Pakistan WT/TPR/S/193 
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I. ECONOMIC ENVIRONMENT 
(1) INTRODUCTION  
1. Since its previous Trade Policy Review, Pakist an's economy has shown impressive real GDP 
growth, averaging over 6% from 2001/02 to 2006/07, helped significantly by more prudent 
macroeconomic policies, including fiscal restraint,  which until recently curtailed budget deficits, and 
ongoing structural reforms.  Real GDP per capita grew at an average 4.0% annually during this period, rising to around US$900 in 2006/07, while average annual population growth has been just over 2.0% since 2001/02 (current population of 156.8 million).  Pakistan rose to a "medium development" country on the UN human developm ent index in 2003.  In 2004, Pakistan ranked 
134
th overall (out of 177) and 71st (out of 83) within the "medium development" group;  in 2002, it 
ranked 142nd overall and was at the top of the "low human development" category.1  Associated with 
growth, unemployment has fallen, from 8.3% in 2001/02 to 6.2% during the first half of 2006/07, as have poverty levels, though these are still high, with nearly one quarter (one third in 2000/01) of 
Pakistanis currently living on less than US$1 a da y, especially in rural areas where 65% reside.
2  
Income inequality has widened slightly.  
2. Pakistan faces formidable economic difficulties,  including macroeconomic and structural, as 
well as social challenges to sustain growth and poverty alleviation.  These are reflected in the 
Government's Poverty Reduction Strategy Paper (P RSP), released in December 2003, aimed at 
halving poverty to 13% of the population by 2015 a nd meeting other Millennium  Development Goals.  
Its pillars are accelerated broad-based economic growth of 7-8% annually, improved governance, 
investment in human capital, and ta rgeted relief to the poor (Chapter  II).  The Government recently 
assessed the PRSP as having reduced urban and rural poverty by primarily raising sustained growth.3  
However, while the PRSP emphasized private sector development, export-led growth, and continued 
trade reforms, trade liberalization has slowed substantially during the period under review, and 
production and export support has been  revamped (e.g. for textiles and clothing) with potentially 
adverse effects on economic efficiency (Chapters III a nd IV).  In addition, there has been little export 
diversification in products or markets.   
3. Despite persistence of inflationary pressures,  the macroeconomy has generally strengthened 
and substantial structural reforms have been intr oduced.  However, external and fiscal imbalances 
raise macroeconomic concerns, recently highlighted  by the State Bank of Pakistan (SBP), and 
deep-rooted structural weaknesses persist.  These in clude a distorting tax (and tariff) system;  narrow 
production and export base;  the State's prominent ro le in the economy; infrastructure bottlenecks;  
weak governance;  business hindrances, including burd ensome regulation and re d tape;  labour market 
rigidities; and political and security uncertainties.  By raising the costs of "doing business" these 
hamper private sector growth and efficiency, thereby impeding, inter alia,  improvements in 
productivity and export competitiveness.  Pakistan's  overall international competitiveness appears to 
be declining, including in traditional products (e.g. textiles).4  Export performance has been mixed and 
exports as a share of GDP have fallen during the revi ew period and contributed less than previously to 
growth (sections (2)(i) and (6)).  Reforming mi croeconomic fundamentals could improve domestic 
                                                      
1 UNDP (2006  and 2004). 
2 IMF (2006b). 
3 Government of Pakistan (2006e), p. 64. 
4 In 2006/07, Pakistan was ranked 91st (out of 125) in the World Economic Forum's Growth 
Competitiveness Index (CGI), 67th (out of 121) in its Business Competitive Index, 84th (out of 122) in its 
Networked Readiness Index (NRI), and 103rd (out of 124) on the Travel and Tourism Competitiveness Index 
(World Economic Forum, 2006).  WT/TPR/S/193 Trade Policy Review 
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savings and investment along with pro ductivity and international competitiveness.5  While Pakistan is 
implementing anti-corruption and governance measures, corruption indicators remain high;  its corruption ranking slipped from 77
th (out of 102) in 2002 to 147th (out of 163) in 2006 on 
Transparency International's la test Corruption Perception Index.6  
4. The economy has become more outward-oriented ov erall, with trade (exports and imports) in 
goods and non-factor services rising from 30.5% of GDP in 2001/02 to 36.1% in 2006/07, and inward foreign direct investment rising tenfold during 2003-07 to record levels.  
(2) R
ECENT ECONOMIC PERFORMANCE  
(i) Growth, employment, and poverty 
5. Real GDP growth (at factor cost) during the review period peaked at 9.0% in 2004/05, slowed 
to 6.6% in 2005/06 and rose again to 7.0% in 2006/07 (Table I.1).  Pakistan is among the fastest growing Asian economies.  While sl ower agriculture growth due largely to poor harvests (e.g. cotton, 
sugar and wheat) dragged down overall growth in 20 05/06, a turnaround in farm output led by record 
wheat and sugar cane production boos ted overall growth in 2006/07.  Manufacturing (facing emerging 
capacity constraints in some industries) and service s (especially construction, finance and insurance, 
and retail/wholesale trade) also continued to expand  robustly, underpinned by rising investment and 
private consumption, the former exceeding th e latter for the first time in three years.
7  
6. The economy remains dominated by services and agriculture, which also provide most jobs 
(Table I.2).  The major GDP compositional change  since 2001/02 has been the relative growth of 
manufacturing at the expense of agriculture.  In broa d terms, labour productivity in agriculture is less 
than one third of that for the rest of economy, la rgely reflecting limited mechanization and relatively 
small farm sizes. 
7. Unemployment declined from 8.3% in 2001/02 to 6.2% from July-December 2006 
(Table I.1).  Poverty, while still high, has been a lleviated since 2000/01, with all indicators declining 
substantially by 2004/05.8  Income inequality rose slightly during this period (the Gini Coefficient 
based on consumption rising from 27.5 to 29.8) but  remains below many comparable developing 
countries.9 
8. The informal (shadow) economy remains large (possibly one third of GDP).10  Despite 
improvements, high and uneven taxes, widespread corruption, heavy regulatory controls, and trade 
barriers still encourage informal activities, including in international trade, with substantial smuggling 
(e.g. from India and Afghanistan).  These activities undermine formal markets, erode the tax base and 
create a cycle of high taxes that in  turn drives informal transactions.  
                                                      
