Pakistan: Staff Report for the First Review Under the Extended Arrangement Under the Extended Fund Facility, Request for Waiver of Nonobservance of a Performance Criterion and Modification of Performance Criteria

EXECUTIVE SUMMARYExtended Arrangement under the Extended Fund Facility (EFF): A 36 month,SDR 4,393 million (425 percent of quota) Extended Arrangement under the ExtendedFund Facility was approved by the Executive Board on September 4, 2013 (CountryReport No. 13/287). The second tranche of SDR 360 million will be made available uponthe completion of this review.Status of the program: All quantitative performance criteria (PCs) for end-September2013 were observed except for the one on net international reserves. The indicativetarget on social transfer payments was also missed, but the technical problems thatcaused the shortfall have since been rectified. The structural benchmark for the firstreview was met with the preparation of the public sector enterprise action plan.Progress is satisfactory in fiscal and structural reforms. Modifications are proposed toend-December 2013 PCs on net international reserves (NIR) and the ceiling on the netforeign exchange swap/forward position. Corrective measures are being taken by thecentral bank to meet future NIR targets and to rebuild gross reserves, which have fallento a critically low level.Key issues: Discussions focused on progress in addressing the main macroeconomicchallenges facing the country, with a particular attention on: (i) challenges on thebalance of payments and corrective measures to address external vulnerabilities andrebuild reserves; (ii) enhancing tax revenues by broadening the tax net and improvingtax administration; (iii) protecting the most vulnerable; (iv) implementing structuralreforms to unlock Pakistan's medium-term growth prospects, and (v) safeguarding thestability of the financial system. Risks to the outlook are tilted to the downside. Securityproblems, continued energy challenges, and delays in implementing program reformscould seriously damage growth prospects. There are also significant risks to the balanceof payments. The mission conducted extensive outreach with representatives of civilsociety, donors, private sector representatives, and the media.