Tag Archive: Pakistan economy


Remember the export of wheat about three years ago by Pakistan triggering a very serious food shortage in the country leading to phenomenal rise in food prices? The same wheat was imported back at exorbitant prices. Since then the price of wheat and flour is constantly on the rise. This was perhaps one of the biggest corruption scandals of the Shaukat Aziz government. It seems that the present government has learnt only one lesson from this regrettable decision; do it again and make billions at the cost of millions of hapless “voters” who you will need only in the next season of “democracy”. Interestingly, this decision, which has been taken to be able to pay off central bank loans, has been taken at a moment when wheat prices are at the lowest in the international market.

It is simply beyond comprehension why export is needed to pay off SBP loans which essentially are in local currency. It seems that the driving factor behind this imprudent decision is dollar-lust. Express Tribune has reported that after a ban stretching more than three years, the government on Tuesday allowed the export of wheat in a bid to pay back central bank debt, a move that could result in a serious food crisis since a World Bank (WB) report has already warned of a five-million-ton drop in production in the next crop. The Economic Coordination Committee (ECC) of the cabinet allowed the grain export without imposing any cap on quantity. It is expected that wheat will be exported in massive quantities since Russia, the world’s largest wheat producer, has banned the grain export resulting in price surge in the international market.

The ECC assessed a $300 per ton (Rs1,040 per 40 kilogram) wheat price in the international market, anticipating a further hike in coming days. Although the government has fixed the wheat price at Rs950 per 40 kg in the domestic market, farmers usually receive an average Rs850. Pakistan is the third largest wheat producer. The ban on export of wheat was slapped in June 2007 when because of incoherent policies the country first exported the commodity and then had to spend over $1 billion to import the same for domestic consumption.

The ministry of food and agriculture’s summary to the ECC proposed lifting the ban primarily to pay back debt taken from the State Bank of Pakistan (SBP) to buy wheat, make room for next year’s crop storage and capitalize on higher prices in the international market. Total wheat stocks are estimated at 9.07 million tons, of which 6.1 million tons are in Punjab. “The Punjab government is paying Rs77.5 million per day interest on loans,” obtained for buying wheat, says the summary. The federal government is picking up Rs24.6 million from the amount.

The production target in the pre-flood scenario was also estimated at 25 million tons. According to the Damage and Need Assessment Report of the World Bank and the Asian Development Bank, “wheat production may reach only 20 million tons opposed to an average production of almost 23 million tons in the last three years.”

The report goes on to say that there is concern about the possible impact of reduced wheat output in the coming season on food security. Around 78,000 tons of wheat were either destroyed or damaged in Punjab during the recent floods.

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As the deadly diseases threaten survivors of Pakistan’s deadliest floods, the global aid response to the Pakistan floods has so far been much less generous than to other recent natural disasters — despite the soaring numbers of people affected and the prospect of more economic ruin in a country key to the fight against Islamist extremists. To make the matters worse, the so-called political leaders, at least a majority of them, remain unmoved by the plight of about 14 million souls they claim to represent, though on dubious credentials. The floods have affected about a quarter of the country, overwhelming an already weak government coping with crushing economic conditions and attacks by al-Qaida and Taliban militants. Around 1,500 people have been killed since the torrents began more than two weeks ago.

International community remains unmoved, so is vote-grabbers who only appear in the voting season like frogs who are irritatingly visible in the monsoon season. It is only the philanthropists and NGOs who are helping the needy. A story of an NGO has already appeared in these pages eliciting tremendous response. There was hardly any response to government’s appeal for donations, apparently for lack of trust. Reasons for international apathy include the relatively low death toll of 1,500, the slow onset of the flooding compared with more immediate and dramatic earthquakes or tsunamis, and a global “donor fatigue” — or at least a Pakistan fatigue. Businessweek has reported that triggered by monsoon rains, the floods have torn through the country from its mountainous northwest, destroying hundreds of thousands of homes and an estimated 1.7 million acres (nearly 700,000 hectares) of farmland. In southern Pakistan, the River Indus is now more than 15 miles (25 kilometers) wide at some points — 25 times wider than during normal monsoon seasons.