5 World Bank (2006). 
6 Transparency International (2007a). 
7 Agriculture and industry contributed 40% of growth in 2006/07 and services the rest;  exports were a 
drag on growth in 2006/07 (Ministry of Finance, 2007a, p. 1). 
8 The headcount fell from 34.5% of the population to 23.9%;  the poverty gap from 7.0% to 4.8%;  and 
the severity of poverty measure from 2.1% to 1.5% (Ministry of Finance, 2007a, p. 55). 
9 Ministry of Finance (2007a), p. 59. 
10 Studies vary in the estimated size of the shadow economy and are technically  flawed (CBR, 2003b).  Pakistan WT/TPR/S/193 
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Table I.1 
Selected macroeconom ic indicators, 2001-07 
  2001/02 2002/03 2003/04 2004/05 2005/06 2006/07a 
National accounts (Percentage change) 
Real GDP (at 1999-00 factor cost prices) 3.1 4.7 7.5 9.0 6.6 7.0 
Real GDP (at 1999-00 market prices) 3.2 4.8 7.4 7.7 6.9 6.4 
Consumption 2.7 1.2 9.1 11.7 6.9 3.8 
Private consumption 1.4 0.4 10.1 12.1 3.2 4.1 
Government consumption 15.0 7.2 1.4 1.7 48.3 2.0 
Gross fixed capital formation -0.4 4.1 -6.1 13.5 17.6 20.6 
Exports of goods and non-factor services 10.0 28.4 -1.5 9.6 9.9 0.4 
Imports of goods and non-factor services 3.0 11.2 -8.6 40.5 18.7 1.3 
XGS/GDP (%) (at current market price) 15.2 16.7 15.7 15.7 15.3 13.9 
MGS/GDP (%) (at current market price) 15.3 16.1 14.6 19.6 23.3 22.2 
Unemployment rate (%) 8.3 8.3 7.7 7.7 6.5 6.2b 
Prices and interest rates (Per cent) 
Inflation (CPI, %age change) 3.5 3.1 4.6 9.3 7.9 7.8 
Core inflation (%age change) .. 2.5 3.7 7.0 7.1 6.2 
Lending rate (end period)c 13.2 9.4 7.3 8.8 10.6 10.3 
Deposit rate (end-period)d 3.6 1.6 1.0 1.4 2.0 4.0 
Treasury bills (end-period)e 6.3 1.7 2.1 8.0 8.4 8.9 
 (Percentage change, unless otherwise indicated) 
Money credit (end period)f  
Money supply (M2) 15.4 18.0 19.6 19.3 15.1 19.3 
Reserve money (M0) 9.6 14.5 15.4 17.6 10.2 20.9 
Credit to private sector  7.1 20.9 34.3 34.4 23.5 16.9 
Exchange rate       
Rupee/US$ (financial year - annual average) 61.4 58.5 57.6  59.4  59.9  60.6 
Real effective exchange rate (end period) 3.3 -3.6 2.6  2.0  1.9  0.8 
Nominal effective exchange rate (end period)  0.8 -3.6 -2.9  -4.3  -2.5  -3.8 
 (Per cent of current GDP at market  price, unless otherwise indicated)  
Fiscal policy  
Revenue receipts 14.0 14.8 14.3 13. 8 14.2 13.4 
Tax revenue 10.7 11.4 11.0 10.1 10.1 10.5 
Custom duties 1.1 1.4 1.5 1.7 1.6 1.5 
Expenditure 18.3 18.5 16.7 17.2 18.5 17.6 
Federal Government overall balance -4.3 -3.7 -2.4 -3.3 -4.7 -4.3 
Government total debt (end-pe riod) 85.0 78.4 70.0 64.5 58.7 55.2 
Domestic debt  38.6 38.0 35.1 32.8 30.2 28.4 
Saving and investment        
Gross national savings 18.4 20.6 18.3 16.7 16.4  18.0 
Gross domestic savings 17.9 17.4 16.2 15.1 14.7 16.1 
Gross domestic investment 15.5 15.3 15.0 17.6 20.1 21.4 
Savings-investment gap 2.9 5.3 3.3 -0.9 -3.7 -3.4 
External sector       
Current account balance  3.8 4.9 1.8 -1.4 -3.9 -4.8 
Net merchandise trade  -0.4 -0.5 -1.2 -4.1 -6.5 -6.8 
Merchandise exports 12.6 13.2 12.7 13.2 12.9 11.8 
Merchandise imports 13.0 13.6 13.9 17.1 19.4 18.6 
Services balance -0.4 0.0 -1.3 -3.0 -3.5 -2.9 
Capital account 0.2 1.4 0.1 0.6 0.2 0.2 
Financial account -1.5 -0.6 -1.4 0.4 4.6 7.1 
Direct investment 0.7 0.9 0.9 1.3 2.7 3.5 
Table I.1 (cont'd) WT/TPR/S/193 Trade Policy Review 
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  2001/02 2002/03 2003/04 2004/05 2005/06 2006/07a 
Balance of payments  4.3 7.1 0.3 -0.6 0.9 .. 
Terms of trade 90.8 82.1 76.7 73.6 65.0 63.6 
Merchandise exports (%age change) 9.1 20.1 13.8 16.2 13.8 3.3 
Merchandise imports (%age change) 6.3 20.1 20.0 37.8 31.3 8.2 
Service exports (%age change) -2.4 41.5 -2.2 25.5 13.6 9.4 
Service imports (%age change) 8.0 22.6 45.9 67.0 24.0 0.8 
Gross official reservesg (US$ million) 7,065.0 11,472.0 13,155.0 13,338.0 14,590.0 17,320.0 
in months of imports 4.6 8.3 6.7 4.7 4.7 5.5 
Total external debt (end period, US$ million)h 33,400.0 33,352.0 33,307.0 34,037.0 35,356.6 38,699.0 
% of GDP 46.1 40.0 34.0 31.1 27.9 26.9 
Debt service ratioi 36.7 22.7  32.5  14.9  13.3  12.6 
.. Not available. 
a Provisional. 
b July to December 2006. 
c Weighted average rates of return on advances. d Weighted average rates of return on deposits. 
e Six months treasury bill weighted average rate. 
f Excluding food and energy. g Excluding foreign currency deposits held with the State Bank of  Pakistan, gold, and net of out standing short-term swap and 
forward contracts. 
h Including IMF, military debt, commercial loans, and short-term debt. i In per cent of current earnings, defined as the sum of expor ts of goods, non-factor services, and private transfers. 
Note: Pakistan's fiscal year is from July to June. 
Source:  State Bank of Pakistan (2007), Annual Report FY06 , May  and Statistical Bulletin,  September.  Viewed at:  
http://www.sbp.org.pk/reports/stat_re views/index.htm [June 2007];  Federa l Bureau of Statistics online 
information.  Viewed at:  http://www. statpak.gov.pk/depts /index.html;  and data provide d by Pakistan authorities. 
Table I.2 
Basic economic and social indicators, 2001-07  
   2001/02 2002/03 2003/04 2004/05 2005/06 2006/07a 
Real GDP at factor cost (PRs billion, 1999/00 prices) 3,745.1 3,922.1 4, 215.6 4,593.2 4, 896.7 5,240.7 
Real GDP at market prices (PRs billion, 1999/00 
prices) 4,027.8 4,223.0 4,534.1 4,881.8 5,219.6 5,552.7 
Current GDP at factor cost (PRs billion)  4,146.2 4,534.2 5,250.5 6,122.6  7,129.2 8,226.5 
Current GDP at market price (PRs billion) 4,452.7 4,875.6 5,640.6 6,499.8 7,593.9 8,706.9 
Current GDP at market price (US$ million) 72, 488.3 83,345.1 97, 970.1  109,502.1  126, 867.4  143,654.8 
GDP per capita at current market price (PRs) 31,266.0 34,259.0 38,524.0 43,495.0 49,841.0 56,064.0 
GDP per capita at current market price (US$) 503.0 586.0 669.0 733.0 833.0 925.0 
 (Annual percentage change) 
GDP by economic activity at real factor cost 1999/00 prices  
Agriculture, forestry, and fishing 0.1 4.1 2.4 6.5 1.6 5.0 
Mining and quarrying 5.7 6.6 15.6 10.0 4.6 5.6 
Manufacturing 4.5 6.9 14.0 15.5 10.0 8.4 
Services 4.8 5.2 5.8 8.5 9.6 8.0 
 Electricity, gas, and water -7.0 -11.7 56.8 -5.7 -23.8 -15.2 
 Construction 1.6 4.0 -10.7 18.6 5.7 17.2 
 Transport, storage, and communication 1.2 4.3 3.5 3.4 6.9 5.8 
 Wholesale and retail trade 2.8 6.0 8.3 12.0 8.7 7.1 
 Finance and insurance 17.2 -1.3 9.0 30.8 33.0 18.2 
 Ownership of dwellings 3.5 3.3 3.5 3.5 3.5 3.5 
 Public administration and defence 6.9 7.7 3.2 0.6 10.0 6.9 
 Community, social, and personal services 7.9 6.2 5.4 6.6 6.3 8.5 
Table I.2 (cont'd) Pakistan WT/TPR/S/193 
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   2001/02 2002/03 2003/04 2004/05 2005/06 2006/07a 
  (Per cent) 
Share of main sectors in current GDP at factor cost  
Agriculture, forestry, and fishing 24.1 24.0 22.9 22.4 21.3 20.9 
Mining and quarrying 2.4 2.5 2.6 2.7 2.6 2.6 
Manufacturing 15.9 16.3 17.2 18.3 18.9 19.1 
Services 57.5 57.2 57.2 56.7 57.2 57.4 
 Electricity, gas, and water 3.0 2.5 3.7 3.2 2.3 1.8 
 Construction 2.4 2.4 2.0 2.1 2.1 2.3 
 Transport, storage, and communication 11.4 11.4 10.9 10.4 10.4 10.3 
 Wholesale and retail trade 17.8 18.0 18.2 18.7 19.1 19.1 
 Finance and insurance 3.5 3.3 3.4 4.0 5.0 5.6 
 Ownership of dwellings 3.2 3.1 3.0 2.9 2.8 2.7 
 Public administration and defence 6.4 6.6 6.3 5.9 6.0 6.0 
 Community, social, and personal services 9.8 9.9 9.7 9.5 9.5 9.6 
Share of sector in total employmentb       
Agriculture, forestry, and fishery 42.1 42.1 43.1 43.0 43.4 43.4 
Mining and quarrying 0.1 .. 0.1 .. 0.1 .. 
Manufacturing 13.8 13.9 13.7 13.8 13.8 13.9 
Services 44.0 .. 43.2 .. 42.7 .. 
 Electricity, gas, and water 0.8 0.8 0.7 0.7 0.7 0.7 
 Construction 6.1 6.1 5.8 5.8 6.1 6.1 
 Wholesale and retail trade and hotels and 
restaurants 14.9 14.9 14.8 14.8 14.7 14.7 
 Transport, storage, and communication 5.9 5.9 5.7 5.7 5.7 5.7 
 Financing, insurance, real estate, and business 
activities 0.9 .. 1.1 .. 1.1 .. 
 Community, social and personal service activity 15.5 .. 15.0 .. 14.4 .. 
 Other 0.0 .. 0.05 .. 0.04 .. 
Memorandum       
Life expectancy at birth (years) .. 63.00 64.00 64.00 .. .. 
Infant mortality rate (per 1,000 liv e births) 85.0 83.00 83.00 82.00 77.0 76.7 
Adult literacy rate (%) 50.5 51.60 53.00  53.00 54.0 .. 
Enrolment ration (net) in education       
 Primary (%) 42.0 .. 52.0 .. 52.0 .. 
 Secondary (%) 16.0 .. 18.0 .. .. .. 
.. Not available. 
a Provisional. 
b Share of employed persons ten years of age and over. 
Source:  State Bank of Pakistan, Annual Report FY06;   Federal Bureau of Statistics online information.  Viewed at:  
http://www.statpak.gov.pk/depts/index.htm l;  and the authorities of Pakistan. 
(ii) Inflation 
9. While consumer price (headline) inflation peaked at 9.3% in 2004/05 and fell to 7.8% in 
2006/07 (7.9% in 2005/06), it rose continuously on "cor e" items (excluding food and energy) largely 
from demand pressures until 2005/06 to reach 7.1%, be fore falling to 6.2% in 2006/07 (Table I.1).11  
Persistent inflation during 2006/07 reflected mainly rising food prices, largely from supply disruptions 
(e.g. pulses, rice, and vegetables) and high global prices (e.g. edible oils).  Monetary factors have been 
shown to be the dominant determinant of inflation in Pakistan12;  the SBP's key objective is to contain 
                                                      
