Yesterday, the Executive Board of the International Monetary Fund (IMF) released the results of its third review of Pakistan’s economic performance under a program supported by the US $7.6 billion Stand-by Arrangement approved by the IMF in November 2008. Shortly after the IMF loan was made, the Pakistani government issued a statement addressing key questions regarding the financing package and attributing Pakistan’s financial decline mainly to “[a]dverse security developments, large exogenous price shocks (oil and food), and global financial turmoil.”

The review, which was completed December 23, 2009, was prepared by IMF staff following discussions that ended in November with Pakistani officials regarding the government’s economic and development policies. In advance of the review the Pakistani government issued a Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding which describes in detail “the policies that Pakistan intends to implement in the context of its request for financial support from the IMF.” The Letter of Intent also notes that, despite numerous external factors, the Pakistan economy has experienced some signs of stabilization. The Letter of Intent stresses that external financial support will be crucial in 2010 to the success of ongoing stabilization efforts.

The IMF review agrees in part with the Letter of Intent and acknowledges that “[d]espite rising political and security uncertainties, economic stabilization is progressing.” The review also notes that “[a]ll quantitative performance criteria for end-June and end-September were met, with the exception of the fiscal deficit targets.” The review does note that the implementation of fiscal policy measures still poses a challenge and “[d]espite the progress made on the stabilization front, Pakistan’s underlying vulnerabilities remain high and have increased in some areas.” In particular, the review states that “vulnerabilities are fueled by continued revenue shortfalls, an increase in nonperforming loans, energy subsidies, and large dependence on commodity imports.” The review also stresses that “[a] credible fiscal consolidation, strengthened competitiveness over the medium term, and improved governance are indispensable for reducing these vulnerabilities.”

In connection with completion of the review, the IMF disbursed to Pakistan an amount equivalent to US$1.2 billion, bringing total disbursements under the program to an amount equivalent to approximately US$6.54 billion.