November 8, 2003	Saturday	Ramazan 12, 1424

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ISLAMABAD, Nov 7: The government has assured the IMF that it will submit to parliament a draft anti-money laundering law reflecting best practices and Financial Action Task Force on Money Laundering (FATF) recommendations by Jan 1, 2004. A draft corporate bankruptcy law will be submitted to parliament by June 30, 2004.

These assurances were extended to the Fund in the Letter of Intent (LoI), sent to Mr Horst Kvhler, Managing Director of IMF on Oct 11 by Finance Minister Shaukat Aziz and State Bank Governor, Dr Ishrat Hussain.

As intermediate steps to bring the National Savings Scheme (NSS) yields down to those prevailing in the market, the LoI says the government would strictly apply the existing formula agreed to on adjusting NSS rates to reflect PIB yields in January 2004 and agree with Fund staff in March 2004 on a new formula that will align NSS rates to government bonds of the same maturity.

Financial penalties for early retirement of NSS instruments will be reviewed by March 31, 2004, with a view to discouraging early encashment.

To further improve data dissemination and move closer to subscribing to the Special Data Dissemination Standard (SDDS), the government plans to meet by end-2003 the requirements of quarterly national accounts and of a regular survey on wage earnings. By the end of 2003, the government intends to finalize work on establishing the Pakistan Bureau of Statistics (PBS) consolidating various existing agencies. The PBS will be granted greater autonomy to enhance the quality of our statistics.

The LoI has proposed the ninth disbursement (subject to the eighth review which will focus on the 2004/05 budget) in an amount of SDR 172.28 million for March 20, 2004 based on end- December 2003 data, and the tenth disbursement in an amount of SDR 172.28 for September 20, 2004 based on end-June 2004 data (ninth review).

The LoI says that there are two significant risks to the fiscal objectives for FY 2003/04. First, until a comprehensive restructuring of the energy sector is completed, there is risk that the utilities’ deficits could be higher than expected. For example, line losses could be larger than envisaged, or it may be difficult to increase bill collection in the federally administered tribal areas (FATA), forecast at PRs 2 billion in 2003/04. However, the more normal hydrological conditions now prevailing, it is hoped could be a mitigating factor.

Second, the allocations for wages and pensions are seen to be tight, despite the upward adjustment mentioned above, in light of the increases in salary and pension rates. In case of unforeseen adverse developments in these or other areas,the LoI promises that the government would seek to safeguard achieving the programme targets by cutting non-priority expenditures on running of the civil government while protecting social- and poverty-related expenditures.

According to the LoI a key objective of the current budget will be to increase the number of income taxpayers (by 500,000 in three years), including through the use of background information such as utility bills and registers of car and cell phone owners.

The government also intends to broaden the coverage of the General Sales Tax (GST) and in this connection will prepare an action plan which will be submitted to the cabinet in February identifying specific steps needed for this.

Any revenue gains would be used, it is promised, to strengthen social sector service delivery. In addition, the government will propose to parliament to remove income and sales tax exemptions and adopt other tax base broadening measures yielding PRs 5 billion in estimated revenues in the 2004/05 budget.

The LoI says that the government has finalized a strategy to contain the ‘Benami’ practice (whereby assets are held in the name of a person who is not the true beneficiary) which will be implemented with a view to enhancing compliance with taxes and supporting Customer Due Diligence for banks. A task force has completed a first round of consultations with stakeholders and provincial governments.

According to the LoI progress continues to be made towards the unbundling of WAPDA. The staff of WAPDA has been allocated to the successor entities. However, the legal transfer of assets and liabilities has been delayed ill end of 2003 essentially because it has taken additional time to obtain the consent of official lenders to transfer the debt to unbundled entities. We expect the new tariffs of WAPDA’s successor companies to be determined by January 2004. The government has fully accepted the principle of differentiated electricity tariffs by region.

The government has promised to adjust energy prices regularly to reflect international market developments. In the case of petroleum prices, fortnightly adjustments in line with import cost will continue, while maintaining stable average tax rates. For gas prices,the government will apply the framework agreed with the World Bank, notably through the phased rationalization of Pakistan Petroleum Limited (PPL) wellhead prices, semi-annual reviews of wellhead and consumer prices, and will endeavour to eliminate cross subsidies to the domestic sector (except lifeline consumers) by end-2005.

For electricity, KESC and WAPDA (and its successor companies) we will adjust tariffs as provided under the NEPRA Act, with the government notifying adjustments as determined by NEPRA within 30 days. This adjustment will take effect on the day of notification. However, downward adjustments will not be notified until and unless final data are available showing that WAPDA’s and KESC’s respective cumulative accrual deficits during the preceding quarter have been at or below the levels targeted in Table 1(b).