Finance Ministry releases details of IMF extended fund facility

ISLAMABAD: The Ministry of Finance has released details of the ‘extended fund facility’ program with the International Monetary Fund in September 2013.

The text of the released report is as follows:


Pakistan entered into an extended fund facility (EFF) program with IMF on September 4, 2013. It is a 36-month extended arrangement under the

Extended Fund Facility (EFF) for SDR 4.393 billion (US$6.64 billion, 425

percent of quota).

First tranche of SDR 360 million ($544.5 million, 34.8 percent of quota)
became available on September 6 2013, and the remainder will be evenly
phased thereafter subject to quarterly reviews.

An Extended Fund Facility with IMF provides assistance in support of
comprehensive programs that include policies of the scope and character
required to correct structural imbalances over an extended period. It has a comparatively longer repayment period of 4½–10 years, with repayments in twelve equal semiannual installments.

Some of the factors, which led Pakistan to enter into this facility and introduce economic reforms, were as follows:

Substandard economic performance during the past few years where GDP
growth averaged only 3 percent over the past five years, insufficient to
significantly improve living standards or fully absorb the growing labor force, with a rising inflation rate of over 8%.

Domestic private investment dropped from 14 percent of GDP in 2007/08 to
an estimated 10.9 percent of GDP in 2012/13. Weak private sector credit
growth contributed to the decline.

State Bank of Pakistan gross reserves dropped to US$6 billion (under 11/2 months of imports) as of end-June 2013.

The 2012/13 fiscal deficit (excluding grants) is estimated to be over 81/2 percent of GDP, well above the original budget target (4.7 percent of GDP) due to slippages on both revenues and expenditures. The revenue shortfall of

11/4 percent of GDP relative to the 2012/13 budgets is largely explained by the underperformance in tax collections in the previous fiscal year, inadequate tax administration, and a slowdown in economic activity. Higher expenditures

(23/4 percent of GDP) reflect higher energy subsidies.

The energy sector remained saddled with considerable problems that have
led to unreliable electricity supply and large fiscal costs, including price distortions, insufficient collections, costly and poorly targeted subsidies, inadequate governance and low efficiency in energy supply and distribution, regulatory inadequacies, and insufficient investment in new energy production and modernization. As a result, power outages (“load shedding”) averaged around 8–10 hours a day, constraining production and employment. Output losses were estimated at 2 percent of GDP annually.

To overcome these challenges, an economic reform program was introduced
by the present government under the Extend Fund Facility to strengthen
macroeconomic and structural policies, reduce economic imbalances, and
foster sustained inclusive growth and employment generation. It has the
following objectives and elements:

Objectives:

• Improve the medium-term growth outlook and move toward sustainable fiscal and external positions.

• Provide macroeconomic stability and improve economic performance during the term of the program.

Elements:

• Raising growth gradually to near 5 percent by 2015/16 as macroeconomic stability is entrenched and structural reforms are pursued.

• Bringing inflation down to 6-7 percent range by 2015/16, from the current level of 8.3 percent.

• Increasing central bank reserves to over 3 ½ months of imports by 2015/16.

• Reducing the fiscal deficit to 3 ½ percent of GDP by 2015/16 from an estimated 8.0 percent in 2012/13, with provincial governments contributing their fair share of the fiscal consolidation process.

• Energy Sector Reforms

• Liberalizing the trade regime and reforming public sector enterprises through restructuring and/or privatization.

• Improving the business climate.

• Strengthening the tax system.

• Protecting the most vulnerable from the direct and indirect impacts of reform measures.



The policies underlying this program have the firm support of Prime Minister Sharif, the cabinet and provincial government leaders as indicated by the recent decision to this effect by the Council of Common Interest.

Progress in the implementation of the program will be assessed through
quarterly reviews, quantitative performance criteria, indicative targets, and agreed structural benchmarks (Annexure 1).

An IMF mission, led by Mr. 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 was encouraged by the overall progress made so far. 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 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.

Note : The complete file is available for download on the Ministry of Finance website.