The floods have disrupted the lives of 14 million people — 8 percent of the population. Many are living in muddy camps or overcrowded government buildings, while thousands more are sleeping in the open next to their cows, goats and whatever possessions they managed to drag with them. And the U.N. says more flood surges may be on the way. Late Friday, local TV reported more flooding in towns and villages along main rivers in Sindh and Punjab provinces.

Going by the numbers of people affected, the disaster is worse than the 2004 Indian Ocean tsunami, the 2005 Kashmir earthquake and the 2010 Haiti earthquake combined, the U.N. says. But international aid for those disasters came at a more rapid pace, aid experts say. Ten days after the Kashmir quake, donors gave or pledged $292 million, according to the aid group Oxfam. The Jan. 12 disaster in Haiti led to pledges nearing $1 billion within the first 10 days.

For Pakistan, the international community gave or pledged $150 million after the flooding began in earnest in late July, according to the U.N. Office for the Coordination of Humanitarian Affairs, known as OCHA. U.N. officials on Wednesday launched a formal appeal for $460 million for immediate relief and have said the country will need billions more to rebuild after the floodwaters recede.

OCHA spokesman Nicholas Reader said that of the $310 million still needed, the U.N. received $93 million with an additional $32 million pledged. Pakistan is also receiving bilateral donations, which are not part of the appeal and which the United Nations does not track. The United States has donated the most, at least $70 million, and has sent military helicopters to rescue stranded people and drop of food and water. Washington hopes the assistance will help improve its image in the country — however marginally — as it seeks its support in the battle against the Taliban in neighboring Afghanistan.

Britain, Pakistan’s former colonial ruler, was the second largest donor, pledging over $32 million. Other major donations included $13 million from Germany, $10 million from Australia, $5 million from Kuwait, $3.5 million from Japan and $3.3 million from Norway. U.N. spokesman Martin Nesirky said humanitarian organizations in Pakistan are working around the clock to deliver lifesaving assistance to at least 6 million people in need, but that far more funding is required to provide help quickly. He said U.N. Secretary-General Ban Ki-moon was planning a trip to Pakistan to inspect the damage.

Comparatively low-key coverage in the international media and a lack of celebrity involvement has also kept the flood disaster off many would-be givers’ radar, said Molly Kinder, a Pakistan aid expert with the Washington-based Center for Global Development. “I haven’t exactly seen Lady Gaga go on Oprah to pledge donations to Pakistan’s flood victims,” she said. The civilian government’s response to the flood has not inspired confidence among many donors. Pakistan’s economy is already dependent on foreign aid and has received billions of dollars since 2001 because of its role in the fight against Islamic militants.

A great country like Pakistan having world-class leaders and a strong democracy guaranteed by all the stakeholders should not have to follow the footprints of foreigners, particularly westerners. And UK should be the worst example to follow. They have been our colonizers and can never be our friends, so why follow them. Moreover they may be setting inappropriate examples for us to dare us to follow them. This may be a perfect Zionist conspiracy.

This post is intended to forewarn our economic managers not to follow the examples set by the UK’s new Premier. A Businessweek column by Mark Gilbert informs that Cameron is about to embark upon an unprecedented experiment. He has told government departments to brace for spending cuts of as much as 40 percent as he seeks to shrink both the UK’s record budget deficit and a public sector that now accounts for nearly 20 percent of all UK jobs. They may have experienced budget deficit for the first time but for us, this is just normal every year in June. We are used to it. UK, with its growing population of South Asian origin, should also get used to it.

The paper informs that with the biggest deficit among Group of Seven nations and the worst looming shortfall in Europe this year according to European Union forecasts, the UK doesn’t want to be the next Greece [he could not write Pakistan because Pakistan is already known around the world for other reasons]. Less than a minute into a June 22 budget speech, Chancellor of the Exchequer George Osborne suggested that bond vigilantes are driving U.K. economic policy. “Questions that were asked about the liquidity and solvency of banking systems are now being asked of the liquidity and solvency of some of the governments that stand behind those banks,” he said. “I do not want those questions ever to be asked of this country.” The austerity debate is now not about whether fiscal tightening in advanced economies is necessary, but on when it should begin in earnest.

