December 31, 2001	Monday	Shawwal 15, 1422

The International Monetary Fund (IMF) does not see marked improvements in Pakistan’s balance of payments position and forecasts an additional deterioration in the external sector of the orders of $500 to 600 million, should the current conditions prevail for another two quarters.

The IMF’s latest Country Report on Pakistan talks about mixed economic and business trends and at the same time expects that the government will have to carry out new set of reforms to continue qualifying for next 11 equal disbursements (each $109.5 million), out of the total of $1.3 billion recently concluded three year Poverty Reduction Growth Facility (PRGF) programme.

The report says that the September 11 attacks have led to a substantial revision of balance of payment projections for 2001-02, increasing the need for exceptional financing. Compared with the projections elaborated for the third review under the Standby Agreement, the current account deficit excluding grants, has been revised upward by $300 million. Exports are expected to remain “broadly flat” in US dollar terms, against an 8 per cent growth target before the September 11 attacks, reflecting cancellation of orders, temporary difficulties in freight and other disruptions in normal trade relations due to war in Afghanistan, as well as lower prices for cotton and other textile products. Some recovery is expected during the second half of the year, in part boosted by the European Community’s decision to increase quotas for textile and clothing products by 15 per cent and to reduced duties by about 7 per cent effective January 1, 2002.

The impact of this measure has been conservatively estimated at $100 million for this fiscal year, and $200 million for the following two years. Imports of goods have also been revised upward, because of the lower activity and commodity prices, while the services’ balance is deteriorating due to higher insurance premia for cargo trade to and from Pakistan. The annual cost of the later is estimated at about $160 million, although it is expected to partly offset by lower travel expenditure abroad.

Shortfalls are also projected in the capital account reflecting lower foreign direct investment and privatisation proceeds. At the same time, the projections assume that the estimated short term capital inflows that have already taken place in the immediate aftermath of the attack will not be reversed, although continuation of such inflows is not expected. “All the projections depend critically upon the assumed return to normal economic and trade conditions by early 2002”.

With the dissipation of the impact of the present crisis and impact of structural reform, the external position should improve in the outer years of the programme. Over the medium term, external current account deficit (excluding official transfers) is projected to narrow to 2.6 per cent of GDP by 2003-04, and subsequently stabilise around 2.0 per cent of GDP. Export volume growth is expected to be sustained at about 6.0 per cent a year on average as a result of structural reforms, the recent exchange rate adjustment, and expected further gains in competitiveness. Over the longer term, import volumes are projected to grow about 5.5 per cent a year, consistent with the long-run growth and investment rates. The capital accounts should improve as private investment inflows respond to a greater confidence and the country’s improved repayment capacity.

Accordingly, substantial exceptional financing for the period is required. expected continuations include programme lending by the World Bank ($1.5 billion) and the Asian Development Bank (ADB) $1.4 billion) - all highly tentative for outer years and based on the assumptions of continued support at broadly the 2001-02 levels - as well as cash grants and commodity support. The residual gap has been filled by the IMF under the PRGF and a debt rescheduling by the Paris Club and other bilateral creditors during the period of the Fund arguments.

The IMF report says that a clear and credible path towards a sustainable external debt position is a key condition to reach the programme’s growth and investment objectives and achieve a sustainable balance of payment positions. For a poor country, Pakistan’s external public and publicly-guaranteed debt of 260 per cent of exports (and even higher if private debt is included) is unsustainable, deterring investment and severely constraining the resource available for social development and poverty reduction. As envisaged under their debt reduction strategy, the authorities therefore plan to reduce non concessional external borrowing to a the minimum required to meet balance of payment needs.

“Risks to the medium term viability of the balance of payments include failure to achieve a significant reduction in the debt burden but also weaker export growth should the global economy deteriorate further, or should the current conflict be prolonged”, the report warned. Another risk would arise if a return of drought condition would necessitate additional food imports. In addition, external balances remain vulnerable to higher oil prices - an increase in the world crude prices by $1 entails, all other things equal, a deterioration of the current account by about $90 million (0.2 per cent of GDP).

The report said that Pakistan always maintained a sound record in meeting debt service obligations to the IMF and based on the above scenario, Pakistan should not encounter difficulties to pay to the Fund. Assuming that all disbursements under the PRGF are made, Pakistan’s liabilities to the Fund would peak at a maximum to 5.5 per cent of total public and publicly-guaranteed debt and 16 per cent of projected growth of goods and services in 2002-03. Debt service obligation would peak at 3.6 per cent of exports in 2002-03 and decline to 1-1.5 per cent in the medium term, and would exceed 12 per cent of gross official reserves after 2002-03.

The proposed level of access and phasing is based upon the size of Pakistan’s balance of payments requirements, including the need to reconstitute reserves to more comfortable levels; the satisfactory track record of macroeconomic performance and the policy actions over the last two years, including the recently expired standby agreement; and the strength of the propose programme.