. and soon after formed negotiation for PRGF will start. According
to IMF sources, adherence to structural reforms, higher revenue
collection, firms demand management, higher allocation for poverty and
resolution of Riba issue would be preconditions for the Poverty
Reduction and Growth facility.
All indications are that the 3 years PRGF may be
approved by the end of the current year. The government has also
proposed to begin talks with bilateral creditors for another
debt-rescheduling preferably for the same period. The approval of the
PRGF may also help in paving the way for debt-rescheduling and creating
greater confidence among the prospective investors.