That’s why policymakers around the world will be watching Britain—especially those at the Federal Reserve, which is not yet ready to follow Osborne’s lead. The Fed’s colors are still tied to the mast of maintaining stimulus and keeping borrowing costs as close to zero as possible. At its June 22-23 meeting, the Fed said it would even “need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably.”

America has remained Pakistan’s traditional and perpetual ally at every hour of its (America’s) need and for this reason, both the countries passionately share at least one passion- spending. Spend at all costs, even if you have to beg, borrow or steal and even sell grandma’s jewelry or/and dispose off family silver, but you must spend. Spend and unlike USA, spend out of public kitty. That will keep the economy going. This is the reason, Pakistan and the USA, even after realizing the need to tighten the belt, are not ready to accept austerity. Both want someone else to do it first and UK has done it. Are we ready to follow? The columnist writes: “With the world economy threatening to slide into a double-dip recession, both the US and the UK are nevertheless talking about fiscal austerity. The only good news for Obama is that Cameron is going first.”

Watch out guys. Don’t buy austerity and never ever fall into its trap.

Pakistan was at the verge of insolvency in the 90s when it had to contract fresh debts, at exorbitant costs, to service existing debts. Then happened 9/11 leading USA to seek Pakistan’s cooperation. The financial institutions had to queue up to offer financial assistance to Pakistan. IMF was booted out and the lenders, most notably the Paris Club offered moratorium and other concessions on Pakistan’s foreign debts. Pakistan, however, could not assess its position and utility in this war and dictate its terms. It was probably happy for coming out of isolation and being recognized as a state despite being chained in sanctions.

If it had negotiated its price for being a frontline state in advance, it would have been in a much better position today when it has a number of economic issues including war on terror which alone is costing it very dearly. Pakistan has paid an immense price for being a front-line state in this war. The direct and indirect costs of our involvement over the last five years have been more than Rs2 trillion ($30 billion). This was the underlying message of Poverty Reduction Strategy Paper released by the IMF and reported in the Express Tribune. The paper noted that Pakistanis have largely lived in a state of denial for years with notions that “this is not our war” and we are “fighting the war for the US”. The economic cost aside, the cost to our image in the world, confidence in our nation’s capabilities and psychological impact on our people is unquantifiable. Taking cue from the acknowledgment of the IMF, the paper suggests that Pakistan should use this as an opportunity to plead for debt relief.

The paper makes a strange assertion that Pakistan’s foreign debt situation is not as bad as it is made to be believed in certain segments of the media. As of March 2010, total foreign debt stood at $54.5 billion. Out of that, Pakistan owes a group of 18 nations called the Paris Club $14 billion, other bilateral lenders $1.8 billion, multilateral agencies like the IMF, World Bank, Asian Development Bank, Islamic Development Bank, etc, around $32 billion. By demanding a relief initially from bilateral loans that are payable to the nations in the Paris Club, and other countries like China, Saudi Arabia, Kuwait and loans from Germany and Japan taken during the last two and a half years, Pakistan can easily get relief to the tune of $15.8 billion.

With success in due course which will depend on our diplomatic and political canvassing, we can make the same demand to the multilateral lenders as well to seek the debt relief. Pakistan’s demand for debt relief is not unjust. It is our role in standing up to terrorists that gives us the opportunity to seek such relief. First and foremost, despite a difficult macro-economic environment, Pakistan has never defaulted on its obligations. Earlier in January 2010, Pakistan successfully repaid its $500 million Euro-Sukuk. All other obligations to the global debt markets are being met as per schedule.

It is worth noting that Pakistan’s Credit Default Swap (CDS) had widened both after the assassination of former Prime Minister Benazir Bhutto and then in the summer of 2008 when a near run on banks was witnessed after rumors emerged that Pakistan was freezing foreign currency accounts. The result of these two events was a flight of capital from the country, causing a liquidity crunch, increase in interest rates and then the economic crash that began in the West from August to September 2008 made the return of the capital back to Pakistan difficult. To put it into context, Pakistan fulfilled its obligations aptly despite taking expending huge sums of money on the war against terror, despite defaults being the order of the day the world over at the time.

