RESTRICTEDWORLD TRADE
ORGANIZATIONWT/BOP/R/51
14 June 2000
(00-2379)
Committee on Balance-of-Payments Restrictions
REPORT ON THE CONSULTATIONS WITH PAKISTAN
1. The Committee held consultations with Pakistan on 5 May 2000, originally scheduled for
November 1999.  The consultations were held under the Chairmanship of Mr. Milan Hovorka (Czech
Republic) in accordance with the Committee's terms of reference, and pursuant to Article XVIII:12(b)of GATT 1994 and the Understanding on Balance of Payments Provisions of GATT 1994.  The IMF
was invited to participate in the consultations in accordance with Article XV:2 of GATT 1994.
2. The Committee had before it the following documents.
WT/BOP/S/11 Background Paper by the Secretariat
WT/BOP/G/11 Basic Document Supplied by PakistanWT/BOP/N/40 Communication from Pakistan
A. O
PENING STATEMENT BY THE REPRESENTATIVE OF PAKISTAN
3. The opening statement by the representative of Pakistan is attached as Annex 1.
B. STATEMENT BY THE REPRESENTATIVE OF THE INTERNATIONAL MONETARY FUND
4. The statement by the representative of the IMF is attached as Annex 2.
C. DISCUSSION IN THE COMMITTEE
(i) Balance-of-payments position and prospects;  alternative measures to restore equilibrium
5. Members recognized the fragile balance-of-payments situation faced by Pakistan; reserves
were at just over month of imports. It was noted that trade performance in particular had been lagging,
although cautious optimism could be expressed over prospects for the external sector.  Members
appreciated that a reform agenda had recently been put in place but sought additional informationregarding specific policies and measures to restore investor confidence.
(ii) System, method and effects of restrictions
6. Members noted that, in spite of the annual notification requirement, no information had been
provided regarding progress towards the implementation of the time table for phasing out of balance-
of-payments restrictions, as contained in WT/BOP/N/ 40.  It was expected that measures that had been
removed within the first phase should be notified and items remaining under restrictions identified.
Members understood that an import deposit requirement had been reinstated and sought clarification
on the product coverage;  it was pointed out that any new measure for balance-of-payments purposes
must be notified and justified and furthermore, that only one restrictive measure should be applied on
the same product for balance-of-payments purposes.  Some members emphasized that a time tablewas eligible for modification, and one member expressed the view that the restrictions were not in
excess of what was necessary to safeguard the balance of payments.WT/BOP/R/51
Page 2
(iii) Replies by the representative of Pakistan
7. In responding to questions regarding the reforms undertaken recently, the representative
referred to Pakistan's fiscal deficit and the lo w tax to GDP ratio;  the extension of the GST was
expected to improve the revenue situation.  A pl anned privatization program would hinge on investor
confidence which was being encouraged by removing restrictions on foreign exchange dealing and animprovement in the regulatory framework.  As to th e time table, the representative clarified that the
timetable extended until June 2002, not June 2001 as cited in WT/BOP/S/11, and there was still time
before the end of June to notify any progress or modification. Import deposit requirements, which in
some instances might raise the cost of imports above their bindings were being phased out.
8. The Committee accepted the commitments by Pakistan to present a full notification regarding
the status of implementation of its phase-out plan by the end of June, and any other measures taken
for balance-of-payments purposes.  On this basis, the Committee decided to suspend the meeting untilSeptember.WT/BOP/R/51
Page 3
ANNEX 1
Opening statement by the representative of Pakistan
1. Pakistan’s paper on recent economic developments, particularly on the Balance of Payments
has already been circulated by the WTO Secretariat.  However, a brief recapitulation of the difficulties
faced by Pakistan in its balance-of-payments durin g the outgoing fiscal year (July 1999 – June 2000)
is necessary to appreciate the context of Pakistan’s inability to adhere to its phase-out plan of
restrictions maintained under Article XVIII:B.
2. Pakistan’s economic indicators had begun to show improvements in the fiscal year 1997-98 as
a result of the various structural reform measures undertaken under its then ongoing programme withthe Fund.  However, this trend was reversed after the events of May 1998 and imposition of unilateral
economic sanctions by certain major countries.  The freeze on official capital flows to Pakistan, and
accompanying erosion of confidence, resulted in a shar p fall in both private transfers and official and
private capital.  Other exogenous factors accentuated the BOP crisis:
• Exports fell sharply in 1998-99 by 10.7% in dollar terms.  Imports were reduced only by 6.7%
mostly due to lower POL prices.  This led to a deterioration in the trade deficit, from US$ 1.9
billion (in 1997-98) to US$ 2.1 billion without the fall in POL prices, the BOP crisis would
have been even worse.
