RESTRICTEDWORLD TRADE
ORGANIZATIONWT/BOP/S/11
28 March 2000
(00-1261)
Committee on Balance-of-Payments Restrictions
CONSULTATIONS WITH PAKISTAN
Background Paper by the Secretariat
1. This paper has been prepared in accordance with paragraph 12 of the Understanding on the
Balance-of-Payments Provisions of the GATT 1994.
I. PREVIOUS CONSULTATIONS WITH PAKISTAN
2. The Committee last consulted with Pakistan in November 1997.  Full consultations were
begun in April and concluded in November with the submission of a revised notification of imports
subject to balance-of-payments restrictions (WT/ BOP/N/31).  The consultations were concluded on
11 November 1997 on the understanding that Pakistan would submit, within twelve months, a time-
table for phase out of its remaining balance-of-payments restrictions.  This time-table, setting forth athree-year programme for phase-out by fiscal year 2001, was circulated on 12 November 1998
(WT/BOP/N/40).
II. MACROECONOMIC AND TRADE DEVELOPMENTS
A. R
ECENT ECONOMIC PERFORMANCE
3. In fiscal year 1997/98, Pakistan's economic performance improved but recovery was stalled
by developments following the nuclear testing in May 1998.  Real GDP grew by 4.3%, compared to
1.9% in the previous year; the budget deficit was reduced to 5.5% of GDP from 6.4% and inflationfell to 7.8%, ahead of expectations.
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4. For fiscal year 1998/99, although overall growth slowed to 3.1%, primarily due to a poor
cotton crop, inflation continued to subside, to an annual rate of 5.7% and the budget deficit was
further lowered to 4.3% of GDP (Table.1).
                                                     
1 Fiscal data is being revised;  consequently these figures should be interpreted cautiously.WT/BOP/S/11
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Table 1
Economic Indicators
1996/1997 1997/1998 1998/1999
Real GDP (annual % change) 1.9 4.3 3.1
CPI (annual average) 11.8 7.8 5.7
Investment (% of GDP) 17.7 16.1 14.9
Gross national savings (% of GDP) 11.6 13.1 11.9
Budget*:
Revenue (% of GDP) 16.0 15.8 15.9
Expenditure (% of GDP) 22.4 21.3 20.2Balance (% of GDP) -6.4 -5.5 -4.3Domestic Debt (% of GDP) 42.7 41.9 37.7
Exports (% of GDP) 12.8 13.3 12.6
Imports (% of GDP) 17.8 16.2 15.6
Current account (excluding official transfers (% of GDP)) -6.1 -3.0 -3.0
External public debt (% of GDP) 44.9 46.2 54.0External debt service (% exports and private transfers) 28.2 24.5 31.5
*Data is under revision and should be interpreted with caution.
B. EXTERNAL PERFORMANCE
5. Along with fluctuations in economic performance the external position has varied
considerably.  The economy's narrow production base keeps it vulnerable to exogenous shocks.
Merchandise trade accounts for slightly less than 30% of GDP, reflecting th e relatively low level of
openness of Pakistan's economy.  Principal exports are cotton manufactures (yarn, cloth and
garments);  leather goods, carpets and rice;  main imports are petroleum products, machinery, wheat
and palm oil.  Motor vehicles, restricted for balance-of-payments reasons, account for just 3% of totalmerchandise imports (Table 2).WT/BOP/S/11
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Table 2
Structure of Trade (US$ million)
1996/97 1997/98 1998/99
Exports (excluding re-exports) (f.ob.)
Primary commodities: 1046 1223 1002
rice 469 562 534cotton 31 126 2wool 13 7 3leather 240 208 177
fish 149 172 123
Textile manufactures: 5554 5523 4973
cotton yarn 1412 1160 945cotton fabrics 1262 1250 1115garments 736 747 651synthetic fibres 513 618 399knitwear 689 697 742
bed linen 456 509 611
Other manufactures: 1,210 1232 1065
leather 364 343 334carpets 199 200 203sports goods 308 384 256
Other 509 651 739
Total (US$ million) 8,320 8,628 7,779
Imports (ci.f.)
