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 SUMMARY Extended 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 (Country Report No. 13/287). The second tranche of SDR 360 million will be made available upon the completion of this review. Status of the program: All quantitative performance criteria (PCs) for end-September 2013 were observed except for the one on net international reserves. The indicative target on social transfer payments was also missed, but the technical problems that caused the shortfall have since been rectified. The structural benchmark for the first review was met with the preparation of the public sector enterprise action plan. Progress is satisfactory in fiscal and structural reforms. Modifications are proposed to end-December 2013 PCs on net international reserves (NIR) and the ceiling on the net foreign exchange swap/forward position. Corrective measures are being taken by the central bank to meet future NIR targets and to rebuild gross reserves, which have fallen to a critically low level. Key issues: Discussions focused on progress in addressing the main macroeconomic challenges facing the country, with a particular attention on: (i) challenges on the balance of payments and corrective measures 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 structural reforms to unlock Pakistan’s medium-term growth prospects, and (v) safeguarding the stability of the financial system. Risks to the outlook are tilted to the downside. Security problems, continued energy challenges, and delays in implementing program reforms could seriously damage growth prospects. There are also significant risks to the balance of payments. The mission conducted extensive outreach with representatives of civil society, donors, private sector representatives, and the media