At the time of rumors of a run on banks in June-August 2008 and when the fight against militants was taking place in Swat, Pakistan’s CDS touched as high as 30 per cent. It is only in due course of time and showing the world that Pakistan is capable of handling the terrorism problem, we find that our CDS is back to the point when troubles started. In a nutshell, today we are a less risky place for an investor than we were 24 months earlier.

In October 2009 when Hillary Clinton was in Pakistan, in a meeting with legislators the matter of writing off the debt, standing approximately at $2 billion, Pakistan owed to the US was raised. Clinton had assured that she would raise the matter with the US Treasury as it was a fresh issue. However, nothing much has happened as the media tirade that followed the Kerry-Lugar Bill and echoing support by the opposition and military made the matter of writing off the debt inconsequential. It is high time that we raise the issue again with the US, which leads the world, and if it is willing to write off our debt, we can move from one country to another to seek the same relief.

This initiative has to begin from parliament and the ministry of finance. A suitable course of action in this regard could begin with devising a strategy involving the ministry of finance, ministry of foreign affairs and State Bank of Pakistan to envisage the scenarios and conditions that can be put on the negotiating table. After a thorough homework, all political parties’ heads can be involved to bring them on board on this matter.

At the same time while presenting the benefits of debt relief, the political stakeholders can be presented a plan of action as to what the state will do with the savings made due to the debt relief. After necessary approvals and agreement within the country is achieved, an effectively planned and executed lobbying with concerned quarters in Washington, DC, has to begin. In Washington, Pakistan has to tap necessary support of the US State and Treasury Department, World Bank and the IMF.

Critics of the proposal will talk about the impact on Pakistan’s image and standing in global capital markets. It is important to note that lenders always have scenarios to envisage a write-off which can be coupled with conditions that need to be met in order to seek an advantage. The IMF and World Bank already have a Heavily Indebted Poor Countries (HIPC) Debt Initiative and Multilateral Debt Relief Initiative (MDRI) whereby debts of indebted countries can be written off to provide due relief.

It was recently reported on these pages that TCP has imported sugar from China @ $558 per tonne which roughly comes to Rs. 47 per kg. After adding freight and taxes, this could be sold at best at around Rs. 51 per kg in the wholesale market. It was hoped that with import of sugar at this rate, consumers, particularly in the month of Ramadan, will be able to get sugar at much cheaper rates as compared to market rate of Rs. 70.

It has now been reported by the Nation that consumers are being fleeced by design right under the nose of the government. The newspaper reports that despite the fact that sugar prices are constantly declining in the international market, helpless consumers in Pakistan are paying an additional amount of Rs 16 to Rs 20 on one kilogram sugar. According to official figures of the Ministry of Industries and Production, the landed cost of international sugar in Pakistan is around Rs 54 per kg along with General Sales Tax, while the consumers are paying around Rs 70 to Rs 75 for it. The sugar prices should be around Rs 57 per kg in the country, if transportation and other costs are added, sources in Ministry informed The Nation.

The crisis may further deepen in the holy month of Ramadan, the paper adds, and prices can further go up, if Provincial Governments did not take action against those sugar millers involved in hoarding and creating artificial shortage. The sources informed that sugar millers had been planning to create artificial sugar crisis in the country since March 2010. The sugar millers purchased commodity at high price of Rs 65 per kg from the international market with a view that its prices would further accelerate in July and August, however it did not happen as prices started declining and now they started to disappear the commodity from the market to exploit the consumers by earning more profit, the sources further disclosed. The Ministry sources believed that there was sufficient sugar stock available in the country, which was enough for the next three months (till October) and sugar shortage in the country was out of the question. Currently the sugar stock is 1.276 million tonnes in the country, which can fulfill demand of the next three months.

It is worth mentioning here that Ministerial Committee on Sugar has already decided to ask the Economic Coordination Committee (ECC) that there is sufficient stock of sugar in the country and only sugar millers are creating artificial shortage and it is the responsibility of Provincial Governments to take action against them.