11 The SBP uses "core" inflation to guide monetary policy setting (SBP, 2007a). 
12 IMF (2006a). WT/TPR/S/193 Trade Policy Review 
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persistently high headline inflation;  while revising its  original 2006/07 target of 6.5% to 7.5-7.8%, its 
2007/08 target has been set at 6.5% (section 3(1)).13 
(3) MAIN MACROECONOMIC POLICY DEVELOPMENTS  
10. The Monetary and Fiscal Coordination Board, est ablished in 1997, coordinates monetary and 
fiscal policies.  The burden of controlling inflation has mainly fallen on monetary policy while fiscal 
policy has traditionally promoted growth.  The recen t expansionary fiscal stance to raise the budget 
deficit above 2004/05 levels as a share of GDP is  at odds with tightening monetary policy, and, 
according to the World Bank, changes in the macr oeconomic policy mix to better align fiscal with 
monetary policy would facilitate longer term sustainable growth.14 
(i) Monetary and exchange rate policy 
11. The State Bank of Pakistan (SBP) maintains r esponsibility for monetary and exchange rate 
policies (SBP Act, 1997).   The authorities indicate that the SB P's independence was strengthened 
during the review period and that the Ministry of Finance, which sets annual inflation targets, has 
"little or no influence" over these policies.15  The high-powered Monetary and Fiscal Policy 
Coordination Board, chaired by the Minister of Fi nance (currently the prime minister), discusses 
financial and fiscal policy stances.  Legislatively, the SBP Board of Directors can limit government 
borrowings from the central bank (these have  traditionally complicated monetary policy 
management).16   
(a) Monetary policy 
12. The SBP targets monetary aggregates (broad money supply as an intermediate target and 
reserve money as an operational target) using market-oriented instruments (especially open market 
operations) to meet government-set real GDP and inflation targets.17  Monetary policy has been 
tightened since 2005/06 to curb excessive demand and the economy's overheating caused by monetary 
overhang.18  However, while monetary growth (bro ad money (M2) and reserve money (M0)) 
contracted significantly in 2005/06, reducing excessi ve demand and curbing import growth to more 
sustainable levels, it accelerated again in 2006/07;  during the same period M2 growth at 19.3%, was 
well above the annual target of 13.5% , and has raised liquidity concerns and a risk of resurgence in 
inflation.19  In August 2007, the SBP again raised its main  policy interest rate variable (3-day Repo 
rate for overnight lending to banks as a last r esort) from 9.5% to 10.0% (previously increased from 
9.0% to 9.5% in July 2006 and initially from 7% in April 2005).  Significant selling of securities on 
the open market has also helped "mop up" excess liquidity.  The SBP's Monetary Conditions Index 
(MCI) has risen, reflecting tighter monetary policy, since August 2003.20  Private sector credit growth, 
                                                      
