Pakistan WT/TPR/S/95
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I. ECONOMIC ENVIRONMENT
(1) OVERVIEW
1. Economic growth in Pakistan has slowed since the previous Trade Policy Review of Pakistan
in 1995.  After accelerating during the period 1993/94-1995/96, real GDP growth slowed sharply
from 5.0% in 1996/97 to 1.2% in 1997/98 and has fluctuated around 4% since then;  in 2000/01,
drought had a negative impact on economic growth.  With population growing at a steady rate and therupee depreciating against the US dollar, Pakistan's real GDP per capita has dropped gradually below
its early 1990s level.  The social consequences of this deteriorating economic performance have been
serious.  The unemployment rate, after rising from 4.8% in 1994 to 6.1% in 1997 has stabilized at
around the higher rate.  At the same time, there has been a marked rise in the incidence of poverty;
nearly one third of the population, particularly in rural areas, now fall below the poverty line,compared with one fifth a decade ago.
1
2. Pakistan's poor economic performance can be attributed, inter alia,  to fiscal and current
account imbalances, caused by inappropriate macroeconomic policies, as well as deep-rooted
structural weaknesses, notably the State's prominent direct role in the economy and a tax system that
appears to have been used more as an instrument of economic policy whose market distorting effectsare minimized than as a source of tax revenue.  Political instability and weak governance have also
contributed to poor economic performance.
3. Recognizing the need to address these macroeconomic imbalances, structural weaknesses and
related social problems, and thereby revive the economy, the Government launched a comprehensive
Economic Revival Programme in October 1999.  Policy changes were backed by a one-year IMF
Stand-By Arrangement;  for the first time in its history, Pakistan completed such a programme.  While
the resulting market-oriented policy reforms seem to have contributed to higher growth andsubstantially lower inflation, challenges stemming, inter alia , from a narrow tax base, state-ownership
of businesses and a narrow production/export base remain.
(2) R
ECENT ECONOMIC PERFORMANCE
(i) Growth, employment, and poverty
4. After a period of rising real GDP growth (1993/94-1995/96)2, the economy has progressed at
a slower and stop-go pace (Table I.1).  This is the outcome of difficulties in addressing
macroeconomic imbalances as well as deeply rooted structural weaknesses, which were compounded
by erratic behaviour in the agricultural sector and its impact on manufacturing, the weak performance
of large-scale manufacturing (particularly sugar processing), and a sharp decline in real investment.3
These difficulties were exacerbated by economic sanctions (i.e. the almost complete suspension of the
inflow of financial aid for non-humanitarian purposes) in the wake of the May 1998 nuclear tests4,
                                                     
1 Ministry of Finance (2000a).
2 GDP growth does not take into account the informal economy.
3 Ministry of Finance (2000b);  and Asian Development Bank (2000a).
4 The G-7 countries imposed a range of economic sanctions while the IMF suspended its Enhanced
Structural Adjustment Facility (ESAF) and Extended Fund Facility (EFF) programmes with Pakistan as well asits Official Development Assistance.  The pace and leve l of economic activity were adversely affected by a
sharp decline in the private capital inflows and erosion of confidence (State Bank of Pakistan, 1999;  andMinistry of Finance, 2000c).WT/TPR/S/95 Trade Policy Review
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prompting the Government to take extraordinary policy measures.5  On the other hand, the subsequent
recovery has been supported by bumper crops (mainl y cotton, wheat, and rice) and growth in services
(mainly finance, insurance).  However, in 2000/01 growth performance suffered from unprecedented
drought, causing serious damage to agriculture.  Real GDP growth is expected to improve gradually to
around 6% by 2003/04;  the realization of the growth target depends on enhanced productivity
resulting from the redirection of investment to export-oriented activities through structural reformsunder the IMF programme (Box I.1).
6
Table I.1
Economic developments, 1994-2001
1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01a
Average annual growth rate (%)
Real GDP, market price 5.1 5.0 1.2 1.2 3.7 4.4 3.3
Private consumption 21.9 14.6 17.9 4.5 -88.4 965.0 11.7
Gross domestic investment 13.3 16.0 7.8 1.5 1.4 8.7 1.8
Exports of goods and services 22.7 14.9 9.0 13.0 2.2 14.0 17.5
Imports of goods and services 21.9 25.4 11.0 -7.0 6.2 13.4 19.1
Inflation 13.0 10.8 11.8 7.8 5.7 3.6 4.7b
Unemployment rate (%)c4.8 5.4 5.4 6.1 5.9 5.9 5.9
Memorandum:
Population (million) 120.9 123.9 126.9 130.0 133.0 136.0 139.08
GDP/capita (US$ current prices) 504.7 515.1 496.6 476.9 472.1 452.0 427.2
Non-financial public sector
finances
Overall fiscal balance(US$ million)-3,414.8 -4,106.2 -4,015.7 -4,745.6 -3,829.4 -3,994.5 -3,177.7
Overall fiscal balance
(% of GDP)-5.6 -6.4 -6.4 -7.7 -6.1 -6.5 -5.3
Tax burden (% of GDP) 13.7 14.3 13.4 13.2 13.3 12.8 13.6
Current public expenditure
(% of GDP)18.4 19.8 18.8 19.8 18.6 20.2 19.0
Net public debt (% of GDP) .. 86.3 87.5 89.4 91.2 86.2 92.6
Net domestic public debt (% of
GDP).. 43.2 43.6 46.0 40.0 40.6 38.8
Interest payments on federal debt
(% of current public expenditure)36.5 40.7 44.5 47.3 47.2 49.7 46.9
Annual export volume growth
rate (1995=100)c23.5 -20.8 18.6 -5.8 -3.0 12.4 12.0
.. Not available.
a Estimates.
bJ u l y - A p r i l  o n l y .c Calendar year instead of fiscal year (e.g. 1994/95 should read 1994).
