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IMF cautions Pakistan on foreign exchange reserves

IMF cautions Pakistan on foreign exchange reserves

ISLAMABAD: Pakistan and the IMF on Friday successfully completed first review under $6.67 billion Extended Fund Facility (EFF) program and now the Fund’s Executive Board will consider release of second tranche $547 million by third week of December.

Addressing a joint press conference after completing review talks, Finance Minister Ishaq Dar and the visiting IMF’s mission chief Jeffry Franks said that Pakistan achieved all targets, performance criteria and structural benchmarks envisaged for first quarter ended on September 30 except Net International Reserves (NIR) held by the SBP.

“Now we will focus on building up of foreign currency reserves,” Ishaq Dar said and added that multilateral financial institutions such as the World Bank increased its credit line up to $1.7 billion under soft lending arrangement.

An International Monetary Fund (IMF) mission, led by Jeffrey Franks, visited Pakistan during October 28-November 8, 2013 to conduct discussions on the first review of Pakistan’s IMF-supported program under the Extended Fund Facility (EFF). The mission met with senior officials from the Ministry of Finance and the State Bank of Pakistan (SBP). The mission also met with representatives of banks, private sector, and donors.

At the conclusion of the mission, Franks issued a statement by saying that the IMF mission held constructive discussions with government and central bank officials on the economic performance under the EFF program and is encouraged by the overall progress made thus far.

The mission reached staff-level understandings with the authorities on a set of economic policies detailed in an updated Letter of Intent.

“Discussions focused on the main issues ahead, and the policies needed to build macroeconomic stability as the basis for shoring up confidence and boosting economic growth. While economic conditions remain challenging, with pressure on balance of payments, growth prospects are somewhat better than previously envisaged. The IMF expects growth to reach about 2¾ percent for FY2013/14 as a whole. The mission was also pleased with the strong fiscal performance in the first quarter of 2013/14 and the steady implementation of the government’s structural reform agenda.

“The program remains broadly on track, with the government meeting all of the quantitative performance criteria by end September 2013, with the exception of the target on Net International Reserves (NIR), which underperformed due to lower than expected external flows including foreign investment and other official assistance, coupled with interventions by the State Bank of Pakistan (SBP) to ease pressure on the Rupee. Going forward, challenges on the balance of payments will persist for some time to come, so it is crucial that firm action be taken to begin to rebuild foreign exchange reserves. The authorities have reaffirmed their commitment to align monetary and exchange rate policies to this objective, while maintaining price stability.

“Fiscal consolidation remains a key component of the government’s economic reform program. The mission was encouraged by the government’s efforts to enhance tax revenues, which slightly exceeded the program target level. The mission also recognizes the authorities’ tax administration reform measures and expects these to gradually deliver further improvement in revenue collections. Furthermore, the government is on track to present a plan by end-December 2013 to broaden the tax net through the elimination of most tax exemptions and loopholes granted through Statutory Regulatory Orders (SROs). A more efficient and equitable tax system will foster competition, while providing the needed resources to finance investments in other priority areas such as infrastructure, health, and education.

“The mission agreed with the authorities that protecting the most vulnerable from the direct and indirect impact of fiscal adjustment continues to be a priority. The government is deepening its support to the poor and most vulnerable segments of the society through the Benazir Income Support Program (BISP) and other initiatives.

The mission also recognized the authorities’ resolve to sustain prudent macroeconomic policies and pursue agreed structural reforms to enhance Pakistan’s medium term growth prospects. The government has already approved a National Energy Policy to comprehensively address energy problems through demand and supply management, and to bring improvements in governance and transparency. The government is moving forward with the privatization or restructuring of 31 public sector enterprises to improve public sector resource allocation and limit poor performance. The authorities are also working towards significant structural reforms in the areas of trade and the business climate to encourage higher investment.

The IMF mission staff will prepare a report for the IMF Executive Board on the first review under Pakistan’s EFF that is tentatively scheduled for consideration in late-December. Upon approval, SDR 360 million (about US$550 million) would be made available to Pakistan.

“The mission thanks the authorities and technical staff for their cooperation and reaffirms IMF’s support to the government’s efforts to implement their economic reforms”

The SDR 4.393 billion (about US$6.6 billion) EFF arrangement was approved by the Executive Board of the IMF on September 4, 2013 and a first disbursement of SDR 360 million (about US$544 million) was made on September 6, 2013, the IMF statement concluded.