• Workers remittances fell by nearly 29%, while inflows in the resident FCAs fell sharply by
63%, from US$ 1476 million in 1997-98 to US$ 539 million in 1998-99.  Private transfersthus fell sharply by 29% from US$ 3.2 billion to US$ 2.3 billion in 1998-99.
• Consequently, the current account deficit increased to US$ 2381 million, i.e. to 3.9% of the
GDP as compared to US$ 1921 million, or 3% of the GDP, in 1997-98; a deterioration of US$
460 million.
• While long-term capital inflows did improve from US$ 1337 million in 1997-98 to US$ 1594
million in 1998-1999, the increase was on account of official capital flows only, since private
capital inflows declined by US$ 269 million.  Even at this level, capital inflows were 27%
lower than those in the financial year 1996-97.
• The crisis was compounded by a deterioration in the terms of trade by 4.1% over 1997-98.
3. As a result, Pakistan’s Foreign Exchange Reserves fell to US$ 415 million in November
1998.  Subsequently, there was a gradual build up of foreign exchange reserves after the IMF and the
International Financial Institutions (IFIs) resumed disbursements under various loans, on the
finalisation of Pakistan’s arrangements with the Fund in January 1999.
4. The important point to note is that despite the unprecedented balance of payments crisis faced
by Pakistan in 1998-99 and the urgent need to protect its external financial position; Pakistan did not
renege on its agreed tariff bindings nor introduce any new tariff/non-tariff restraints on imports apart
from the cash deposit requirement which was aimed at curbing speculative imports.  Even this
measure was gradually reduced and finally eliminated as the foreign exchange reserves position
improved.  This is no mean achievement.  It is a concrete manifestation of Pakistan’s unwaveringcommitment to structural reform, liberalization of  its economy and its integration into the global
economy.
Developments in the Fiscal Year 1999-2000
5. The economic indicators so far should be viewed with some cautious optimism.  There are,
however, several difficult areas in relation to the balance of payments situation:WT/BOP/R/51
Page 4
• In the current fiscal year, an amount of US$ 1.6 billion was expected to be disbursed by the
IFIs.  To-date, there has been no disbursement.  As a result, substantial negative transfers,
amounting to US$ 533.7 million, are expected to take place.  This has severely aggravated
Pakistan’s balance of payments difficulties.
• At the same time, terms of trade continue to dete riorate.  This is expected to have an adverse
impact of US$ 1.4 billion.
• There has been no significant improvement in access to the markets of major trading partners.
Existing restraints were maintained and some new restraints introduced with regard to our
textile exports by some major partners.
• With the loss of access to international financia l markets, the only way that foreign exchange
reserves can improve in the short-term is a sharp improvement in the current account deficit
and net inflows from the IFIs.  Neither is happening in the current fiscal year.
Prospects for 1999-2000
6. Against the estimates formulated in September 1999, the trade deficit is expected to
deteriorate by US$ 562 million, from US$ 1300 million to US$ 1862 million.  The current account
deficit is expected to deteriorate by US$ 335 million and the overall balance by US$ 502 million.  Net
of adjustments in other flows, foreign exchange reserves on the 30th of June 2000 are expected to be
less than US$ 1 billion (equivalent to 4 weeks of imports) compared to a target of US$ 2.075 billion
(9.7 weeks of imports).
7. To sum up, Pakistan’s balance of payments continue to be fragile and subject to uncertainties.
The foreign exchange reserves are expected to deteriorate sharply from US$ 1.7 billion in June 1999
to less than a billion dollar in June 2000.
8. This places in context Pakistan’s performance vis-à-vis its phase-out plan of restrictions
maintained under Article XVIII:B.
9. Pakistan maintains one of the most liberal trade regimes among the developing countries,
especially other low-income countries.  We have undertaken and are in the process of implementing
significant structural adjustments and poverty reduction measures in consultation with the IFIs.  As
stated earlier, Pakistan has fully demonstrated its commitment to live up to its undertakings with the
WTO and to maintain an open trading regime.
10. However, for a variety of external and internal reasons, our balance of payments position
remains precarious in short and medium-term, although the present Government is making every
endeavour to overcome the past weaknesses, restore confidence, revive the economy and achieve
greater balance and stability in the BOP situation.