Note: Average annual growth is calculated using current prices except for GDP.
Source: Ministry of Finance (2001),  (Tables 1.1, 1.5, 1.6, 4.2, and 12.9);  IMF (2001), International Financial Statistics,
September;  and IMF, Pakistan – Review under the stand-by arrangement and request for waiver of performance
criterion  (various issues).
                                                     
5 Fiscal (reduction of development expenditure, 25% in crease in gasoline prices, revision of structure of
telephone tariffs) and exchange rate (devaluation, exchange rate float in the interbank market) measures,inter alia,  were adopted to contain the threat of imminent balance-of-payments difficulties and to sustain
domestic economic activity (IMF, 1998).
6 IMF (2000).Pakistan WT/TPR/S/95
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Box I.1:  Developmental and social challenges
Following a broad consultative process with the civ il society (business leaders, professionals, academics,
non-government organizations), a sustainable development strategy has been set within the December 1999Economic Revival Programme, which is aimed at stabilizing the economy, rebuilding investor confidence,alleviating poverty, and promoting good governance.  In addition to macroeconomic objectives discussed inthis chapter, the programme focuses, inter alia, on the agriculture sector, promoting small and
medium-scale industries, expanding the oil and gas subsector, and promoting the information technology
industry.
Progress on poverty reduction, particularly with slackening economic growth, and poor social indicators has
been a major concern.  Under the 1997 Pakistan Poverty Alleviation Fund (PPAF), a number of specialprogrammes have been undertaken including:  a small public works programme to create employment and
income opportunities for the poor;  the establishment of a micro-credit bank (as from August 2000);  a food
support programme (as from 1 July 2000, wheat (flour), edible oil, and sugar provided to the poor thro ugh a
coupons system) to insulate the poorest segments of population (monthly income of up to PRs 2,000) fromthe adverse effects of economic adjustment;  and the re vitalization (including the rise of monthly transfers)
of the system of social safety ( Zakat  and Ushr ).  As from 2000, action has been taken to increase social
expenditure (under the Public Sector Development Programme, the Social Action Programme (SAP), and
Food Support Programme) by 28% (2000/01);  total expenditure in this area is targeted to increase from
2.5% to 2.8% of GDP.  To ensure that this type of expenditure is protected, quarterly quantitative targetshave been operated.  A comprehensive poverty reduction strategy is also being prepared by theGovernment.
So far the Economic Revival Programme has been supported by an IMF Stand-By credit of about
US$596 million (until end September 2001);  the Asian Development Bank and the World Bank were to
consider adjustment loans.  Pakistan has met targets set under the IMF loan.
Source: Ministry of Finance (2000a, b, and c);  IMF Press Release No. 00/64 , 29 November 2000 [Online].
Available at:  http://www.imf.org/external/np/sec/pr/2000/pr0064.htm [4 December 2000];IMF (2000);  World Bank (2000);  Asian Development Bank (2000a and b).
5. Since 1994/95, there have been no major changes in the composition of Pakistan's GDP and
employment;  the economy continues to be dominated by services and agriculture.  The share of the
manufacturing7, construction, and wholesale and retail trade services in Pakistan's GDP have declined
steadily, while that of electricity and gas distribution has increased.  The share of agriculture,
livestock, fisheries, and forestry (single largest employer) in total employment has followed anupward trend, while that of other sectors has remained stable or declined (Table I.2).
6. Since 1995, the unemployment rate has risen from 5.4% to 5.9% (2000), while the number of
unemployed persons has increased (by 31%), much faster than the labour force (which grew by
20.2%).
7. The slowdown in economic growth and conse quent rise in unemployment together with
relatively high population growth have contributed to a marked increase in the incidence of poverty
particularly in the second half of the 1990s.
8  The proportion of the population below the poverty line
has risen from 20% a decade ago to 30%, with the majority of the poor (about 70%-80% of poor
households) living in rural areas.  About two fifths of the population is without access to safe drinking
water and more than half has no access to sanitation.  Literacy has remained low (compared with
                                                     
7 The decline of the manufacturing sector was, inter alia,  due to the adverse impact of economic
sanctions and resultant foreign currency crisis that led to drastic reduction in domestic and foreign investmentand a contraction of imports (Asian Development Bank, 2000a).
