IMF and Pakistan
Current IMF-Supported Program
34-month, US$11.3 billion Stand-By Arrangement (SBA), originally approved by the IMF's Executive Board on November 24, 2008, augmented on August 7, 2009, and extended by nine months in December 2010. The Board completed the fourth review of the program on May 14, 2010. In addition, on September 15, 2010, the Board approved US$451 million disbursement under the Emergency Natural Disaster Assistance framework to help Pakistan manage the immediate effects of the floods.
Until the economic crisis of 2008, Pakistan had enjoyed a relatively robust economic performance since 2001. Warning signs emerged in 2007 and early 2008, as ...view middle of the document...
3 percent of GDP in 2009/10, and inflation has been on the rise, recording 13 percent in March 2011. The external position has strengthened, the exchange rate has been stable, and the current account deficit has narrowed considerably, helped by lower import growth, higher exports, and a robust increase in workers’ remittances. Foreign currency reserves have increased from US$3.3 billion in November 2008 (before the SBA approval) to over US$14 billion at present.
Fiscal policy has been affected by low economic activity and a difficult security environment. Raising budget revenues has been difficult, and efforts have been made to maintain fiscal discipline by eliminating non-priority spending while accommodating additional large security spending. These efforts proved initially successful, but since June 2009, the authorities have exceeded the budget deficit targets under the program, among others, due to large additional subsidies for the electricity sector. The overrun on the fiscal deficit target at end-June 2010 reached 1.7 percent of GDP. Meanwhile, the catastrophic floods, which hit Pakistan in the summer of 2010, reduced growth and posed a further challenge to public finances by depressing budget revenues and necessitating additional spending to meet the humanitarian and reconstruction needs. Important delays in tax and expenditure reform and the impact of the floods are expected to keep the fiscal deficit high in 2010/11.
Structural reforms had moved forward in late 2008 and 2009, but have been retarded or reversed in 2010 and 2011. In 2008 and 2009, steps were taken to strengthen bank supervision, bolster the social safety net, reform petroleum pricing and taxation, and liberalize the foreign exchange market. Also, some progress has also been made recently in modifying the existing general sales tax by reducing exemptions and strengthening the refund mechanism. However, this reform has been delayed and its scope has been far narrower than earlier envisaged. Moreover, very little progress has been made in reforms in the electricity sector and commodity operations, which are urgently needed to eliminate financial losses that impose a burden on public finances and pose a threat to macroeconomic stability. Further, the legislation needed to strengthen bank supervision and central bank autonomy has not yet been enacted, strengthening of the social safety net is still not complete, and the reform of petroleum pricing has been partially reversed in recent months.
The Challenges Ahead
Prior to the floods, modest signs of recovery in manufacturing (mainly in the textile sector) and exports suggested that the Pakistani economy was regaining momentum. Real GDP growth is estimated to have reached 4 percent in 2009/10. However, as a result of floods, real GDP growth is unlikely to exceed 2¾ percent in 2010/11. Also, adverse security developments continue to hurt domestic and foreign investors’ confidence, while electricity...