IMF RELEASES $1.2 BILLION TRANCHE

ANOTHER $3.3BN BRINGS IMF LOAN TO $11.3BN

AMANULLAH BASHAR
Aug 10 - 16, 2009

The International Monetary Fund has agreed for immediate disbursement of an amount of about US$1.2 billion for Pakistan to meet its budgetary deficit, which has brought the total disbursements under the standby arrangement program to $5.3 billion.

After completion of the second review of Pakistan's economic performance under a program of Stand-By Arrangement (SBA), IMF board agreed that a portion of the augmented access could be used to finance priority spending until the disbursements of donor support pledged for 2009/10 are received.

To help the country address increased balance of payment needs, the board also approved an augmentation of access by an amount equivalent to SDR 2,067.4 million bringing the total financial support to an amount of US$11.3 billion, equivalent to 700 percent of Pakistan's quota or 6.3 percent of its GDP.

The Executive Board also approved Pakistan's request for a waiver for the non-observance of two end-June 2009 structural performance criteria on submission to parliament of legislative amendments to (i) enhance the effectiveness of the State Bank of Pakistan in banking supervision; and to (ii) harmonize the income tax and sales tax laws and reduce exemptions for both taxes. The Executive Board also approved Pakistan's request for a waiver for non-observance for the end-June quantitative performance criterion on the fiscal deficit, which according to preliminary information was missed by an amount equivalent to 0.9 percent of GDP.

Murilo Portugal, Deputy Managing Director and Acting Chair in remarks on the performance of Pakistan's economy has said that it has continued to stabilize. Reforms in the financial sector and the foreign exchange market have been progressing, and steps have been taken to strengthen the social safety net. These achievements are appreciable, considering the security developments that resulted among others in the large number of internally displaced persons (IDPs), the global economic recession, and the difficult domestic political environment.

'The end-2008/09 fiscal deficit target was missed, due partly to unforeseen security- and IDP- related expenditures but also to excessive spending by provinces and revenue shortfalls, owing partly to delayed implementation of tax reforms. The unresolved energy sector problems have continued to undermine Pakistan's growth potential and burden public finances.

"A durable solution to the problem of low tax revenue should start with the early implementation of VAT and the ongoing tax administration reform. These reforms will make the economy less vulnerable, provide the steady flow of resources needed to reduce poverty and develop basic infrastructure, and strengthen the government's ability to deal with the pressing needs of the population, which are now compounded by the large number of IDPs.

"The recent agreement with World Bank and Asian Development Bank on the electricity sector reform signals a desire to address the deep-seated problems in that sector, including the resolution of the inter-corporate circular debt, which burdens the energy sector enterprises, and the elimination of tariff differential subsidies within a year from now, making additional fiscal resources available for priority spending."

The macroeconomic outlook for 2009/10 remains difficult, and the external position is subject to considerable downside risks. The donor support pledged in Tokyo and the augmentation of access under the IMF-supported Stand-By Arrangement by about $3.1 billion will help mitigate these risks and enable the implementation of the government's fiscal program; however, this financing is temporary and should be used as a bridge until the revenue reforms bear fruit.

The 2009/10 budget aims to provide adequate space for priority spending. This includes spending on IDPs, support for poor households, and other well-targeted social spending.

"The accelerated reforms to strengthen central bank independence and the legislative amendments to increase its supervisory powers will enhance the monetary policy framework and help strengthen the banking system," Mr. Portugal said.

According to IMF, a rebound in agriculture on the back of a bumper wheat crop helped maintain growth in positive territory. However, with increasing weakness in large-scale manufacturing, exports, and private sector credit, the estimate of real GDP growth for 2008/09 has been lowered from 2.5 to 2.0 percent and is projected by the IMF at 3 percent for 2009/10.

Moreover, the Federal Bureau of Statistics recently revised downward real GDP growth for 2007/08 from 5.8 to 4.1 percent, indicating that the economic slowdown began before 2008/09.

POLITICAL AND SECURITY SITUATION

Inflation has continued to decline, but it remains high with core inflation at just below 16 percent in June. Buffeted by a volatile political and security situation, Pakistan's growth has been anemic and the near-term outlook for economic activity, especially manufacturing remains weak.