8 Ministry of Finance (2000a);  and U.S. Commercial Service (1999a).WT/TPR/S/95 Trade Policy Review
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elsewhere in the region and low-income countries wo rld-wide) and gender disparities in education are
significant.  Health indicators, however, have b een improving slowly.  A Social Action Programme
(SAP) has been operated since 1992, with the financial support of the World Bank and other donors,
with a view to expanding and improving the country's very weak social services (in elementary
education, primary health, welfare, and rural water supply and sanitation) and creating employment.9
The sharp rise in poverty has prompted intensified efforts by the Government in recent years to
address its causes and consequences (Box I.1).10
Table I.2
Structure of the economy, 1994-2001
1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01a
Share of main sectors in GDP (%, current prices) 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Agriculture 25.9 25.2 26.4 27.3 27.0 26.3 25.0
Mining and quarrying 0.5 0.6 0.5 0.5 0.5 0.6 0.6
Manufacturing 17.1 17.0 17.0 15.8 15.5 15.1 15.7
Services 56.5 57.2 56.2 56.3 57.0 58.0 58.7
Electricity, gas, and water 3.3 3.8 3.4 3.8 4.5 3.8 3.6
Construction 3.6 3.6 3.6 3.6 3.2 3.3 3.1
Wholesale and retail trade 16.3 16.5 15.8 15.2 15.0 15.0 15.5
Transport, storage, and communication 10.1 9.5 9.7 10.2 10.1 10.7 11.1
Finance and insurance 3.3 3.4 3.6 3.1 3.2 3.3 3.4
Ownership of dwellings 4.3 4.3 4.3 4.4 4.5 4.6 4.6
Public administration and defence 7.7 8.2 7.6 7.4 7.6 8.3 8.3
Other 7.8 8.0 8.2 8.6 8.8 9.0 9.2
1995 1996 1997 1998 1999 2000
Share of sectors in total employment (%)b
Agriculture 46.8 46.8 44.2 47.3 47.3 47.3
Mining and manufacturing 10.5 10.5 11.2 10.2 10.2 10.2
Services 42.7 42.7 44.7 42.6 42.6 42.6
Electricity, gas, and water 0.8 0.8 1.0 0.7 0.7 0.7
Construction 7.2 7.2 6.8 6.3 6.3 6.3
Transport 5.1 5.1 5.7 5.5 5.5 5.5
Commerce 14.5 14.5 14.6 13.9 13.9 13.9
Other 15.1 15.1 16.6 16.3 16.3 16.3
a Estimates.
b Including employed persons of ten years of age and above.
Source: Ministry of Finance (2001), Tables 1.5 and 12.11.
(ii) Price inflation
8. Since 1994/95 consumer price inflation has dropped markedly, from just over 13% to 3.6% in
1999/00.  This is the result of tight monetary policy, improved supply of essential items, little upward
movement in administered prices, reduction in tariff rates, depressed international prices of Pakistan's
major imports (including non-oil commodities) and the buoyant domestic output of food crops.  In thesecond half of 2000, however, inflation was expected  to pick-up owing to exchange rate depreciation
as well as petroleum and gas price adjustments and the carry-over effects of increases in the prices of
                                                     
9 IMF (1998).
10 Ministry of Finance (2000a).Pakistan WT/TPR/S/95
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key products (fuel, wheat, and medicines) in the absence of comprehensive structural reforms.11
Despite the impact of drought, and as a result of prudent financial policies and still large food
inventories, annual inflation in 2000/01 was expected to be 4.4%, better than envisaged.  Price
stabilization is to be pursued by close monitoring of money supply and by augmenting agricultural
supplies;  inflation is forecast to moderate steadily to 3.5% by 2003/04.
(3) MAIN MACROECONOMIC POLICY DEVELOPMENTS
(i) Monetary and exchange rate policy
9. Monetary policy has been increasingly conducted by the State Bank of Pakistan (SBP) with
market-based instruments;  interest rates have been liberalized and new lending is on a prudent basis.
The SBP manages domestic liquidity largely by intervening in the secondary market through open
market operations (OMOs);  this involves the purchase or sale of government securities by the SBP inorder to supply or absorb bank reserves.
12  To meet the short-term liquidity requirements of the money
market, the SBP provides a "lender of last resort" faci lity to eligible financial institutions on the basis
of three-day Repo, and charges the discount rate.  Since June 1998, the SBP has allowed banks and
other financial institutions to determine their own deposit rates, subject to principles of Sharia
(Chapter IV(5)(iii)(a)).
10. On 19 May 1999, Pakistan shifted (ahead of schedule) from two-tier exchange rate
(introduced on 22 July 1998) to a unified exchange rate system, by abolishing the official rate13;  since
then the value of the rupee has been determined by supply and demand in the inter-bank and the open
(authorized dealers) market.  The SBP intervenes in the sale and purchase of foreign exchange from
any source, within or outside the country, on its own account at rates and timing of its choice;  while
authorized dealers are free to fix their rates, th e spread between their spot buying and selling rates
must not exceed PRs 0.50 per US dollar.  To facilitate a smooth transition to a fullymarket-determined exchange rate, the authorities have allowed for a sizable up-front exchange rate
adjustment (i.e. a 15.5% depreciation against the US dollar in the period May-October 2000) and
tightened monetary policy.  On 21 July 2000, the unified exchange rate system was replaced with a
free-floating system against the US dollar.
11. Foreign exchange controls and restrictions (introduced at the same time as the dual exchange
rate system) have been lifted
14;  the requirement to surrender 5% of export proceeds to the SBP has
                                                     
11 IMF (2000);  and Asian Development Bank (2000c).
12 State Bank of Pakistan online information.  Available at:  http://www.sbp.org.pk/ monetary.htm
[29 July 2000].
