Auto industry imports remained under an intensified exchange restriction regime, contrary to a condition of the IMF programme, however, during the first quarterly review the IMF team and the government agreed to remove several items from the intensified exchange restriction including those related to the auto industry by the end of June.
This was stated by Adnan Mazarei, Mission Chief for Pakistan, International Monetary Funds (IMF). This agreement therefore led to the second tranche release of the 7.6 billion dollar stand-by arrangement (SBA) programme on March 30.
Mazarei said that Pakistan had projected that in fiscal year 2008-2009, which begins in June, growth would be 3.5 percent. More recently, the government has revised the 2008-2009 growth projection to 2.5 percent. "For 2009-2010, we had originally followed last year and envisaged a growth of 5 percent, and we have lowered this to 4 percent, but the risks are considerable.
And it is likely that the growth projection, using actual outcome for 2009-2010, may be lower", he added. Mazarei maintained that political events were certainly adding to the general uncertainty and insecurity that would affect the economic climate, the investment climate, and would raise financial risks. He said, "Initial developments under the programme have been positive.
The exchange rate has been broadly stable, enabling the State Bank of Pakistan (SBP) to nearly double its gross reserves since the late 2008. Inflation has been falling more rapidly than expected and the external current account deficit has been narrowing. T-bill auctions have been consistently oversubscribed, following the 200-basis point increase in the SBP discount rate last November, and the government has retired some of its debt to the SBP".
He added, "The SBP discount rate remains on hold, but there could be scope in the future to lower it if inflation abates further, the external reserve position continues to improve, and the government can sell its T-bills to banks and non-bank private investors. Exchange rate flexibility will continue to facilitate external adjustment".
Mazarei stated that the global economic and financial environment had deteriorated significantly since the start of the Pakistan program last fall. While oil prices are low, exports are falling and external financing is more difficult, as in many other emerging countries, and there are increasing risks to remittances.
And, also, as you know, the political situation has become more difficult.According to a statement issued by the SBP, the government of Pakistan during Q1-FY09 borrowed Rs 264.4 billion from the SBP, while this amount reduced to Rs 44.3 billion during Q2-FY09. The government has committed itself to limiting SBP budget financing to zero during 1 October, 2008 to 30 June, 2009. While the government has retired Rs 28 billion worth of debt to the SBP during March 7 and March 14.
The IMF statement says that in the past, Pakistan had both stand-by arrangements and an arrangement under the Poverty Reduction and Growth Facility (PRGF). Loans under the PRGF carry an annual interest rate of 0.5 percent. However, PRGF loan amounts available are limited to a maximum of 185 percent of quota for the initial three-year arrangement, and then to 90 percent of quota for second time the facility is used. Given Pakistans large financing needs, borrowing under the PRGF was not an option. Also, the IMF-supported programme does not envisage a new tax on agricultural income.