13 SBP (2007b).  The Sensitive Items Price Committee and the ECC of Cabinet monitor prices 
(Ministry of Finance, 2006, p. 126). 
14 World Bank (2006b), p. 101 and SBP (2007c), p. 3. 
15 In particular, amendments to central bank legislation in late 2004 clarified the role of the Monetary 
and Fiscal Policies Coordination Board and prevented it from taking measures that would adversely affect SBP 
authority.  Power to appoint or dismiss the SBP Governor  was also transferred to the President of Pakistan. 
16 SBP (2007a). 
17 The SBP is conducting preparatory work on whether to adopt inflation targeting, which would 
require a supportive legal and regulatory framework and greater SBP operational independence (SBP, 2007a). 
18 SBP (2007a). 
19 SBP (2007a) and SBP (2007c), p. 1.  
20 The MCI, a weighted average of short term interest and exchange rates relative to a base period 
(July 2002), tracks their impact on monetary conditions and is used by the SBP for internal monitoring purposes Pakistan WT/TPR/S/193 
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a major source of monetary expansion, contracted  to 23.5% (2005/06) and further to 16.9% (2006/07), 
and while remaining strong, it seems that it is returning to its long term trend.21  
13. Conducting monetary policy has been complicated by the expansionary impact of the easing 
fiscal stance on reserve money in recent years, esp ecially given the associated rising dependence on 
and volatility of government borrowings as budgetary  support from the SBP and the banking system 
generally, which continued in 2006/07 (section (ii)).22  Large FDI inflows and the increased 
concessionary credits provided since 2006 by the SBP to industrial and export sectors (especially 
textiles and clothing) under the Long-term Financi ng for Export-Oriented Projects (LTF-EOP) and the 
Export Finance Scheme (EFS) (negativ e real interest rates) have also  added substantially to monetary 
expansion.23  Growth in these soft credits continued in 2006/07, and aside from causing monetary 
management complexities have started to distort industry incentive structur es according to the SBP.24 
14. Accommodating the expansionary  2007-08 Budget deficit without inflationary pressures is 
seen as a major SBP challenge.  The SBP introduced several strategic qualitative changes to monetary 
policy formulation in August 2007.25  It abandoned the annual credit plan of setting prescribed broad 
monetary targets, and recognized the need to deal with the two main sources of reserve money growth 
more sustainably, i.e. the Government's relianc e on central bank borrowings and SBP's provision of 
concessionary finance, which dilute d its tight monetary policy stance.26  The SBP recommended that 
in 2007/08 the Government retire SBP borrowings of  PRs 62.3 billion;  adopt quarterly ceilings on 
such budget borrowings;  and implement a more bala nced domestic debt strategy of funding budget 
deficits from less inflationary financing sources e.g. Pakistan Investment Bonds.27  The SBP also 
changed the EFS and LTF-EOP to limit their im pact on monetary growth (Chapter III).   
(b) Exchange rate policies 
15. The authorities classify Pakistan's exchange ra te regime as a managed float without setting 
pre-determined paths or targets, and have indicated  that market intervention is limited to moderating 
and preventing "excessive" fluctuations.   However, since 2005 the  IMF has classified it as a de facto  
conventional peg to the U.S. dollar wi thin the range of PRs 59.0 to 60.5.28  SBP intervenes in the 
market using the U.S. dollar;  from November 2004 it substantially supported the rupee by selling 
U.S. dollars, until early 2007 when it starte d buying them to reduce the rupee's value.29  While the 
nominal effective exchange rate depreciated by  some 15% (slowed by SBP intervention) from 
2001/02 to 2006/07, higher inflation relative to trading partners means that the real exchange rate has 
                                                                                                                                                                     