13 This system, which was introduced on 21 July 1998 to cope with balance-of-payments difficulties,
comprised an official exchange rate (determined by th e State Bank of Pakistan), a floating inter-bank rate
(FIBR) (determined by market forces), and a composite rate  (based on a specified ratio of the official rate and
the FIBR).  The composite rate was used for all tran sactions except for specified categories subject to the
official exchange rate;  the system, which was meant to operate a de facto  devaluation of the rupee, favoured
exporters and expatriate workers wishing to remit money to Pakistan, compressed non-essential imports, andcontained price increases of essential imports and repayments of external debt, thereby limiting the impact oninflation and the overall fiscal deficit.  The system, whic h is contrary to Pakistan's IMF Article-VIII obligations,
could have led to a discriminatory and price/cost distorting multiple exchange rate practice (State Bank ofPakistan online information.  Available at:  http://www.sbp.org.pk/annual.htm#Download
[19 September 2000]).  Prior to the dual system Pakistan pursued a managed floating exchange rate policy.
WTO document WT/BOP/S/11, 28 March 2000.
14 These measures, inter alia,  comprised:  restrictions on withdrawal of foreign exchange from foreign
currency deposits;  a minimum margin of 30% was imposed on all Letters of Credit (Chapter III(2)(iv)), exceptfor essential commodities;  the reduction of the markup rate on export refinance from 11% toWT/TPR/S/95 Trade Policy Review
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also been abolished.15  Individuals and firms in Pakistan may hold foreign currency bank accounts and
may freely import and export currency.  Foreign firms (other than banks) with investments in Pakistan
may remit profits and capital without prior SBP approval.
0102030405060708090100
1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01Chart I.1                             
Exchange rate developments, 1994-2001
Rupees per unit of forei gn currenc y, avera ge rate
State Bank  of Pakistan (2001), Statistical Bulletin, August [online].  Available at: http://www.sbp.org.pk/downloads
[1 October 2001].Source:DMUS$
100 YenUK£
12. Following considerable depreciation against the US dollar from 1994/95, the rupee's
depreciation slowed for a short period after the introduction of the unified floating exchange rate
system in 1999 (Chart I.1);  the recent relative stability and predictability (in relation to the previous
years) appear to have played an important role in facilitating the sharp recovery of exports in fiscal
year 1999/00 as well as in maintaining investor confidence amidst the uncertain outlook for external
financing.16  Furthermore, the free market rate of the rupee has come closer to the inter-bank rate
(FIBR);  an initial narrowing of the average premium of open market rate over FIBR from 17%
(July-December 1998) to 3.4% (January-June 1999) was followed by a relatively stable spread within
a narrow range of 4% to 5%.  Since the beginni ng of 2000/01, the Pakistan rupee has depreciated
against the US dollar by 14.1% (April 2001), largely due to heavy demand for the US dollar to clear
up foreign repayment obligations and oil import bills.
                                                                                                                                                                    
8% (Chapter III(3)(viii));  and withdrawal of certain ri ghts from authorized (foreign exchange) dealers on a
range of payments (State Bank of Pakistan, 1999).
15 WTO document WT/BOP/G/11, 1 May 2000.
16 Ministry of Finance (2000c);  and IMF (2000).Pakistan WT/TPR/S/95
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(ii) Fiscal policy
13. Pakistan has an extremely weak tax base, with taxes accounting for a mere 14% of GDP in
2000/01.  Not only does the weak tax base impair the Government's capacity to undertake essential
expenditures (including on programmes such as poverty alleviation, health, education, and
infrastructure), but it also remains a major source of fiscal imbalance, both of which hamper the
country's economic growth and development.17
14. During the period under review, the fiscal deficit (emanating, inter alia,  from debt servicing
charges, financial support for loss-making state-owned enterprises, defence spending, and absence of
regular adjustment in petroleum prices) widened from PRs 105.3 billion (1994/95) to
PRs 185.7 billion (2000/01);  its share of GDP (and absolute value) peaked in 1997/98 at 7.7%, and
subsequently declined to 5.3% (2000/01) largely as a result of efforts to impose some fiscal discipline(Table I.1).
18,19  The IMF programme target of a reduction in the deficit to 5.2% of GDP by 2000/01
seems to have been met despite disappointing revenue perfomance as well as weaker GDP and
declining import trends (which caused a reduction in tariff revenues);  the target was met through
expenditure restraint (mainly at provincial level).
15. For the period 2000-01, the authorities intend to accelerate tax reforms (section I(4)(i)) with a
view to reducing the gap between taxes and public spending.  At the same time, the latter is to be
made more efficient through improvements in budgeting and expenditure management.
(4) MAIN STRUCTURAL POLICY DEVELOPMENTS
(i) Tax reform
16. Pakistan's low level of tax revenues in relation to GDP, and the resulting fiscal imbalance are
the consequences of a deficient tax system.  Notwithstanding the imposition of numerous new taxes in
recent years, growth in tax revenues has been negligible, due, inter alia , to the Government's tendency
to use taxation more as an instrument of economic policy than as a source of revenue.  Tax measures,
including import tariffs, have been used in particular to encourage import substitution, curtail imports
of luxury and non-essential goods, promote exports, and stimulate investment in various activities.20
The widespread use of concessions, including incentives, contributes to the erosion of the internal tax
base and makes it vulnerable to tax avoidance and evasion.  The multiplicity of taxes, often narrowlybased owing to such concessions, and some involving high tax rates
21, have resulted in a tax system
that not only constitutes a potentially important source of economic in efficiency, but is complex and
difficult to administer;  the complexity of the tax system also provides considerable scope for
administrative discretion.  The system is characterized by cumbersome assessment procedures,
including long delays in the resolution of tax disputes.  The erosion of the tax base is exacerbated bydifficulties of governance.  At the same time, tax evasion (including smuggling) is endemic, owing to
                                                     
17 Ministry of Finance (2000c);  and WTO document WT/BOP/G/11, 1 May 2000.
18 Efforts have included an increase in the rate of general sales tax (GST), as well as the lowering of
development and defence expenditure and net lending.
