ISLAMABAD (November 08 2002) : In the conclusion of Article-IV consultations, the IMF Executive Board has concluded appreciation for consolidation on fiscal and foreign exchange reserves position after government reforms, while raising reservations on slow privatisation in energy sector, financial sector's non-performing loans and decisive efforts for CBR's proficiency.
The board directors expressed reservation about plans to support the restructuring and/or investment programs of various public enterprises with “one-off” budgetary transfers. They cautioned that such plans should be part of a clearly articulated strategy to restructure, privatise, or liquidate them, and that their cost should be part of the budget process rather than being brought up in an ad hoc fashion after the budget was passed.
While welcoming steps to make major public enterprises more accountable to the public, the directors underscored the importance of accelerating privatisation, especially in the power and telecom sectors.
The directors commended the recent efforts to restructure public enterprises, but noted that a considerable agenda remains. They urged the authorities to accelerate the reform of the two power utilities to contain their drain on the budget, and in particular, to ensure timely tariff adjustments and step up efforts to improve receivable collections.
They called for keeping tight control over expenditures, while appreciated protecting social and poverty-related spendings. In this regard, the directors highlighted, in particular, the need for carefully following through CBR reforms and several directors suggested for exploring the feasibility of more ambitious revenue plans going forward.
The Central Board of Revenue (CBR) revenue shortfall through June 2002 is, however, regrettable and calls for a decisive effort to reinforce revenue collection.
Keeping in view the reforms process, the IMF board stressed that the central task for the new government will be to deal resolutely with the remaining challenges, while further broadening and deepening the ownership of the reform effort in the period ahead. Important, in this regard, will be continued strong efforts to explain the rationale for reform to the population, and further sustained improvements in governance and the delivery of social services.
IMF Executive Board said that the authorities' comprehensive structural reform agenda, focusing on improved governance, was steadfastly implemented in the past two years. Progress has been made in particular in tax policy and tax administration reform, fiscal accountability and transparency, trade reform, energy pricing, privatisation, and financial sector restructuring.
The board directors noted that despite various adverse shocks, which took a toll on economic activity, Pakistan has succeeded in consolidating macroeconomic stability over the past two years. Growth appears to be picking up, inflation remains subdued, and the external accounts have strengthened considerably owing to high worker remittances, sizeable capital inflows, and, more recently, improved export performance.
The directors were encouraged that the fiscal deficit has declined and social sector spending is increasing as local governments have become operational.
Most directors saw merit in continued sterilised intervention to contain the real appreciation of the Pakistani rupee in the face of continuous strong capital inflows. Some directors, however, cautioned that this is unlikely to be a solution over the longer term, and that competition-enhancing structural measures are a more effective approach to deal with upward pressures on the external value of the currency.
The IMF board encouraged the authorities to continue working closely with Pakistan's development partners to address the remaining weaknesses in the financial sector, including further strengthening of the regulatory environment and the resolution of non-performing loans.
They looked forward to the smooth development of Islamic banking alongside conventional banking, and passage of anti-money laundering legislation in line with international standards, and were hopeful that an Financial Sector Assessment Program could soon be conducted.
The directors welcomed the authorities' efforts to improve the quality, timeliness, and reporting of data. They looked forward to further steps to address remaining weaknesses that hamper the analysis of economic and financial market developments, and to Pakistan's participation in the General Data Dissemination System.