11. Pakistan’s capacity to further liberalise its trade regime will depend on our success in this
endeavour.  The phase-out of the limited number of restrictions maintained by Pakistan under Article
XVIII:B, as envisaged, will be obviously related to our success in substantially strengthening the
balance of payments situation.  Such improvement will be facilitated in particular by the timeliness of
disbursements by the IFIs and increased access for our textile and clothing exports in the markets of
our principal trading partners.WT/BOP/R/51
Page 5
ANNEX 2
Statement by the representative from the International Monetary Fund
1. This statement:  (i) outlines economic developments in 1998/99 and so far in 1999/2000,
particularly in the external sector;  (iii) describes the most recent policy initiatives;  (iv)  the outlook
for the remainder of 1999/2000;  and (v) concludes with a brief assessment of the government’s
economic strategy.
1. Recent economic developments
2. During 1998–99, economic growth was moderate and inflation was low.  Real GDP grew by
3.1 percent, with a strong expansion in services offs etting weak growth in the agricultural sector, and
the manufacturing sector contributing moderate growth (Table 1).  Inflation fell to 5.7 percent, due in
part to the favorable performance of food crops.  Following recent upward revisions to fiscal
expenditure and financing data for 1997/98 and 1998/99, the overall fiscal deficit narrowed by about
1.5 percentage points to 5.9 percent of GDP in 1998/99.  Broad money growth moderated to
6.3 percent, as the pickup in private sector credit gr owth in the latter part of the year was more than
offset by lower net bank borrowing by the government.
3. On the external side, with the adverse effect of a poor cotton crop and low demand from
Asian trading partners on exports and lower private transfers, the current account deficit deteriorated
to 3.6 percent of GDP.  The capital account was supported by increased disbursements from
international financial institutions.  In addition, the Paris Club agreed to provide debt relief of$3.3 billion to Pakistan on public and publicly guaranteed debt service falling due in calendar 1999
and 2000 (and arrears as of December 31, 1998), and frozen foreign currency deposits of financial
institutions amounting to $1.4 billion were effectively rescheduled as the State Bank of Pakistan
agreed to release only 20 percent of these deposits in 1999/2000.  As a result of these developments,
reserves rose to $1.7 billion at end-1998/99, from $0.9 billion at the start of the fiscal year.
4. A number of structural reform measures were taken during the year.  The exchange system
was unified for all current transactions, the trade system was liberalized further, the GST was
extended and registration of firms was increased, and the prudential and regulatory framework was
strengthened with the passage of the Banking Companies Amendment Bill.
5. In the first nine months of 1999/2000, improved crops for cotton and major foodstuff staples
have boosted economic activity.  Large-scale manufacturing output growth has picked up to almost
8 percent on a year-on-year basis.  Inflation fell below 4 percent, reflecting the lower cost ofdomestically produced food items as well as and softer world prices for imported food items.  Fiscal
developments suggest a further narrowing of the deficit, with overall tax revenues increasing by
almost 20 over the corresponding period of last year .  Among the categories of tax revenues, sales tax
receipts have expanded rapidly, benefiting from the extension of the GST to petroleum products,
natural gas, and electricity.  The growth of cust oms duties, excises, and income taxes has, however,
failed to keep pace with nominal GDP growth.  Broad money growth—6.8 percent on a year-on-year
basis in February 2000—has been weak.  This was due principally to slow private credit growth,
which was affected by intensified loan recovery drive (which increased collections from
nonperforming loans and led to a decrease in net credit growth rates), sharply lower cotton prices
(which reduced working capital needs), and the gove rnment’s initiative to reduce the processing time
for tax refunds (which diminished the cash financin g requirement of the industrial sector).  Credit to
the government expanded rapidly, accounting for about one half of the expansion in broad money
since the beginning of the year.WT/BOP/R/51
Page 6
6. On the external side, the trade deficit widened due to higher prices of imported oil products.
Its effect on the current account, however, has been offset by a strong increase in private transfers,
which were captured in part through central bank purchases in foreign exchange markets without
weakening the rupee.  The capital account was boosted by a new credit facility for oil imports, valued
at a little under $800 million for the year.  Investment inflows, which are mainly tied to ongoingprojects, have remained relatively stable, albeit at a low level.  Pakistan rescheduled its $608.3 million
outstanding  Eurobond obligations and signed a restructuring agreement with commercial banks on
$512 million of short-term trade credits.  Consequently, despite the absence of program financing
from international financial institutions during the fis cal year, reserves have remained stable at around
$1.2  billion (about five weeks of imports of goods  and nonfactor services of the following year)
during the second and third quarters, after declining by about $400 million in the first quarter of the
fiscal year.