19 Ministry of Finance (2000c), Appendix Tables 4.2;  Ministry of Finance (2001);  IMF (2000);  Asian
Development Bank (2000a);  and Ministry of Finance (2000a).
20 State Bank of Pakistan online information.  Available at:  http://www.sbp.org.pk/monetary.htm
[29 July 2000].
21 By the year 2000 only 36,000 companies or registered firms paid the bulk of the direct taxes on
income and wealth (Ministry of Finance, 2000a).WT/TPR/S/95 Trade Policy Review
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the large size of the "informal" economy;  less than 1% of the population paid any income taxes in
1999.22
17. In order to address the deficiencies in the tax system, the authorities have announced or
undertaken a number of reforms as of 2001/02 (see Chapter III(4)(i)).  These include:  the extension
of the sales tax to all retailers and traders with a threshold of PRs 5 million (as of July 2001);  the
introduction of a 20% GST rate on sales of certain inputs and intermediate products;  the eliminationof 11 minor excise taxes;  the lowering of the general maximum customs tariff to 30% (from 35%),
and a cut in the number of tariff rates from five to four (as of July 2001);  fundamental reform of the
federal income tax;  and the implementation of the agricultural income tax (as of July 2001).  Tax
measures are expected to raise revenue by an estimated PRs 16 million annually, or 0.4% of GDP.
(ii) Privatization
18. In the light of the pervasive role of state-owned enterprises (SOEs) in the economy
(Chapter III(2)(vii)), privatization is a key element of Pakistan's structural reform programme.  Under
a 1991 privatization programme aimed at minimizing state involvement in commercial activities,
103 units (including cement production, and vegetable oil refining) have been privatized, despite a
slowdown in the process mainly due to litigation and structural problems.  Privatization in the energysector, for example, has remained stalled by long-standing unresolved disputes between the
Government and some of the independent power producers.
23  As of 2000, the authorities undertook
to implement speedily and judiciously the progra mme drawn up by the Privatisation Commission.  It
includes a new privatization law, apparently passed in 2000/01;  restructuring and corporatization of
SOEs;  short-term measures affecting 16 entities, notably the listing of selected SOEs (e.g. banks) on
the stock exchanges and divestment/liquidation of small non-competitive industrial units by the
end of 2000;  medium-term measures, including di vestment of 34 entities in banking, finance,
electricity, oil and gas, telecommunications, and industry, to be launched by June 2002;  and
long-term measures, notably divestment of remaining financial, insurance, utilities, and infrastructure
entities beyond June 2002.24  In its privatization efforts, Pakistan has benefited from World Bank
technical assistance and has hired several foreign financial advisors.  A generous relief package for
employees of divested SOEs was agreed.  A database and management information system is to bedeveloped to monitor the performance of public enterprises.  Privatization of a few pilot firms (a
nationalized bank, the only telecom company, and shares in oil fields) was expected by end 2001.
19. In addition to contributing to structural adjustment and reducing the burden of SOEs on the
budget, and thereby helping to redress the fiscal imbalance, privatization is also intended to achieve
other important objectives.  Receipts from privat ization, which are expected to reach US$4 billion
over the medium term, are to be used to retire Pakistan's foreign debt (90%) and help finance the
Government's poverty reduction programmes (10%).
(iii) Governance
20. Pakistan has taken a number of steps to address difficulties in the area of governance.  In
accordance with the Structural Adjustment Loan of the World Bank, improving governance andenhancing transparency constitute other key elements of the Government's reform agenda.  Weak
governance has constrained Pakistan's economic growth and contributed to low investor confidence.
Governance problems have severely reduced the effectiveness of public expenditure, contributed to
tax evasion and loan defaults, and to the accumulation of arrears in payment of utility bills.  With a
                                                     
22 Financial Times , 4 April 2000, "Pakistan's tax gatherers limber up for marathon".
23 Asian Development Bank (2000b).
24 Privatization plans are publicly available online at:  http://www.privatisation.gov.pk/.Pakistan WT/TPR/S/95
Page 9
certain lack of transparency in the Government's decision-making, the  discretionary powers enjoyed
by political office-holders and civil servants, and weaknesses in auditing have facilitated corruption,
and has caused the authorities to act.  Work has been under way for the formulation of a National
Devolution Plan to redistribute the balance of activities and responsibilities across the various tiers of
(federal, regional, local) government;  the adoption of measures to enhance the quality of economic
decision-making and public spending;  reform of the civil service, police, and judiciary, withincreased accountability of public officials;  and improvement in financial management and the
quality and dissemination of public and national accounts statistics.  Work has been carried out in the
context of the Commission on Administrative Re structuring and the Good Governance Group.  A
National Accountability Bureau (NAB) to enforce transparency, prosecute tax evaders and loan
defaulters, and examine other charges of corruption has operated since 1999.