(SBP, 2007b, p. 10).  While rising initially by 0.4% in 2006-07 the MCI fell by 0.5%  in the second half of the 
year (SBP, 2007c, p. 12). 
21 SBP (2007c), p. 8. 
22 By end 2006/07, SBP holdings of government paper stood at PRs 452 billion (SBP, 2007c, p. 2). 
23 Financing under these two schemes contributed around one third of the 20% growth in reserve 
money during 2006/07.  At end-June 2007, total SBP concessionary credit was about PRs 245.0 billion (PRs 134.4 billion under the Export Finance Scheme);  textile exporters were also allowed debt swaps and 
long-term borrowings totalling PRs 34.9 billion during 2006/07 (SBP, 2007c, p. 11). 
24 SBP (2007c), p. 2. 
25 SBP (2007c), p. 2. 
26 Under the new arrangements, the SBP will announ ce and pursue a broad monetary (M2) growth 
target consistent with the Government's real GDP growth and inflation targets.  Assuming a real GDP growth 
target of 7.2% in 2007/08 and an inflation target of 6.5%, the SBP has set M2 growth for that year at 13.7%.  
27 SBP (2007c), p. 3. 
28 IMF (2006b), p. 36.  In July-March 2006/07 the exch ange rate depreciated slightly outside this band.  
Evidence confirms that Pakistan has followed a de facto pegged exchange rate to th e U.S. dollar, albeit with 
infrequent major devaluations (IMF, 2006c). 
29 SBP (2007d), p. 70. WT/TPR/S/193 Trade Policy Review 
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appreciated continuously since 2003/04 (1.9% in 2005/06 and 0.8% in 2006/07).30  This may have 
contributed to Pakistan's declining international co mpetitiveness;  the fall in export growth in 2006/07 
to 0.4% (9.9% in 2005/06) also reportedly re flected one-off supply factors and EC-specific 
preferences and safeguards.31  Greater exchange rate flexibility may be in Pakistan's economic 
interests, including by facilitating macro-stabilization.32 
16. Foreign exchange controls and restrictions ar e minimal;  all current account transactions are 
unrestricted except for a limit of 50% on  advance payments for some imports.33  
(ii) Fiscal policy 
17. Fiscal deficits dropped to 2.4% of GDP in 2003/ 04, before peaking at 4.7% in 2005/06, and  
falling to 4.3% in 2006/07 (Table I.1);  recent highe r deficits have been mainly due to increased 
public expenditure after the October 2005 earthqua ke.  Fiscal policy is underpinned by the 2005 
Fiscal Responsibility and Debt Limitation Act, which s tipulates a "revenue deficit" (total revenue less 
current expenditure) of zero by 13 June 2008 and surpluses thereafter, as well as declining debt-to-
GDP ratios by 2.5 percentage points annually to a maximum of 60% by 2012/13.34  This debt target 
was achieved in 2005/06 (58.7%) and further reduced to 55.2% in 2006/07.   Primary budget deficits, 
re-occurring since 2005/06 (last in 1996/97), narrowed in 2006/07 to 0.1% of GDP (PRs 9 billion).  
Any renewed  expansionary budgetary stance could, as highlighted by the SBP, undermine fiscal 
consolidation and aggravate inflationary pressures,  especially if accommodated by an insufficiently 
tightened monetary policy.35  The fiscal deficit has been incr easingly financed by SBP and bank 
borrowings (PRs 116.6 billion in July-March 2006/07).36  Total public domestic debt as a share of 
GDP fell substantially during the review period, to 28.4% in 2006/07 (38.6% in 2001/02) (Table I.1). 
18. The effectiveness of fiscal policy is hamper ed by the weak tax base, which appears 
insufficient to meet developmental needs and aggr avates budgetary pressures.  Despite significant tax 
reforms and improved collection, tax revenue as a shar e of GDP has declined during the review period 
to 10.5% in 2006/07;  overall revenue (including grants) as a share of GDP has also declined, to 
13.4% in 2006/07.  Reduced fiscal deficits have mainly reflected declining expenditures, falling as a 
share of GDP from 18.3% of GDP to 17.6%. 
(4) MAIN STRUCTURAL POLICY DEVELOPMENTS  
19. Sustainable improvements in Pakistan's  economic performance depend on achieving 
productivity gains to improve international compe titiveness and exports.  Total factor productivity 
                                                      
30 SBP (2007d), p. 9;  SBP (2007a);  and World Bank (2006b), pp. 101-102.  Analysis based on 
equilibrium real exchange rate and external sustainability approaches suggest the rupee is overvalued in real 
terms (10% as at July 2006);  a th ird macroeconomic balance approach in dicates no overvaluation (IMF, 2006b, 
p. 14). 
31 SBP (2007a), p. 90. 
32 IMF (2006c). 
33 IMF (2006b), p. 36.  The authorities indicate that this is not a "payment" restriction but an 
adjustment in the mode of payment aimed at controlling speculation without affecting genuine business needs, 
and that advance payments above 50% are not prohibited but require SBP approval.  Blanket approval of 100% advance payment is always granted in genuine cases.  
34 Since the "revenue deficit" excludes development expenditure no such deficit may still imply a 
significant fiscal deficit depending on the level of development spending.  The Government has tried to avoid accumulating fiscal imbalances by committing to a 4.2% of  GDP cap on the fiscal deficit target (SBP, 2007d). 
35 There is evidence to suggest that Pakistan's long-run  inflation is mainly related to fiscal deficits and 
their financing by government borrowings from SBP. 
36 SBP (2007d), pp. 66-67. Pakistan WT/TPR/S/193 
 Page 9 
 
 
(TFP), export competitiveness, and economic growth are closely linked.  Structural and other 
micro-economic reforms, including trade and invest ment liberalization, should boost productivity.  
Higher TFP, a key determinant of the economy's performance, explains about one quarter of 
Pakistan's growth since 2001;  about 80% of this  was from the improved investment climate due to 
structural reforms (especially better public in frastructure, reduced government burden on business, 
including reduced costs of "doing  business", and greater trade openness), as well as better governance 
and financial sector efficiency.37  The Government's second-generation reforms are aimed at 
strengthening institutions;  improving competitivene ss;  building a robust financial sector, including 
further capital market reforms;  on-going strengthe ning of tax administration;  promoting economic 
policy transparency;  and improving physical and human infrastructure over the next five years.38    
(i) Tax and expenditure reforms 
20. Under the Medium Term Budgetary Framew ork 2003/04-2010/11 (MTBF), tax and total 
revenues (including grants) are projected to rise slightly to 12.5% and 15.8% of GDP, respectively, and public expenditure to 19.0% in 2010/11.   
(a) Taxation 
21. Tax reform is a government priority.  Significant steps taken since the last Review of Pakistan 
include on-going efforts to reduce tax rates, broade n the tax base, shift the tax incidence from imports 
to consumption and income, to improve the effici ency of tax administration and collection, and 
enhance voluntary compliance.  Specific reforms cover higher income-tax-free thresholds;  lower 
company taxes towards a common rate;  re-introduc tion of a uniform general sales tax (GST) rate;  
and raising the turnover threshold for registrati on of retailers and manufacturers from PRs 1 million 
and PRs 0.5 million respectively to PRs 5 million in 2003/04 (Chapter III).  However, taxation 
remains mainly an industrial policy instrument to di rect market outcomes, and thus a potential source 
of economic inefficiency.  The tax system remains co mplex, administratively difficult, and costly;  the 
tax base continues to be eroded by widespread ex emptions and concessions, which also facilitates tax 
evasion/avoidance, and weak fiscal governance, whic h ensures widespread administrative discretion 
and corruption.
39  The large "informal" economy also compounds tax evasion. 
22. The number of people paying tax remains "a bysmally low", despite improvements in 
2006/07.40  Only 1.5% of the population are registered ta xpayers:  less than half of these file income 
tax returns, and one tenth file GST returns.  More over, the sectoral incidence of the tax burden is 
highly uneven and the overall burden falls disp roportionately on large-scale manufacturing.  
Agriculture (largely a provincial tax matter), which, like manufacturing, accounts for almost one fifth of GDP, contributes only 1-2% of total tax reve nue while manufacturing accounts for well over half
41;  
the authorities expect this imbalance to improve as tax reforms progress.  Poor tax compliance and 
collection has also meant greater reliance on potentiall y distorting trade taxes, including tariffs and the 
income withholding tax levied  on imports and exports.   
23. Tax administration reforms have focused, with limited success, on:  simplifying tax laws (e.g. 
introducing the universal self-assessment scheme in July 2002, reducing exemptions and dependence 
on income withholding taxes (including as levies on imports and exports), and more effective dispute 
resolution);  improving collections  (e.g. enhancing skills and integr ity of tax collectors, reducing 
                                                      
