Pakistan: Letter of Intent, Memorandum of Economic and Financial
Policies, and Technical Memorandum of Understanding to IMF
November 20, 2008
1. In the last decade, Pakistan’s economy witnessed a major economic transformation.
Ø The country’s real GDP increased from $60 billion in 2000/01 to $170 billion in 2007/08 (fiscal year starts July 1st).
Ø Per capita income rising from under $500 to over $1,000.
Ø The volume of international trade increased from about $20 billion to nearly $60 billion.
Ø Real GDP grew at more than 7 percent a year with relative price stability.
The improved macroeconomic performance enabled Pakistan to re-enter the international capital markets in the mid-2000s. Large capital inflows financed the current account deficit and contributed to an increase in gross official reserves to $14.3 billion (3.8 months of imports) at end-June 2007. Buoyant output growth, low inflation, and the government’s social policies contributed to a reduction in poverty and an improvement in many social indicators.
2. This strong macroeconomic performance resulted from the implementation of a
series of important structural reforms.
In the early 2000s, with financial support from international financial institutions (IFIs), including the IMF, the World Bank, and the Asian Development Bank, the government expanded the role of markets in the economy, privatized a number of large state-owned enterprises, established market-based regulatory bodies, and took steps to reduce the cost of doing business in Pakistan.
3. The macroeconomic situation, however, deteriorated significantly in 2007/08 and in the first four months of 2008/09
Owing to adverse security developments, large exogenous price shocks (oil and food), global financial turmoil, and policy inaction during the political transition to the new government.
Ø Real GDP growth slowed to 5.8 percent in 2007/08 (6.8 percent in 2006/07), reflecting weaker performance of the agricultural and manufacturing sectors.
Ø Headline CPI 12-month inflation rose to 25 percent in October 2008, with core inflation (excluding energy and food) increasing to 18 percent.
Ø The external current account deficit widened to about $14 billion or 8½ percent of GDP in 2007/08.
4. With the surplus in the financial account of the balance of payments declining to $7.7 billion, from $10.1 billion in 2006/07, this led to a decline in the gross international reserves of the State Bank of Pakistan (SBP) of $5.7 billion, to $8.6 billion at end-June 2008.
5. The fiscal deficit (excluding grants) is targeted to decline to 4.2 percent of GDP (PRs 562 billion) in 2008/09, from 7.4 percent in 2007/08.