25
(5) BALANCE OF PAYMENTS DEVELOPMENTS
(i) Current and trade accounts
21. Pakistan's persistent current account deficit peaked at an unprecedented level in
1995/96 (7.2% of GDP), but has been reduced considerably (1.9% of GDP in 1999/00)  largely due to
a substantial fall in the trade deficit, which had deteriorated significantly in 1998/99 mainly as a resultof the economic sanctions imposed by the international community in May 1998 (Table I.3).  The fall
in the trade deficit was largely due to the favorable supply conditions in the agriculture sector (prior to
the drought), the recovery in the textile sector, several export promotion and facilitation measures
taken in 1999/00, as well as the rescheduling of the external debt.  Workers remittances have declined.
In 2000/01 the current account deficit is expected to remain stable (about 1.6% of GDP), despite a
projected further deterioration in the terms of trade;  the adverse impact of high world oil prices on
imports is to be offset by continued strong export performance, partly reflecting the export of excessagricultural crops.  Improvements in the balance of payments are expected through increased exports
and reduced private-sector capital outflows brought about by a rebound in investor confidence.  The
Government aims to cut the current account deficit (excluding official transfers) to 3.2% of GDP for
2001/02.
22. Since the previous Review, foreign exchange reserves have recorded marked fluctuations and
remained below their peak level of US$2.9 billion (end June 1995);  this is due, inter alia,  to lower
inflows under residents' foreign currency deposits, the fall in exports and other receipts under current
transfers and services account, and the sanctions-related suspension of bilateral and multilateral
disbursements.
26  By end December 2000, Pakistan's foreign exchange reserves stood at
US$1.4 billion, equivalent to eight weeks of imports of goods and non-factor services (2000/01 level)
or 4.5% of its external liabilities.27  Under the IMF programme, gross official reserves were to attain
US$1.76 billion (equivalent to about ten weeks of im ports of goods and non-factor services) by end
September 2001, through a flexible exchange rate policy, monetary tightening, fiscal adjustment, and
substantial exceptional financing.28  Pakistan aims to increase official reserves to the equivalent of
12 weeks of imports of goods and non-factor services.
                                                     
25 USTR (2000a).
26 WTO document WT/BOP/G/11, 1 May 2000.
27 Ministry of Finance (2001), Table 8.15.
28 IMF Press Release No. 00/64 , 29 November 2000 [Online].  Available at:  http://www.imf.org/
external/np/sec/pr/2000/pr0064.htm [4 December 2000].WT/TPR/S/95 Trade Policy Review
Page 10
Table I.3
Balance of payments, 1994-2001
(US$ million)
1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000 2000/2001a
Current account -2,484 -4,575 -3,846 -1,921 -2,429 -1,143 -672
Merchandise trade balance -2,537 -3,704 -3,145 -1,867 -2,085 -1,412 -1,109
Exports 7,759 8,311 8,096 8,434 7,528 8,190 6,572
Imports 10,296 12,015 11,241 10,301 9,613 9,602 7,681
Services balance -613 -1,296 -1,492 -934 -810 -776 -723
Exports 1,968 1,916 1,685 1,584 1,314 1,384 1,035
Imports 2,581 3,212 3,177 2,518 2,124 2,160 1,758
Investment income -1,771 -1,953 -2,167 -2,330 -1,808 -2,018 -1,716
Credit 182 184 155 124 95 117 85
Debit 1,953 2,137 2,322 2,454 1,903 2,135 1,801
Private transfers (net) 2,437 2,378 2,958 3,210 2,274 3,063 2,876
of which worker remittances 1,866 1,461 1,409 1,490 1,060 983 855
Capital account 2,797 4,195 2,748 1,181 -1,705 -2,791 -471
Public capital account 1,072 1,514 916 1,512 196 -748 -85
Private capital account 1,725 2,681 1,832 -331 -1,901 -2,043 -386
Direct investment 1,529 1,311 968 793 456 546 67
Other long-term 101 223 325 -176 10 -269 -226
Short-term 95 1,147 539 -948 -2,367 -2,320 -227
Changes in reservesb-238 431 1,032 306 -824 -72 -57
F i n a n c i n g  a c c u m u l a t i o n  o f  a r r e a r s 0000 3 , 9 6 6 3 , 9 6 5 6 4 6
Errors and omission -75 -51 66 434 992 42 554
a Provisional July to March only.
b Negative value means an increase in reserves.
Source : Ministry of Finance (2001).
23. Pakistan has continued to consult periodically (1996, 1997, 2000) in the WTO Committee on
Balance-of-Payments Restrictions, where several WTO Members have reiterated the advantages of
price-based measures over Pakistan's quantitative restrictions for balance-of-payments purposes.  In
November 1998, Pakistan submitted a three-year programme for their final phase-out by fiscal year
2001.29  This programme was put in place in December 2000 when Pakistan removed the first tranche
of its balance-of-payments restrictions (several textile items).  Pakistan proceeded in the eliminationof remaining restrictions at the end of June 2001 and is to continue until June 2002, in accordance
with the scheduled phase-out;  should market access for its exports and the sustainability of its
balance of payments improve, the phase-out may be accelerated.
(ii) External liabilities/debt
24. Pakistan's total external liabilities (and debt service obligations) rose from 45.5% of
GDP (1994/95) to 50.4% (1999/00);  a non-sustainable level at four times the level of export earnings
(Table I.4).
30  Their structure has remained virtually unchanged;  external debt is mainly public and on
concessional terms.31  Following the rescheduling of debt under the aegis of the Paris Club and its
                                                     
29 WTO documents WT/BOP/N/53, 13 December 2000, and WT/BOP/R/56, 22 December 2000.
30 Ministry of Finance (2000a);  and State Bank of Pakistan, statistical data [Online].  Available at:
http://www.sbp.org.pk/monetary.htm [29 July 2000].
