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World Bank to lend Pakistan $350 million

The World Bank has approved a $350 million structural adjustment loan for Pakistan as its contribution to the $5.2 billion bailout package worked out by the International Monetary Fund for the cash-strapped country on Islamabad's acceptance of its tough conditions.

The loan will support Pakistan's commitment to improve governance in the key public-sector activities of banking, tax administration, public utilities, and public expenditure.

The loan, approved by the bank yesterday, will be disbursed in a single tranche.

It was approved on the basis of Pakistan's reform programme, the adequacy of its macroeconomic framework, and its balance-of-payments needs.

These three elements have all been worked out within the context of Pakistan's policy framework, with IMF collaboration.

The bank's loan will contribute much-needed resources within an overall financing plan that includes additional financing from the IMF and the Asian Development Bank.

Pakistan expects about $2 billion from the IMF, World Bank, ADB and some donor countries, and about $3.5 billion in the form of debt rescheduling by the Paris Club.

Financial transactions in the sectors covered by the loan account for almost half of Pakistan's gross domestic product, and poor performance in these areas is one of the key reasons for high public-sector deficits.

The banking reforms supported by the structural adjustment loan are a continuation of the steps taken under the $250 million banking sector adjustment loan provided by the World Bank in December 1997. These reforms aim to strengthen banking governance, bring in private-sector management to banks with some public ownership, arrest the flow of bad loans, curtail losses, and conserve the assets of nationalised banks prior to privatisation.

In the power sector, the main objectives of the bank's loan are:

1. to restore the financial viability of the Water And Power Development Authority and Karachi Electric Supply Corporation, and
2. to ensure that the National Electric Power Regulatory Authority becomes fully operational in order to regulate corporate entities and provide necessary comfort to investors and consumers.

Over the medium term, Pakistan's reform agenda will focus on:

1. completing the corporatisation process and establishing commercially oriented autonomous corporations, with NEPRA issuing licences for the new corporatised entities,
2. implementing theft and loss reduction programmes and introducing other efficiency improvements,
3. intensifying bill collection efforts from both public and private customers,
4. implementing financial and other restructuring measures, and
5. accelerating the privatisation programme for the thermal generation and electricity distribution companies.

The government has long been committed to the privatisation of the Sui Northern and Sui Southern companies through a strategic sale with management rights and the creation of an independent gas regulatory authority to promote competition in the sector and de-politicise tariff setting.

The future agenda for reform includes improving the financial discipline of the gas distribution companies, reducing the stock of overdue bills, and improving the legal basis for gas tariff setting and collections.

Pakistan will put in place a tax administration that is more efficient and responsive. The programme includes steps to reform tax administration, broaden the base of domestic taxes, further liberalise the trade regime, and increase tax revenues while these institutional reforms are being undertaken.

The reform agenda for tax administration envisages that the Central Board of Revenue will be transformed into the Pakistan Revenue Authority through an act of the National Assembly. The CBR is to increase the number of income-tax payers with tax deduction at source to 1.6 million while the law ministry is to increase the number of fully functioning tax tribunals from seven to 15 and collect Rs3 billion in tax arrears.

Public-sector expenditure reforms focus on adjustment in public-sector development programme allocations by imposing cutbacks on low-priority sections and retaining only projects with the highest priority.

UNI

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