Pak fulfils all quantitative performance: IMF

Budget deficit remains, VAT in July
Islamabad—International Monetary Fund (IMF) says that its Pakistan programme is progressing well and the country fulfilled all quantitative performance criteria for end-December 2009 except for the budget deficit target which was exceeded by a small margin.

This has been stated in a statement issued at the conclusion of talks between Pakistani delegation and IMF staff mission led by Adnan Mazarei in Dubai over the past week to initiate discussions on the fourth review under Pakistan’s Stand-By Arrangement (SBA).

The IMF noted that the exchange rate has remained stable at Rs. 84–85 per U.S. dollar and the foreign reserves position has strengthened (the banking system’s gross foreign exchange reserves, including the State Bank and commercial banks, reached US$14.3 billion in mid-February, of this total the State Bank held US$10.5 billion).

The fund described early signs of recovery in some sectors and the improved external position are encouraging, although it pointed out that there are risks and challenges to Pakistan’s economic program.

It said economic growth in Pakistan is starting to recover; large-scale manufacturing output has started to increase, the improvement in the global economy has helped manufacturing exports, and private sector credit growth has picked up somewhat as businesses rebuild their working capital.

Looking ahead, the IMF said resumption of higher growth is needed to raise living standards and will require improvements in the business climate to stimulate higher investment by local and foreign investors.

However, the growth outlook is subject to risks: most prominently the domestic security situation and reliability of electricity supply, as well as the pace of global economic recovery.

Further, the widening of military operations, revenue shortfalls and delays in disbursements of pledged donor support have complicated fiscal management, and inflation has picked up.

The statement said the IMF mission held constructive discussions with government and State Bank officials, focusing on Pakistan’s recent economic performance, the outlook for the rest of the fiscal year 2009/10,and policies to consolidate macroeconomic stability and further structural reforms.

The mission welcomed the efforts being made by the authorities to implement their economic program to stabilize the economy and advance structural reform against the background of significant security challenges and continued delays in donor disbursement of pledged financial aid.

The discussions focused on the fiscal program and the monetary policy stance. On the fiscal side, shortfalls in budget revenue and expenditure pressures, if any, shall be met through adjustments in expenditure and additional revenue measures, if necessary, to assure the achievement of the program’s fiscal targets for 2009/10.

Monetary policy will continue to focus primarily on price stability, while building international reserves. Inflation has been more persistent than expected, due to higher administered prices and higher inflationary expectations. The State Bank will monitor inflation carefully and if inflationary pressures persist, monetary policy will be tightened, as needed.

The Fund noted that structural reforms are progressing. The amendments to the State Bank of Pakistan Act have been submitted; tax administration reforms are continuing; the amendments to the Banking Companies Ordinance have been approved by the National Assembly; and electricity reform has proceeded, albeit slower than planned.

Slow electricity reform is a drag on growth as it undermines the reliability of the electricity supply. The authorities reaffirmed their commitment to the introduction of the VAT by July 1, 2010 and the draft VAT law will be soon submitted to parliament and provincial assemblies.

The Fund noted that the roll out of the Benazir Income Support Program has been slow. The pilot for introducing the new targeting mechanism, using a poverty scorecard, has been completed in 15 districts and covering 2.1 million people. —INP