ISLAMABAD (November 08 2002) : The Executive Directors of IMF Board have observed that high public debt burden of Pakistan continues to constrain needed investments in human development and infrastructure, and that private investment and economic growth remain insufficient to reduce rapidly Pakistan's high rate of poverty.
They drew comfort from the improved resilience of Pakistan's debt dynamics to various shocks, provided recent reforms are not reversed, and from the authorities' demonstrated ability to hold the programme broadly on course in a difficult environment.
They welcomed the publication of a draft fiscal responsibility and debt reduction ordinance for public comment, which encouraged the authorities to consider further simplifying its specifications and extending its application to provinces and local governments.
The key policy challenges for the medium-term are, therefore, to improve the public debt dynamics further through fiscal adjustment, and address Pakistan's “social gap” through enhanced provision of basic social services.
The International Monitory Fund Board executive directors stressed that progress on these fronts will critically depend on strong tax collection efforts and improved financial performance of public enterprises, especially the utility companies.
They called upon the authorities to step up the allocation of resources to basic education and health as well as to ensure the efficient use of these resources, which will be key to improving productivity and growth prospects. Ongoing steps to improve the monitoring of social spending were welcomed.
They viewed that Pakistan's near-term economic outlook as broadly encouraging, with recent data confirming a continued recovery in exports, imports, and tax revenue. At the same time, however, downside risks remain, including the risk that the reform efforts will not be sustained over a sufficiently long period, or that the current reforms will take longer than assumed to produce a strong impact.
They also considered the proposed macroeconomic policy for the near future to be appropriate. The monetary policy will be geared toward keeping inflation low, within the current flexible exchange rate system, and continued fiscal adjustment will aim at further improving public debt dynamics. They said monetary and price developments will nevertheless need to be kept under close watch, and the authorities should be ready to consider a moderate tightening of monetary policy, if needed.
The IMF Board executive directors welcomed the focus on the structural reform agenda at improved governance across a broad range of areas, and strongly supported the continuation of these efforts to improve conditions for private sector development and growth. They emphasised that delays or loss of momentum in implementing the reform agenda would work at cross-purposes with the aim at reducing poverty.
The strong external position has allowed the central bank to build official reserves to unprecedented levels, reducing its vulnerability to external shocks, they said, adding the structural reforms have focused on tax policy and administration, energy pricing, privatisation, fiscal accountability, transparency, and governance.
They said the external accounts recorded a dramatic turnaround, and the reserves were built up to the unprecedented levels in Pakistan's history. The current account excluding grants recorded a small surplus in 2001/02 on account of an improved trade balance, and the surge in workers' remittances. Combined with a substantial net exceptional financing in the form of debt-rescheduling and programme financing from the international financial institutions, this allowed the State Bank of Pakistan (SBP) to build up foreign exchange reserves in the course of the year much faster than expected.
At end-June 2002, they noted, the gross official reserves stood at $4.3 billion, equivalent to 17.5 weeks of next year's imports of goods and non-factor services, compared with $1 billion at 2000-end; by September-end 2002, the reserves had risen to $5.9 billion. Since late 2001, the Pakistani rupee has remained virtually stable against the dollar, with large foreign exchange purchases by the SBP, exclusively in the interbank market since June 2002.
Though revenue collection has been repeatedly below programme targets, the overall fiscal situation improved in 2001/02.
The budget deficit, including grants decreased from 5.5 percent of GDP in 1999/2000 to 4.2 percent of GDP last fiscal year, despite sizeable exceptional expenditures in 2001/02, such as the recapitalisation of the Karachi Electric Supply Corporation (KESC) and the settlement of excess taxes paid by banks. Social and poverty-related expenditure picked up significantly in the second half of the year, once the initial administrative problems of the newly-elected local governments were overcome, and were only marginally lower than the target under the I-PRSP.
The broad money increased strongly in 2001/02. Though the SBP was successful at containing reserve money growth within programme limits, owing to an aggressive sterilisation of its foreign exchange purchases, the banking system's net domestic assets recorded a slight increase partly on account of a moderate rise in credit to the private sector.
As a consequence, the very large accumulation of net foreign assets by the banking system led to an almost 16 percent annual increase in broad money at end-June 2002. The interest rates have remained relatively stable since early 2002, with the yield on six-month treasury bills hovering around 6.5 percent after a sharp decrease in 2001.
In the past two years, considerable progress was made in implementing this agenda, even while Pakistan's economy was exposed to several negative shocks.
A slowdown in the world economy, high oil prices, protracted drought, trade disruption in the wake of September 11 events, and regional and domestic security problems have increased uncertainty for business and hampered growth.
Despite this unfavourable context, the real GDP at factor costs grew by 3.6 percent in FY 2001/02 (ending in June 2002). Due to a large increase in worker remittances, real GNP growth was significantly higher. Average inflation in 2001/02 was 2.7 percent, one of the lowest in Pakistan's history. However, inflation picked up in the first half of 2002, to 3.7 percent in the year through August 2002, they added.