37 World Bank (2006b). 
38 Ministry of Finance (2007a), p. 22. 
39 World Bank (2004b), p. 25.  Authorities indicat ed that corruption within CBR has been largely 
curtailed and that further reform s are aimed at its elimination. 
40 SBP (2005), p. 88;  Ministry of Finance (2006), p. 64. 
41 World Bank (2006b), p. 98;  Ministry of Finance (2006), p. 66. WT/TPR/S/193 Trade Policy Review 
Page 10 
 
 
face-to-face engagement, and advancing manua l collection processes);  and strengthening 
organizational structures, such as re-structuring the CBR.  The CBR's functional autonomy has been 
increased, and the Government intends to replace it with a more autonomous tax administration 
authority, the Federal Board of Revenue, and to form the Cabinet Committee for Federal Revenue to 
approve policy guidelines and reforms (Federal Bo ard of Revenue Act, 2007).  A five-year Tax 
Administration Reform Project (TARP), launched in 2005, aims to boost administrative reforms, 
including promoting a tax compliance culture and establishing regional tax offices to clearly separate 
domestic and international tax responsibilities.  While fiscal authorities believe that TARP has 
enhanced revenue collection, the SBP has expressed  concerns that recent efforts to place greater 
reliance on voluntary compliance and reduced auditi ng of taxpayers, without effective penalties and 
prosecution, may have worsened revenue co llection, especially in the short term.42 
(b) Expenditure 
24. The Government's objective is to improve expe nditure management as part of greater fiscal 
transparency.  Budgetary reforms began in March 2003 under the MTBF to improve overall planning 
and budget processes as well as public  expenditure effectiveness.43  These reforms are contained in 
the Strategy Paper released by the Ministry of Finance in December 2004 and the 2005 implementation road map.  They were successfully implemented in two ministries in 2005/06, four in 
2006/07, and are being progressively extended to othe r ministries using three-year implementation 
cycles.  A Medium Term Fiscal Framework was incorporated into the MTBF in February 2006 to prepare budget forecasts, including on meeting the Government’s legislative responsibilities.  The 
MTBF’s implementation is overseen by the Nati onal Coordination Committee, formed in 2006.   
(ii) Privatization 
25. Privatization is being revitalized as a key elemen t of Pakistan's structural reforms to reduce 
the still substantial participation of state-owned enterprises (SOEs) in the economy (Chapter III).  
Despite delays, seven sales tota lling PRs 125.5 billion were completed by June 2007 in the 2006/07 
programme:  26% of Pakistan Telecommunications Corp Ltd (PTCL) was divested overseas.  The Government anticipates raising US$3.9 billion in 20 07/08 (US$15 billion over the next five years) 
from the privatization process.  Fiscal deficits ar e accentuated by SOEs subsidies, including losses, 
especially on power (forecast at PRs 55.9 billion in 2006/07), oil marketing companies and refineries 
(PRs 10 billion), food (PRs 7.9 billion), and fertilizers (PRs 2.3 billion).
44  Future budgetary outcomes 
are also adversely affected by contingent liab ilities arising from government obligations, such as 
SOEs' guaranteed loans and loss-making operations, which totalled PRs 102.9 billion or 1.2% of GDP 
in 2006/07 (PRs 75.9 billion or 1.4% of GDP in 2003/04) (Table AI.1). 
26. Improved SOEs efficiency is also a pr iority, including enhancing management, 
commercialization, and accountability, often as a pre-re quisite for privatization.  In preparing the 
2007/08 Budget, the Government has linked future s ubsidies to SOEs (e.g. Pakistan International 
Airlines and Pakistan Railways), to acceptable financial improvement plans.   
(iii) Governance 
27. Pakistan continues to take important steps to improve governance and enhance transparency. 
This has included reducing corruption along with ad ministrative and other costs of doing business.  
The Government has resolved to improve govern ance and transparency, and the Prime Minister 
                                                      
42 SBP (2005), p. 91. 
43 Ministry of Finance (2007b). 
44 ADB (2006), p. 20.  The Gove rnment recently capped a recomme nded 22% rise in power tariffs 
at 10%.  Pakistan WT/TPR/S/193 
 Page 11 
 
 
signed the Declaration of the Federal Cabine t Government Regarding Governance in the 21st Century 
in 2005.  A Ministerial Committee is currently  examining ways to improve public sector 
accountability.  The National Accountability Bureau, formed in 2002 with the adoption of the 
comprehensive National Anti-Corruption Strategy (NACS),  has successfully prosecuted many high 
profile corruption cases against politicians, civil servants, and businessmen.45  A major initiative 
launched in 2007 is examining the implementation of  the NACS.  Corruption remains widespread and 
Pakistan has recently approved ratification of  the UN Convention Against Corruption (UNCAC) 
(signed in 2003);  it is a founding member of th e International Association of Anti-Corruption 
Authorities (IAACA), established in 2006 to facilita te UNCAC's implementation.  Pakistan has 
participated in the ADB/OECD anti- corruption initiatives for Asia a nd the Pacific and, as a member 
of the Asia Pacific Group on Money Laundering, is about to pass anti-money laundering legislation. 
28. Despite improvements, the business climate seems to remain somewhat unfriendly to private 
economic activity, including investment, and costs of doing business remain high.46  Economic 
freedom is still constrained by g overnment intervention and regulation.47  Pakistan is ranked 74th out 
of 125 in the World Bank's 2007 benchmarki ng business regulations survey (down from 66th out of 
125 in 2005).48   
(iv) Financial sector and capital market reforms 
29. Financial services reforms have focused on bank s to improve their soundness and efficiency;  
they include allowing entry of foreign banks (and bran ches) and privatizing state banks (Chapter IV).  
SBP prudential supervision has also been strengthe ned in line with international standards;  
non-performing loans have declined and capital adequ acy ratios raised during the review period.  A 
new banking law was drafted in 2006.  Efforts to cr eate a well functioning capital market are being 
pursued by the Securities and Exchange Commissi on, the securities market regulator.  Prudential 
regulations were unified for non-ba nk financial intermediaries in  2003 and a new securities law was 
drafted.  A 2002 Code of Corporate Governance h as also improved company disclosure and financial 
reporting requirements, broadly in line with OECD principles.  
(v) Labour market 
30. Various labour laws and regula tions govern employment.  They cover employer/employee 
relationships and provide for five employer levies (t wo of which are the Workers Welfare Fund at 2% 
and the Workers Profit Participation Fund at 5%), as well as profit and employment taxes, minimum 
wages, and workplace standards.49  These labour market rigidities are reflected in several international 
indexes.50  The regulations have encouraged payment of wages according to contractual "piece rates" 
rather than hourly rates;  up to 90% of employ ment may fall outside the regulated formal labour 
                                                      
