1. This statement summarizes information that has become available since the staff report for the eight review under Pakistan’s Poverty Reduction and Growth Facility (PRGF) arrangement was circulated to the Board on June 9, 2004. It does not change the thrust of the staff appraisal.
2. In addition to strong external and consumer demand, there has been a significant increase in private investment in 2003/04. The government’s annual Economic Survey, published on June 10, shows that fixed investment increased by an estimated 1.6 percentage points to 16.4 percent of GDP in 2003/04 (July–June). Private investment has picked up significantly in the manufacturing and services sectors, as well as in housing. For 2004/05, the authorities are now targeting 6.5 percent economic growth, slightly higher than the projection in the staff report.
3. The results of a new household survey suggest a reduction in poverty. To gauge the impact of the economic policies of the past few years, the authorities conducted a small-scale household survey in April–May of this year, the results of which were presented in the government’s Economic Survey. This survey used a different methodology and was less comprehensive than the full-scale Household Consumption Expenditure Survey or the Core Welfare Indicators Questionnaire, both of which will be launched shortly, but for which results will become available only in 2005. The survey does indicate an improvement in social indicators (see Table). The reduction in poverty appears to have been most pronounced in urban areas, reflecting the rapid expansion in manufacturing and services that has provided more employment opportunities.
|Housing units with one room||38.1||…||25.0|
|Housing units with 1–4 rooms||55.0||…||68.3|
|Electricity (as source of lightning)||70.5||…||83.7|
|Population ever attended school||50.0||51.0||57.0|
|Net enrollment 5–9 years||42.0||42.0||56.0|
|Net enrollment 10–12 years||16.0||16.0||20.0|
|Net enrollment 13–14 years||9.0||9.0||12.0|
4. Consumer prices continued to rise in May. Twelve-month inflation rose further to 7.1 percent in May, while prices in the period July 2003–May 2004 were 4.2 percent higher compared to the corresponding period of the previous year. Core inflation has been edging upwards as well, but is still lower at 3.6 percent during July 2003–May 2004 compared to the same period of the previous year. Annual average inflation for 2003/04 as a whole is expected to slightly exceed the 4 percent target. The State Bank of Pakistan is continuing to gradually tighten its monetary policy and both short- and long-term interest rates have moved up further.
5. The fiscal and monetary outlook for 2003/04 remain as envisaged in the staff report. Quantitative performance criteria for end-June will probably be met. The external current account surplus may turn out slightly lower than projected in the staff report, as imports have accelerated somewhat in the last quarter. Some early repayments of external debts by public and private corporations are impacting the capital account. As a result, foreign exchange reserves declined slightly in the fourth quarter, although the end-June target should still be achieved.
6. The 2004/05 federal budget that was submitted to parliament on June 12 is consistent with the agreed consolidated deficit (excluding grants) of PRs 199 billion (4 percent of GDP). Revenue and expenditure aggregates are also broadly in line with the numbers presented in the staff report. The draft budget contains a number of proposed measures to broaden the tax base as planned under the program, including elimination of the sales tax exemption on cotton seed and introduction of a tax on share purchases. In addition, the draft contains several proposals to streamline tax rates and customs duties with a view to promote investment, as well as some proposals to extend existing exemptions and possibly introduce a few new ones (which, if implemented, could be a breach of a performance criterion). Key tax measures are: (i) to streamline the sales tax regime by putting most effective rates at 15 percent; (ii) to exclude all plant, machinery, and equipment from sales tax and tax withholding, and to reduce import duties on these items if they are not produced locally; and (iii) to significantly reduce import duties on cars (many of which are currently over 100 percent). Overall, the tax measures are likely to have a modest negative impact on tax revenues. The authorities also announced an increase in government wages by 15 percent and pensions by 8 to 16 percent, although the financial impact of this measure had not yet been reflected in the budget proposal. The authorities indicated that this increase will be accommodated by higher non-tax revenues. The 2004/05 budget is expected to be approved by end-June. As envisaged under the program, the staff will make a full assessment of the budget as approved by parliament during the ninth review under the PRGF.
7. Petroleum surcharge rates were returned closer to the levels prevailing prior to the latest spike in petroleum prices. This was made possible by the recent decline in international petroleum prices, which was not passed on to domestic consumers in the fortnightly adjustment made on June 15. International prices would have to decline further to allow the surcharge rates to return fully to their original levels. If international prices were to remain at their current levels, however, or go back up, the authorities will have to accept an increase in domestic petroleum prices if they are to avoid a major revenue shortfall.