Pakistan: Second Review Under the Extended Arrangement and Request for Waivers of Nonobservance of Performance Criteria; Staff Report; Press Release; and Statement by the Executive Director for Pakistan

EXECUTIVE SUMMARYExtended Arrangement under the Extended Fund Facility (EFF): A 36 month,SDR 4,393 million (425 percent of quota) Extended Arrangement under the Extended Fund Facility was approved by the Executive Board on September 4, 2013 and the first review was concluded on December 19, 2013, with a total of SDR 720 million disbursed. A third tranche of SDR 360 million will be available upon the completion of this review.Status of the program: Program performance is mostly positive, with most performance criteria (PCs) met including those on the fiscal deficit and net international reserves (NIR). Two quantitative performance criteria for the second review were missed:(i) The ceiling on the net swap/forward position; and (ii) the ceiling on government borrowing from the State Bank of Pakistan (SBP). Since end-December 2013, SBP has continued to unwind the swap/forward positions and the government has reduced its borrowing from the SBP to reach program limits. The indicative target on social transfer payments was also missed for a second time due to further administrative difficulties which have since been addressed. The progress on fiscal and structural reform is mostly satisfactory. Of six structural benchmarks for this review, all have now been completed (albeit some with a delay). The SBP and government have taken actions since the last review to meet future NIR targets and to rebuild gross reserves.Key issues: Discussions focused on progress in addressing the main macroeconomic challenges facing the country and remedial actions to meet missed performance criteria. Particular attention was given to: (i) challenges on the balance of payments and efforts to address external vulnerabilities and rebuild reserves; (ii) enhancing tax revenues by broadening the tax net and improving tax administration; (iii) protecting the most vulnerable; (iv) implementing further structural reforms to unlock Pakistan's medium-term growth prospects, and (v) safeguarding the stability of the financial system. The mission marginally raised its growth forecast, but risks to the outlook remain tilted to the downside. Security concerns remain a critical risk factor. Delays in implementing key reforms—to address energy challenges, improve the business climate, broaden the tax base and improve tax administration—could also seriously damage prospects. There continue to be significant risks to the balance of payments. For security reasons, the mission was held offsite. However, a joint press conference was held, along with several bilateral interviews with the media.