Pakistan is making improvements by leaps and bounds. Its credibility may not have been established but its credit riskiness has nosed down. It is now at some good position of credit worthiness. What is this position, let’s see. Oh no, not visible. Let’s look at it from the other side. Lo and behold. It has fourth position from the other side of the scale. Very prominent and very distinguished. The Global Sovereign Credit Risk Report for the second quarter of 2010 has ranked Pakistan’s sovereign debt the fourth most risky in the world.

According to Express Tribune, the report issued by CMA stated that the riskiness of debt owed by the Government of Pakistan has marginally reduced since last quarter when the country was ranked third on the list of world’s riskiest sovereign debtors. The risk premium on debt issued by the government stands at 719 basis points. The country’s sovereign debt currently holds a ‘B’ rating, an improvement from last quarter’s rating of ‘B minus’. Pakistan’s sovereign debt is still considerably riskier than all other Asian countries, despite dropping 131 basis points since hitting the peak of 850 basis points on April 27.

Good news is that Pakistan is ranked ahead of Venezuela, Greece and Argentina which are the riskiest sovereign debtors of the outgoing quarter.

CEO Topline Securities opined “thanks to the International Monetary Fund, Pakistan’s foreign exchange reserves are now worth more than five months of imports. Investors are viewing this as a positive sign. Political and security situation in the country has also been improving gradually over the past few months helping to bring down risk premium associated with the country’s sovereign debt.”

According to the report, Norway has maintained its title as the safest government to lend to. Its risk premium stands at 26.7 basis points. Iceland, Dominican Republic and Egypt have shown the most improvement in terms of reduction in risk premium on sovereign debt since last quarter.

On the flip side, Greece, Belgium, Spain and Portugal have posted the worst quarterly performances. The report cited that “towards the end of the quarter Greece temporarily overtook Venezuela as the sovereign with the highest default probability and has been the worst performer this quarter, globally.”

Risk premium on sovereign debt issued by Greece has increased by 190 per cent to reach 1,003.4 basis points.

The report also highlighted that “all of the worst performers have come from Western Europe this quarter, with protection costs for the poorest performers more than doubling,” adding “major widening action in European sovereign credits indicates that the eurozone remains the hub and focus of the global debt crisis, none of the Western European Sovereign CDS (credit default swaps) have tightened this quarter”.

Analysts said Pakistan is unlikely to face major problems due to the worsening economic situation of Western European states. Mohammad Sohail commented “the country is not heavily dependent on exports. Most of our international trade is with the US and China so we should remain fairly insulated from the crisis unfolding in countries like Greece and Belgium.”

CMA is a wholly-owned subsidiary of CME Group, the world’s largest derivatives exchange. CME is considered one of the leading sources of independent data on credit markets.

Strengthening your currency is not a difficult proposition; you only have to cut down on dollars’ outflow and increase the inflow. Outflow can be curtailed through controlled imports or if and when the prices of major import commodity i.e. crude oil face southward. Increase in inflows can be achieved through increase in export items like textile products but that seems a far cry due to scarcity of electricity. There are other factors; like foreign investment in stocks etc but that is possible only if the political stability, as per investors’ perception is achieved.

In spite of dooms day scenario painted by prophets of doom, there are certain developments here and there that give you some reason to feel a bit of relief. Bloomberg Businessweek has recently reported that Pakistan’s rupee was headed for a weekly gain as stock inflows picked up and a drop in crude oil prices helped reduce the nation’s import bill.

The currency strengthened on each of the five days, its longest winning streak since April 2009, and overseas investors pumped a net $14.6 million into Pakistani shares in the first three days of this week, exceeding weekly tallies for the past two months. Pakistan imports 80 percent of the oil it uses and the cost of crude was $76.56 a barrel in recent trading, 0.8 percent less than at the end of last week.

“The reduced demand for dollars from oil importers helped the currency to strengthen,” said Mustafa Pasha, assistant vice president and economist at BMA Capital Management Ltd. in Karachi. “The rupee will remain under pressure as importers will need as much as $600 million to import oil next week.”

The rupee traded at 85.281 per dollar as of 9:35 a.m. in Karachi, 0.3 percent stronger than at the end of last week, according to data compiled by Bloomberg.