2. Recent policy changes and initiatives
7. The new authorities have prepared a comprehensive homegrown reform agenda with the main
objectives of rebuilding confidence of domestic and foreign investors, alleviating poverty, and
promoting good governance.  The agenda includes:  (i) well conceived reforms in the energy sector,
which if implemented could provide a significant boost to economic growth and foreign directinvestment;  (ii) structural fiscal measures with significant consolidation potential over the next few
years;  (iii) an ambitious privatization schedule covering the banking, energy, and manufacturing
sectors with proceeds to be used mainly to retire debt;  (iv) an agricultural policy that promotes
market liberalization and reduces government interventions in pricing and trade;  (v) a comprehensive
poverty reduction program with emphasis on social sectors and a targeted social safety net which hasbeen laid out in a draft interim Poverty Reduction Strategy Paper (PRSP) prepared by the authorities
in consultation with various groups in the society;  and (vi) specific measures to improve governance
and transparency.
8. In line with this agenda, the authorities have already taken the following steps:
− Immunities from tax probe for new investments in existing instruments enjoying immunity
have been withdrawn and the income tax exemption relating to new deposits in foreign
currency accounts has been withdrawn;
− A loan recovery drive is underway and PRs 14 billion (representing around 10 percent of
nationalized commercial banks’ (NCBs) defaulted loans) has been collected;
− A mechanism for linking domestic petroleum prices with world prices has been put in place
and the subsidy on furnace oil has been eliminated;
− Several foreign exchange controls that were imposed in May 1998 have been withdrawn;
− A new cotton policy allowing free export and import of raw cotton, including during the
harvest season, has been announced;  and
− Progress has been achieved in resolving disputes with independent power producers (IPPs).
Revised tariffs have been agreed with 12 IPPs.
9. In addition, the authorities have also announced their intention to move ahead with the
following specific measures:
− Fiscal policy—extension of the GST to services, inclusion of agriculture in the tax net,
improved tax administration, and review of the income tax ordinance;
− Financial sector—resolution of remaining disputes with IPPs, enhanced commercial
orientation of state-owned enterprises, and liberalization of end-user prices;
− Agricultural sector—reduced intervention in pricing and external trade;WT/BOP/R/51
Page 7
− Industry and trade—promulgation of WTO-consiste nt trade legislation in various areas, and
reduction in excises on imported goods to bring the effective  tariff rate to no more than
35 percent;
− Privatization—preparing state-owned banks, other financial institutions, and enterprises in the
gas, petroleum, an power sectors for sale to the private sector;
− Poverty reduction—developing a well-targeted income support program and enhancing
employment opportunities for the underprivileged; and
− Governance and transparency—devolution of power and responsibilities from the Federal and
Provincial Governments to District Governments to improve the delivery of essential public
services;  vigorous pursuit of accountability of public officials;  and preparation and
publication of monthly reports on fiscal data.
3. Outlook for the remainder of 1999/2000
10. Real GDP growth is expected to increase to 4.5 percent for the year as a whole, with the
rebound in the cotton crop benefiting both the agricultural and the manufacturing sectors.  The annual
average inflation rate for 1999/2000 is expected to fall to 4 percent, while the budget deficit is
projected to narrow to 5.4 percent of GDP.  Broad money growth is projected to moderate to around
6.5 percent by the end of the fiscal year, reflecting sluggish growth of net credit to the private sector.
11. On the external side, the trade account is projected to improve significantly in 1999/2000
despite a sharp deterioration in the terms of trade (which is estimated to have worsened the trade
balance by around US$1.4 billion).  The improvement reflects the strong growth in export volumes,particularly for cotton manufactures.  The current account deficit is expected to decline to 2.5 percent
of GDP.  Taking into account the developments in the capital account, foreign exchange reserves are
projected to amount to around US$950 million at end-June 2000 (about 3.7 weeks of imports of goods
and nonfactor services of the following year).
4. Conclusions
12. Pakistan needs to achieve high and sustainabl e economic growth to reduce the internal and
external imbalances in the economy.  This will require prudent demand management policies, a
private investment friendly environment, and a bold structural reform program.  The new
government’s reform agenda and commitment to improve public finances are encouraging and should
be implemented vigorously.  In the near term, however, the external outlook will remain fragile andfinancial support from the international community will be critical.  This support, in turn, will hinge
on the government’s ability to start implementing a strong and credible program of economic reform,
including steps to enhance transparency and governance.  Given the misreporting of fiscal data in
1997–99 under the programs supported by Fund resources, these efforts would need to be
accompanied by improvements in data reporting and reconciliation procedures, as was emphasized bythe Executive Board during its recent discussion of this matter.
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