PAKISTAN: IMF standby to pave the way back to ESAF

05 January 1996

The executive board of the IMF has approved a 15-month standby credit for Pakistan equivalent to SDR 401.85 million ($596 million). It is hoped that the broadbased economic programme supported by the credit will put Pakistan back on the path to an enhanced structural adjustment facility (ESAF) programme.

Pakistan's ESAF and extended fund facility (EFF) programmes go back to February 1994 when the government reached agreement with the IMF on a three-year combined package worth $1,500 million. However, IMF targets for 1994/95 were not achieved.

Growth in gross domestic product (GDP) was more than 2 per cent short of its 6.9 per cent target; the budget deficit was 5.6 per cent of GDP, compared with a target of 4 per cent.

The new budget, which took effect from 1 July 1995, incorporated a cut of the budget deficit to 5 per cent of GDP. The target agreed with the IMF was 4 per cent. It also fell short of import duty targets. As a consequence of Pakistan's failure to meet targets, the combined package was effectively cancelled. In the first quarter of fiscal year 1995/96, the trade gap widened, foreign reserves fell further and the government devalued the rupee by 7 per cent against the dollar.

The standby programme aims to boost international reserves to levels equivalent to between nine and 10 weeks of imports.

Depleted reserves currently stand at $1,100 million - equivalent to just four or five weeks of imports. The programme also aims to reduce inflation to 9 per cent and accelerate real GDP growth to 5.5 per cent.

The budget deficit in relation to GDP must be cut through a combination of revenue and expenditure measures. Monetary policy aims to slow the growth of domestic liquidity by tightening credit policy and interest rate measures.

The government is designing schemes to streamline bureaucracy and cut costs for foreign investors; bringing the private sector into infrastructural programmes; and implementing a privatisation programme encompassing the power, telecommunications and banking sectors.

Such reforms are all part of the measures incorporated into an ESAF programme.

When Prime Minister Benazir Bhutto announced the budget for fiscal year 1995/96 the government stated that Pakistan needed a 'breathing space'. The standby credit has given the country just that. 'If rigorously implemented the (standby) programme should revive market confidence and lay the groundwork for a comprehensive medium term programme beginning in 1996/97, that could be the basis for a return to an ESAF credit', an IMF statement said. A spokesperson commented that it is now up to Pakistan to show itself fully committed to structural reform and therefore deserving of a new ESAF programme.

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