Food: 1596 1873 1635
wheat 477 709 407tea 134 227 223
palm oil 493 669 597
Petroleum 2266 1572 1465Textiles 202 191 168Chemicals 1981 1792 1812Metals 550 372 349Machinery: 3295 2402 2198
road motor vehicles 450 351 312
Total (US$ million) 11,894 10,118 9,432
Source:  State Bank of Pakistan;  Monthly Bulletin of Statistics
6. Pakistan has run a trade deficit every year since the early Seventies.  In the last two years
imports have been severely compressed due to slack domestic demand, exchange controls, a dual
exchange rate system that penalized imports, and an import deposit requirement in place for a large
part of fiscal 1998/99.  In 1997/98, exports recovered compared to the previous year but fell in thefollowing year to all major markets, except the United States (Table 3).WT/BOP/S/11
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Table 3
Direction of Trade
Fiscal year (end 30 June) 1996/97 1997/98 1998/99
Exports
(percentage share)
Major markets
North America 19.7 22.7 23.8
EC 32.6 31.3 30.8Asia: 37.0 34.9 35.9
Hong Kong 9.0 7.0 7.0
Japan 5.5 4.0 3.0
UAE 4.8 5.8 5.4
Total (US$ millions) 8,320 8,627 7,779
Imports
(percentage share)
Main suppliers
North America 12.5 12.4 8.4
EC 20.2 17.2 17.4
Asia: 54.4 56.2 58.8
Mid-East oil suppliers*21.0 18.8 19.5
Japan 8.6 8.9 8.4Malaysia 4.7 6.7 6.7
Total including others 11,894 10,118 9,432
* Saudi Arabia, Kuwait, UAE.
Source:  based on data supplied by IMF.
7. In spite of the slowdown in exports, the trade deficit narrowed considerably from more than
US$3 billion to US$1.8 billion in two years.  Pakistan's terms of trade shifted favourably as import
prices of petroleum and wheat fell in 1998 and 1999 (Table 4).  Reducing the trade deficit through
import compression is not a viable long term option;  fewer imported inputs have a direct impact on
manufacturing performance.  Furthermore, the trade deficit is likely to widen as international oilprices rise although recent data suggests that exports are buoyant and wheat imports lower than
expected.WT/BOP/S/11
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Table 4
Balance-of-payments (US$ million)
1996/1997 1997/1998 1998/1999
Trade balance -3,145 -1,868 -1,775
Exports, f.o.b. 8,096 8,433 7,570
Imports, f.o.b. -11,241 -10,301 -9,344
Services (net) -3,662 -3,264 -2,497
    of which:  interest payments -1,754 -1,763 -1,503Private transfers (net) 2,956 3,210 2,499    of which:  workers remittances 1,409 1,490 1,055
Current account balance -3,562 -1,702 -1,580
Capital account 2,530 1,421 -1,692Overall balance -1,032 -281 -3,272
Memorandum:
    gross official reserves 1,141 932 1,672
    in weeks of imports 4.9 4.3 7.2
Exchange rate (average PR:  $) 41.04 45.01 50.20
Terms of trade (% change) -4.8 3.3 0.8
8. Although the current account deficit (before official transfers) narrowed to 3% of GDP from
over 6% in 1996/97, there were large shortfalls in the capital account.  Towards the end of fiscal year1997/98, sanctions were imposed by several countries and multilateral disbursements for non-
humanitarian purposes withheld.  In order to contai n a threat of balance-of-payments difficulties,
under emergency powers, the Government froze with drawals from foreign currency deposits (valued
at US$11 billion) in June 1998, introduced a 30% import deposit requirement on 12 July 1998 and on
21 July imposed exchange restrictions in parallel with a dual exchange rate system for currenttransactions.  Private capital inflows and remittances from abroad declined and, by end-October 1998,
official reserves had fallen to three weeks of import coverage.  Following the normalisation of
relations with the international financial institutions early in 1999, reserves levels have increased but
remain uncomfortably low.