The central bank said yesterday its foreign-exchange reserves as of June 18 were $12 billion, up from $11.9 billion on June 11.

Pakistan is one of the richest countries of the world, yet it has to invite IMF every now and then and remains in perpetual domestic and foreign debt. Imagine, the country has the second largest salt mine in the world, fifth largest gold mine, seventh largest copper mine, fifth largest coal reserves, seventh largest wheat and rice production capacity (can be enhanced to be the largest), is eighth in the rankings of fresh water availability with 2,053 cubic meters of water per person in 1995.

Then what are the reasons of the poverty of one of the richest nations on earth? Mismanagement of its resources, poor economic management, greed of a few influential people to plunder whatever they can, its ever-growing population which is in fact multiplying as per Malthusian theory? Please do grumble and criticize as it is your right, but before doing that don’t forget to count your blessings.

Whatever are the reasons of its poverty, it is a fact that world’s one of the richest countries has one of the poorest economies. Look at other examples. Take the case of Dubai. What has it got in terms of natural resources? It is only a trading hub and it has thrived on that, thanks to legendary tribal wisdom of desert people. It has no agriculture, no mineral resources. It does not even have water of its own except, of course the sea water which it exploits to the maximum to become one of the happening economies.

Express Tribune has recently published an interesting analysis titled: Pakistan: poor economy, rich country by Saqib Omer Saeed. Please click Express Tribune to read and enjoy the article.

The problem with common people in understanding the macroeconomic concepts embedded in the budget and other political claims of the government is their lack of understanding of the basic concepts affecting their lives. Try to understand this:
When there is inflation, there is price hike of even the basic necessities like food and clothing. Inflation is triggered by real or engineered shortage of basic commodities and production inputs like wheat, electricity etc. This can be cured through many ways but someone has to keep a watchful eye on gross domestic product (GDP). If it falls, it spells disaster for economy and triggers inflation and recession. The Inflation and GDP are, therefore, closely related. Please read the following taken from http://www.investopedia.com
Many investors, especially those who invest primarily in fixed-income securities, are concerned about inflation. Current inflation, how strong it is, and what it could be in the future are all vital in determining prevailing interest rates and investing strategies.

There are several indicators that focus on inflationary pressure. The most notable in this group are the Producer Price Index (PPI) and the Consumer Price Index (CPI). The PPI comes out first in any reporting month, so many investors will use the PPI to try and predict the upcoming CPI. There is a proven statistical relationship between the two, as economic theory suggests that if producers of goods are forced to pay more in production, some portion of the price increase will be passed on to consumers. Each index is derived independently, but both are released by the Bureau of Labor Statistics. Other key inflationary indicators include the levels and growth rates of the money supply and the Employment Cost Index (ECI). (To learn more, read The Consumer Price Index: A Friend To Investors
The gross domestic product(GDP) may be the most important indicator out there, especially to equity investors who are focused on corporate profit growth. Because GDP represents the sum of what our economy is producing, its growth rate is targeted to be in certain ranges; if the numbers start to fall outside those ranges, fear of inflation or recession will grow in the markets. To get ahead of this fear, many people will follow the monthly indicators that can shed some light on the quarterly GDP report. Capital goods shipments from the Factory Orders Report is used to calculate producers’ durable equipment orders within the GDP report. Indicators such as retail sales and current account balances are also used in the computations of GDP, so their release helps to complete part of the economic puzzle prior to the quarterly GDP release. (For related reading, see The Importance Of Inflation And GDP and Understanding the Current Account In The Balance Of Payments.)
Other indicators that aren’t part of the actual calculations for GDP are still valuable for their predictive abilities – metrics such as wholesale inventories, the “beige book”, the Purchasing Managers’ Index (PMI) and the Labor Report all shed light on how well our economy is functioning. With the assistance of all this monthly data, GDP estimates will begin to tighten up as the component data slowly gets released throughout the quarter; by the time the actual GDP report is released, there will be a general consensus of the figure. If the actual results deviate much from the estimates, the markets will move, often with high volatility. If the number falls right into the middle of the expected range, then the markets and investors can collectively pat themselves on the back and let prevailing investing trends continue.