45 Transparency International (2007a). 
46 World Bank (2007a). 
47 Pakistan ranked 89th (out of 157) and is categorized as "mostly unfree" in the Heritage Foundation's 
2007 Index of Economic Freedom (Heritage Foundation, 2007).  It is constructed from ten "freedoms" and 
Pakistan performed particularly poorly in those of trade, investment, finance, property rights and corruption. 
48 Rankings were particularly low in th e areas of dealing with licenses (89th), employing workers 
(126th), paying taxes (140th), trading across borders (98th), and enforcing contracts (163rd) (World Bank, 2007a). 
49 Ministry of Industries, Production and Special Initiatives (2005), p. 43. 
50 In the World Bank's costs of "doing business" survey, for example, Pakistan's low global ranking in 
the "employing workers" sub-category reflects a relatively high "rigidity of employment" index, mainly due to a 
high "difficulty of hiring" index;  moreover, non-wage labour costs are on average 12% of salary and average firing costs are 90 weeks of wages (World Bank, 2007a). WT/TPR/S/193 Trade Policy Review 
Page 12 
 
 
market.51  Streamlining such rigidities, including levies, to create a more flexible labour market would 
nevertheless enhance efficiency and employment prospects. 
31. Modernization and simplification of labour laws to reflect current market realities is being 
undertaken in accordance with the 2002 Labour Policy.   The Government is also extending vocational 
training to increase labour productivity, for example in the textile and clothing sector (Chapter IV).   
(5) BALANCE -OF-PAYMENTS DEVELOPMENTS  
(i) Current and trade accounts 
32. Mounting external trade deficits, fuelled by demand pressures, reached 6.8% of GDP in 
2006/07.  These reflected surging import growth ( 18.7% in 2005/06) buoyed by investment (e.g. 
machinery and equipment), consumer spending, a nd rising world oil prices.  Import growth fell 
sharply, to 1.3%, in 2006/07, while exports remained largely stagnant.52  External deficits, including 
rising negative balances on services trade until 2006/07 (2.9% of GDP), have been partially financed 
by substantial worker's remittances (3.8% of GDP in 2006/07) (Table I.3).  Current account deficits 
(4.8% of GDP in 2006/07) have been met by capita l and financial account surpluses (7.1% of GDP 
combined in 2006/07), largely due to record net in ward FDI helped by overseas divestment of major 
state entities (3.5% of GDP in 2006/07) (Table I.1).  Gross official reserves, while growing during the 
review period to US$17.3 billion, had not kept up with import growth until 2006/07 when import 
cover rose to 5.5 months (from 4.7 months in 2005/06) (8.3 months in 2002/03). 
33. Pakistan's gross domestic investment was cons iderably lower than national savings during 
most of the review period, due mainly to higher national savings levels (peaking at 20.6% of GDP in 
2002/03) and falling investment levels (bottoming at 15.0% of GDP in 2003/04).  However, its 
traditional savings shortfall re-emerged in 2004/05 (at 0.9% of GDP) when current account deficits 
returned, due to lower growth in savings from 16.4% of GDP in 2004/05 to 18.0% in 2006/07 than in 
investment (from 17.6% to 21.4%).  Increased remittances have significantly supplemented national 
savings, investment, and consumption.53 
Table I.3  
Balance of payments, 2001-07 
(US$ million)  
 2001/02 2002/03 2003/04 2004/05 2005/06a 2006/07b 
Current account 2,833 4,070 1,811 -1,534 -5,015 -7,016  
Goods and services balance -592 -361 -2,594 -7,807 -12,896 -13,871  
Trade balance -294 -359 -1,279 -4,514 -8,464 -9,728  
Exports 9,140 10,974 12,396 14,482 16,533 16,924  
Imports -9,434 11,333 13,604 -18,996 -25,017 26,652  
Services balance -298 -2 -1,315 -3,293 -4,432 -4,143  
Receipts 1,196 2,712 2,644 3,319 3,769 4,122  
Payments -2,214 2,714 -3,959 -6,612 8,201 8,265  
Income balance -2,319 1,014 -2,207 1,041 -2,667 ..  
Credit 111 1,187 186 1,315 784 ..  
Debit -2,430 173 -2,393 -274 -3,451 ..  
Table I.3 (cont'd) 
                                                      
51 Ministry of Industries, Production and Special Initiatives (2005), p. 46. 
52 Empirical evidence has confirmed th at trade restrictions could aggrav ate Pakistan's burgeoning trade 
deficit, since imported inputs are critical for exports,  and any immediate trade deficit created by trade 
liberalization would be more than offset by additional exports in the long run (SBP, 2006b). 
53 Regarding economic development, Pakistan's domestic savings rate (excluding mainly remittances) 
is low relative to countries with comparable  GDP per capita (World Bank, 2006a, p. 2). Pakistan WT/TPR/S/193 
 Page 13 
 