9. External debt, mainly public and on concessional terms, amounts to roughly half of GDP and
more than twice export earnings;  to help close the external financing gap, US$3.3 billion of medium-
and long-term public debt has been rescheduled with the Paris Club, and some US$900 million with
commercial creditors, including deferments on debt service payments due in 1999 and 2000.  In
addition, Eurobond obligations with a face value of US$608 million have been rescheduled, as have
institutional foreign currency deposits, and the bulk of individual foreign currency deposits has been
converted to rupees or to longer-term obligations.WT/BOP/S/11
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C. MACROECONOMIC AND STRUCTURAL POLICY REFORM
10. A three-year programme of stabilization and structural reform was put in place in
October 1997 and progress has been made in achieving macroeconomic targets as well as in a number
of areas with respect to structural reform.  Under the current military administration, an anti-
corruption campaign is underway.  Vigorous efforts are still required to overcome structuralimpediments to growth in Pakistan;  fiscal cons olidation is key.  Public finances need to be
strengthened to increase domestic saving, to support higher investment rates and to reduce the
accumulation of public debt.
11. In a nation where the majority of the population lives in acute poverty, the tax to GDP ratio
stagnates at 13% due to a narrow tax base and widespread tax evasion; meanwhile, interest payment
and defense expenditures make up over half of the annual budgetary outlays.  So far, the budget
deficit has been narrowed as a result of cuts in current expenditures and buoyant petroleum surchargerevenues (in 1998/99).  Serious efforts are being made to address the perennial problem of the fiscal
deficit by strengthening tax administration, improving tax collection and extending the tax base.  The
general sales tax, raised on 1 December 1998 from 12.5% to 15%, has been extended to textiles and
retail sectors, and subsequently to electricity,  petroleum and other previously exempt products.
Legislation removing the discretionary power of government to grant tax and duty exemptions waspassed in March 1999, the electricity subsidy has been eliminated, cotton prices have been
decontrolled and agricultural income tax is being strengthened.  The 1999/2000 budget aims for
further fiscal consolidation.
12. In early 1997, Parliament approved key legislation for financial sector reforms, including
increased autonomy for the central bank, the State Bank of Pakistan.  As a result, the central bank'sregulatory and supervisory capacity has been strengthened and its ability to manage monetary policy
enhanced.  Credit ceilings have been removed and interest rate policy liberalized;  improvements in
the process of financial intermediation accompany a steady evolution in the use of market-based
instruments for monetary control.  The dual exchan ge rate system, a composite of an official rate
(R 46 to $1), at which certain current international transactions could take place, and a floating rate,imposed in June 1998, was unified, ahead of schedule, on 19 May 1999 and the rupee has been set
free to float.  The monetary authorities intend to allow exchange rate policy to safeguard external
competitiveness while achieving official reserve targets.  Once the immediate balance-of-payments
pressures are relieved and the country's external financial position has improved sufficiently, the
overall limits on banks' open foreign exchange positions will be increased in line with international
standards.
13. Reform, supported by a World Bank loan, has improved transparency and governance in the
national banks and financial institutions.  Measures to strengthen the banking system have brought
capital adequacy and disclosure standards up to international norms.  The profitability of the three
state-owned commercial banks has been restored through changes in management, reduction in staff
and the closing of branches.  The stock of non-performing loans has been reduced, but is currently
estimated at US$3 billion.  With the passage of the Banking Companies Amendment Bill, the plan isto reduce non-performing loans to 10% of banks portfolios by 2001/2002.  A deposit insurance
scheme is under consideration.  Banking reform w ill culminate in the privatization of the national
banks which will take place once market conditions improve.  Privatization of non-financial public
sector enterprises has been proceeding and preparation for privatizing a number are now advanced.WT/BOP/S/11
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14. On the trade policy front, the maximum tariff has been reduced to 35% and the number of
non-zero tariff bands reduced to 4.  A 30% import deposit requirement, removed in 1999, was
reinstated at 35% for certain types of imports last October2.  Export bans, duties and minimum prices
were withdrawn in July 1999 and a number of export incentives introduced; the export tax on cottonwas recently lifted.  Certain import restrictions on textile products have been lifted, in accordance
with the timetable presented to the WTO, and will be phased out, along with those applied to
automobile imports, by June 2001.
3
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2 However, a few products are subject to excise duties which differ between imports and domestically-
produced goods.  This results in effective tariff rates in excess of 35% in a few cases (sugar, polyester chips, and
medium-density fibre boards).
3 WT/BOP/N/40.