31 WTO document WT/BOP/S/11, 28 March 2000.Pakistan WT/TPR/S/95
Page 11
commercial creditors, the service payments during 1999/2000 were expected to decline by 8.5% to
2.2% of GDP.  By mid 2000, the authorities planned to put in place a strong debt management and
monitoring system, to define medium and long-ter m debt reduction goals, and to adopt technical
guidelines for external and public-sector debt contracting.32  Furthermore, in January 2001 the
Paris Club was to consider a request by Pakistan for a rescheduling of both its accumulated arrears
and its debt service payments to Paris Club creditors falling due during the implementation period ofthe reforms programme (Box I.1) on pre-cut-off debt;  the authorities intend to seek comparable
treatment from all other official bilateral and private creditors.
Table I.4
External liabilities structure, 1994-2000
(US$ million and per cent)
1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000a
Total external liabilities 27,762 28,121 28,709 29,000 30,480 31,010
Long-term liabilities 24,996 24,967 25,726 25,776 26,607 27,262
Per cent of GDP 41.0 39.1 40.8 41.6 42.4 44.3
Per cent of total external liabilities 90.04  88.78 89.61 88.88 87.29 87.91
Project and non-project aid 22,117 22,275 23,145 23,042 23,101 23,834
Commercial banks and Islamic Development Bank 543 647 701 1,100 730 560
Other 2,336 2,045 1,880 1,634 2,776 2,868
Short-term liabilities 1,256 1,619 1,667 1,809 2,049 2,253
Per cent of GDP  2.1 2.5 2.6 2.9 3.3 3.7
Per cent of total external liabilities  4.5 5.8 5.8 6.2 6.7 7.3
Commercial banks and Islamic Development Bank 716 873 418 298 583 671
Foreign Exchange Bearer Certificates and Dollar
Bearer Certificates540 496 414 328 196 147
IMF credit and loans 1,535 1,535 1,316 1,415 1,825 1,496
Per cent of GDP 2.5 2.4 2.1 2.3 2.9 2.4
Per cent of total external liabilities 5.5 5.5 4.6 4.9 6.0 4.8
External debt to GDP ratio 45.5 44.1 45.6 46.8 48.5 50.4
a Estimates.
Source: State Bank of Pakistan;  Ministry of Finance;  and IMF estimates.
(6) DEVELOPMENTS IN MERCHANDISE TRADE
25. Persistent endogenous weaknesses such as, inter alia,  the absence of structural adjustment,
inability to offset anti-export bias, and restrictive measures for balance-of-payments purposes, have
impeded further progress in opening the Pakistani economy to international trade and its integration in
the world economy.  The ratio of Pakistan's trade (exports plus imports) in goods and non-factor
services to GDP peaked in 1995/96 at 37.9% before dropping and then stabilizing at levels ranging
between 32.5% and 34.5%, thus reflecting a steady and considerable decline in the importance of
foreign trade.  However, in 1999/00 imports (largely oil-price related) and exports rebounded.Exports attained their 1991/92 level, as a result of improved supply of exportables, stronger demand
in international markets, and a relativel y stable and predictable exchange rate.
                                                     
32 Ministry of Finance (2000a).WT/TPR/S/95 Trade Policy Review
Page 12
(i) Composition of trade
26. Since 1993/94, Pakistan's merchandise trade structure has changed slightly.  Food, mining,
clothing, machinery and transport equipment, and other consumer goods have increased their shares in
total exports (Chart I.2).  Nevertheless, exports have remained highly concentrated in seven product
categories – cotton, fish, leather, rice, synthetic textiles, wool and carpets, and sports goods –
accounting for more than 80% of total export earnings.  On the import side, the shares of iron andsteel, electrical and non-electrical machinery, semi-manufactures, and transport equipment have fallen
as a consequence of the increases in the oil bill and, until recently, trade restrictive measures for
balance-of-payments purposes.  Imports have been concentrated in eight product categories –
fertilizer, petroleum and its products, machinery, transport equipment, edible oil, chemicals, iron and
steel, and tea – representing 75% of total imports.
(ii) Direction of trade
27. Reflecting the combination of a narrow export base, concentration in low-value-added
products, and few markets
33, the share of total exports destined to Asian (except for the Middle East)
and European markets has declined, while the share of exports to the United States has risen
considerably (Chart I.3).  As a result of the hike in oil prices, the share of goods supplied by theMiddle East increased; more than 50% of imports originate in the EU, the United States, Japan,
Kuwait, Saudi Arabia, and Malaysia.
(7) T
RENDS AND PATTERNS IN FOREIGN INVESTMENT
28. Despite the increased openness of the foreign direct investment (FDI) regime and incentive
packages (Chapter II(8)), foreign investment activity  has been relatively modest and FDI inflows have
dropped to less than half of their 1995/96 level (Chart I.4), mainly reflecting investors' uncertainty
over the prospects of the Pakistani economy and political environment.34  During the period under
review, FDI inflows to th e power sector have been reduced drastically (due to saturation of the
sector), and the chemicals/pharmaceuticals/fertilizer group has emerged as the single largest recipient
of FDI flows;  FDI in mining and quarrying has increased.35  Investment has originated largely from
the EU, the United States, Japan, and Saudi Arabia (Chart I.4).
