. .

Pakistan - IMF negotiations on PRGF

Pakistan has met all the conditionalities and achieved all the bench-marks set by the IMF

From Shamim Ahmed Rizvi, 
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.