Following is the Program Note of IMF on Pakistan economy. For more details, please visit: http://www.imf.org/external/np/country/notes/pakistan.htm

Current IMF-Supported Program
25-month, US$11.3 billion Stand-By Arrangement (SBA), originally approved by the IMF’s Executive Board on November 24, 2008 and augmented on August 7, 2009. The Board completed the third review of the program on December 23, 2009.
Background
Until the economic crisis broke out in 2008, Pakistan had enjoyed a relatively robust economic performance. Warning signs emerged in 2007 and early 2008, as inflation began to rise and external imbalances arose, even though growth remained strong. Conditions worsened significantly in mid-2008 with the sharp increase in international food and fuel prices and the deterioration in the security situation. The widening fiscal deficit, due in large part to rising energy subsidies, was financed by credit from the central bank. As a result, the rupee depreciated and foreign currency reserves fell sharply. Inflation reached 25 percent in mid-2008, causing harm to vulnerable social groups.
Role of the IMF
In Fall 2008, the Pakistani authorities embarked on a stabilization program, supported by US$7.6 billion under a 23-month SBA. This exceptionally high level of financial support was necessary, given the country’s sizable external imbalances and the risk of large capital outflows. In August 2009, the IMF extended the program to 25 months and raised its support to US$11.3 billion to help address increased risks and financing needs. The program aims to:

* restore financial stability through a tightening of fiscal and monetary policies to bring down inflation and strengthen foreign currency reserves;
* protect the poor by strengthening the social safety net—this is a key element of the government’s policy strategy; and
* raise budgetary revenues through comprehensive tax reforms to enable significant increases in public investment and social spending required for achieving sustainable growth.

Progress to Date
The program got off to a good start and Pakistan’s economy has made progress toward stabilization. Macroeconomic imbalances have shrunk and inflation fell below 10 percent in mid-2009. More recently, however, inflation has been on the rise and reached 13 percent in March 2010. The exchange rate has become somewhat more flexible, and the current account deficit has narrowed considerably, helped by the decline in oil prices and a robust increase in workers’ remittances. As a result, foreign currency reserves have increased from US$3.3 billion in November 2008 (before the SBA approval) to US$11 billion in March 2010.
Fiscal policy continues to be affected by low economic activity and a difficult security environment. Following a series of interest rate increases in late 2008 and early 2009, demand for treasury bills increased, allowing the government to end its reliance on credit from the central bank. However, given the depressed economic activity, raising budget revenues proved difficult, and the authorities have been striving to maintain fiscal discipline by eliminating non-priority spending, while facing the need to accommodate additional large security spending. These efforts proved initially successful, but since July 2009, the authorities have repeatedly exceeded the quarterly budget deficit targets under the program.
Structural reforms have moved forward, but the agenda remains challenging. Important steps have been taken to strengthen bank supervision, bolster the social safety net, reform petroleum pricing and taxation, and liberalize the foreign exchange market. Also, significant steps have been made in preparation for the introduction of the value-added tax in July 2010. There has been some progress toward the reform in the electricity sector, but more needs to be done to eliminate the financial losses of electricity companies and other public enterprises, which impose a burden on public finances and pose a threat to macro-economic stability.
The Challenges Ahead
Modest signs of recovery in manufacturing (mainly in the textile sector) and exports suggest that the Pakistani economy is regaining momentum and economic growth in 2009/10 will reach, or even exceed, 3 percent, and could rise to 4 percent in 2010/11. However, adverse security developments continue to hurt domestic and foreign investors’ confidence, while electricity shortages continue to prevent the economy from achieving its potential. The pace and extent of the recovery of the global economy also remain uncertain.
Despite these risks, the program can continue to build on initial success in stabilizing the economy, but to achieve that, economic reform needs to command broad support. External donors made generous pledges to Pakistan at the donor meeting in Tokyo in April 2009; it is crucial that these pledges be disbursed promptly to support priority budget spending and reform. At the same time, however, external support should only be treated as a bridge to a greater domestic revenue effort, which will be indispensable to sustain development spending, achieve poverty reduction, and increase much-needed social outlays over the medium term. In this regard, the introduction of a broad-based value-added tax in July 2010 is essential.