                                                     
33 This issue is a source of serious concern for the authorities, who are of the view that trade policy
changes or sophisticated policy schemes may contribute to export expansion when based on soundfundamentals.  The authorities understand that a major focus on Pakistan's competitive strength, a consequentdiversification of the export base, and upgrading of  its productive capacity are required (Ministry of
Finance, 2000c).
34 Reportedly, this trend may be explained, inter alia, by Pakistan's inadequate infrastructure,
perceptions of political instability, prevalent war climate (e.g. nuclear threats between Pakistan and India), law
and order difficulties, policy inconsistencies, and resistance to the new policies by some elements of thebureaucracy, who have not yet fully adjusted to the new, open economic environment (U.S. Commercial
Service, 1999a).
35 Ministry of Finance (2000c).Pakistan WT/TPR/S/95
Page 13
Chart I.2
Product composition of merchandise trade, 1993/94 and 1999/2000
1993/94 1999/2000
(a)    Ex ports
Other consumer 
goods
6.1Other  0.3Manufactures
86.9Textiles
54.3
Total:   US$7.3 billion Total:   US$9.1 billion
(b)    Im ports
Transport 
equip.  6.7
Other semi-manuf.
4.1Other agriculture
6.2
Food
16.3
Non-electrical machinery
15.8Fuels
18.3
Iron & steel
3.7
Manufactures
56.0 Chemicals
16.4Agri-
culture
22.6Mining
21.0Other mining
2.7
Electrical
 machinery
6.0Food
13.8
Other manuf.
3.7Fuels
32.5
Non-electrical 
machinery 
8.9Transport equip.
4.9Mining
34.6
Other mining
2.1
Manufactures
46.0
Chemicals
18.1
Total:   US$8.9 billion Total:   US$11.1 billion
Source :  UNSD, Comtrade database (SITC Rev.3).Per cent
Other agriculture  2.9
Manufactures
84.7Other 0.2Food  10.6
Clothing  
23.5Mining 1.7
Iron & steel
2.5Other manuf.
3.3Clothing
21.5Textiles
49.6
 Electrical
 machines
4.7Other semi-manufactures
3.2Other
2.4Other  0.5Food  9.8Mining  0.9
Other agriculture 
2.1Semi-manufactures  4.7Machinery & transport equip.  
0.2
Semi-manuf.  4.8Machinery & transport equip.  
                       0.4
Other consumer goods
6.5
Other agriculture
        3.2
Agri-
culture
17.0WT/TPR/S/95 Trade Policy Review
Page 14
Chart I.3
Direction of merchandise trade, 1993/94 and 1999/2000
1993/94 1999/2000
(a)    Ex ports
East Asia
24.9Middle East
10.9Korea, Rep. of
  3.0
Other East Asia
       6.9
Africa 
4.5
United States
15.8Japan
7.3
Total:   US$7.3 billion Total:   US$9.1 billion
(b)    Im ports
Other America
17United States
9.8Kuwait  6.4
EU(15)
25.8U.A.E.  3.3East Asia
30.5
Africa  2.9China
5.0 Japan
5.6Malaysia  3.9
EU(15)
14.6East Asia
29.3
United States
6.0
Total:   US$8.9 billion Total:   US$11.1 billion
Source :  UNSD, Comtrade database (SITC Rev.3).Per cent
Korea, 
Rep. of
   2.9
Other East A.  4.7
Malaysia
7.4East Asia
19.2China, 2.7
Other Europe
2.7Hong 
Kong, 
China  5.9
Other America
2.0Hong Kong, China  
7.7
Africa  4.9
EU(15)
27.0United States
24.9
Oceania  2.9Other E. Asia  5.8Japan
9.4
Saudi Arabia
5.5
Other Europe
3.1
Other  
Europe
2.1Saudi Arabia
10.5Other East Asia
8.4
South Asia  1.7Oceania  1.7South Asia  4.5
EU(15)
32.5Middle East
11.5
Other America
4.1Other America
3.4Oceania  1.9South Asia  3.6
Other Europe
2.4
United Arab 
Emirates
10.8Other Middle East
4.8
South Asia  2.7
EFTA
2.8Other Middle East
5.5
Oceania  2.2China
4.7
Middle
East
20.7
Kuwait
11.7EFTA
2.3Africa  2.3Middle
East
27.2Japan, 2.6
Korea, Rep. of   3.3
Korea, Rep. of   3.2Pakistan WT/TPR/S/95
Page 15
02004006008001,0001,200
1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01
02004006008001,0001,200
1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01Chart I.4
Inflows of foreign direct investment, 1994-2001
(a)  By origin
US$ million
(b) By sectorUnited States EUa
OtherJapan Korea, Rep. ofUnited Arab Emirates Saudi Arabia
Power
Chemicals, pharmaceuticals & 
fertililzers
Construction
Food, beverages & tobaccoPetro-chemical & refiningFinancial businessMining & quarrying
Other Transport, storage & communication
c
EU includes France, Germany, Italy, the Netherlands, and the United Kingdom.  Other members 
might be included in "Other".Revised data.July-March only.Figures reflect direct investment only (i.e. cash, capital, equipment and reinvestment of earnings).Ministry of Finance (2001), Pakistan Economic Survey 2000-2001  [Online].  Available at:  
htt
p://wwww.finance. gov.pk/ [Se ptember 2001].a
b
cNote:
Source :US$ million