 
 2001/02 2002/03 2003/04 2004/05 2005/06a 2006/07b 
Current transfers (net) 5,744 6,642 6,612 8,659 10,548 ..  
Official current transfers 1,500 905 511 250 681 ..  
Private transfers 4,244 5,737 6,101 8,409 9,867 ..  
Workers' remittances 2, 390 4,237 3,872 4, 169 4,600 5,490  
Capital and financial account -1,107 -5,213 -1,978 1,596 4,817 ..  
Capital account 0 1,133 82 685 241 ..  
Financial account -1,107 -6,346 -2,060 911 4,576 ..  
Foreign direct investment (net)c 483 771 906 1,459 3,450 5,125 
Portfolio investment -491 -239 314 620 986 3,291  
Other investment -1,099 -952 -2,981 -1,778 1,276 ..  
Net errors and omissions 927 523 222 -7 253 ..  
Exceptional financing 138 620 -55 -55 -55 ..  
Official reserve assets -3,081 -5,926 -299 610 -1,136 ..  
.. Not available. 
a Provisional. 
b Projection. c FDI flows are on the basis of enterprise surveys. 
Source : State Bank of Pakistan, Statistical Bulletin , various years.  Viewed  at: http://www.sbp.org.pk/ 
 reports/stat_reviews/Bulleti n/index.htm [September 2007]. 
(ii) External debt 
34. External debt, while still substantial at US$38. 7 billion in 2006/07, dropped as a share of 
GDP from 46.1% (2001/02) to 26.9%;  the debt service ratio also fell, from 36.7% to 12.6%.  Most of the debt is medium and long term with Pari s Club creditors, bilateral donors, and multilateral 
institutions, e.g. World Bank.   
(6) D
EVELOPMENTS IN MERCHANDISE TRADE  
35. During the period under review, the ratio of Pa kistan's total trade (exports and imports) in 
goods and non-factor-services to GDP peaked at 38. 6% in 2005/06;  it declined to 36.1% in 2006/07 
when the shares of exports and imports fell from 15.3% to 13.9% and from 23.3% to 22.2%, 
respectively (Table I.1). 
(i) Merchandise trade 
(a) Composition of trade 
36. Little export diversification has occurred since th e last Review of Pakistan.  Exports remain 
highly concentrated:  two thirds were textiles and clothing in 2005/06.54  Since 2001, the main change 
in Pakistan's merchandise trade structure has been a rise in the share of mining exports (from 2.3% to 
5.5% in 2006) and agriculture (12.5% to 13.7%) at the expense of manufacturing (85.0% to 80.8%), especially textiles (Chart I.1).
55  The share of manufacturing imports has increased (from 49.6% to 
56.7%), mainly reflecting rises in electrical machines and transport equipment, at the expense of 
agriculture (16.5% to 13.8%) and mining (31.3% to 27.3%), primarily due to a fall in the share of 
fuels.  Imports remain concentrated in fertilizer, petroleum products, machinery, transport equipment, 
edible oils, chemicals, and iron and steel. 
                                                      
54 Rice, textiles, clothing, leather and leather goods,  rugs, petroleum and petroleum products, chemicals 
and pharmaceuticals, and s ports goods accounted for 85 % of exports in 2005/06. 
55 Merchandise trade statistics are for calendar years. WT/TPR/S/193 Trade Policy Review 
Page 14 
 
 
Chart I.1
Product composition of merchandise trade, 2001 and 2006
2001 2006
(a)    Exports (f.o.b.)
Other 
consumer goods
6.4
Manufactures
85.0
Total:   US$9.2 billion Total:  US$16.5 billion  
(b)    Imports (c.i.f.)
Iron & steel
3.2Chemicals
18.8Transport equipment  
4.5
Manufactures
49.6Electrical machines 
4.9
Non-electrical 
machinery
10.6
Other mining
2.7Fuels
28.6Other
2.2
Electrical machines
9.5Textiles
43.7
Other semi-manuf.   
3.8Transport equipment  
8.4
Chemicals
14.6Manufactures
56.7Non-electrical
machinery
11.2
Total:   US$10.2 billion Total:   US$28.4 billion Per cent
Manufactures
80.8Other agriculture  1.3
Other consumer goods  
4.4
Other
2.7Food
12.4
Mining  2.3
Textiles
48.9Other
0.1
Other semi-
manufactures
4.2Mining  5.5
Agriculture
13.7
Source :  UNSD, Comtrade database (SITC Rev.3).Other consumer goods 
4.0
Mining
27.3Other 
consumer goods 
5.6
Clothing
22.7Other semi-manufactures
3.6
Other semi-
manufactures
3.6Other agriculture  1.7Food
10.8
Agriculture
13.8Agriculture
16.5
Mining
31.3
Iron & steel
4.8Chemicals  1.7
Chemicals  2.6Other 
0.2
Other mining
3.1Fuels
24.2Clothing
23.1Agric.
12.5
Machinery & 
transport equipment
1.2
Machinery & 
transport equip.
1.9
Food
12.2Food
10.2
Other agriculture
3.6Other agriculture 
4.3
 Pakistan WT/TPR/S/193 
 Page 15 
 
 
Chart I.2
Direction of merchandise trade, 2001 and 2006
2001 2006
(a)    Exports (f.o.b.)
Other Asia  
11.7
Asia
23.0
Total:  US$9.2 billion Total:  US$16.5 billion
(b)    Imports (c.i.f.)
Other Asia  
11.7
EC25
16.8
Other Europe
2.6EC25
17.2
China
9.5Other Europe
2.8India  2.8United 
States
5.8
Total:  US$10.2 billion Total:  US$28.4 billionPer cent
Asia
23.1Other Asia  
9.8
Other Middle East
5.2
CISa
0.3
Other Middle East  
3.9United States
24.2
Other Asia  
9.8United States
25.4
Source :  UNSD, Comtrade database (SITC Rev.3).Japan
6.4EC25
26.0Other Middle East
6.6
Asia
33.6Asia
32.3Japan
5.1
Kuwait
7.8EC25
27.6Hong Kong, China  
5.1
CISa
0.7Other 
America
3.2
Malaysia  2.5Korea, Rep. of
3.1
Hong Kong, China  
4.1
Singapore  3.2China  
3.1
Other 
Europe
2.6
Korea, Rep. of   
3.2  Indonesia  2.7Other 
America
3.8
Africa  
5.4China  
2.8
Africa
5.7
Other 
America
2.3Other 
America
2.6
China
4.8Malaysia  
4.3Other
 Europe
1.6
Kuwait
6.0Afghanistan
6.4
Middle East
35.5Middle East
32.2
United Arab Emirates
13.1
Saudi Arabia
11.2United Arab Emirates
11.9Other Middle East
3.4
Saudi Arabia
10.5United
States
5.6
CISa  1.2
CISa  2.9
Africa
2.9Africa
3.6United Arab Emirates
7.6United Arab Emirates
8.2Middle East
14.1Middle East
13.4
a       The Commonwealth of Independent States (CIS) comprises Armenia, Azerbaijan, Belarus, Georgia, 
          Kazakhstan, Kyrgyzstan, Moldova, Ru ssian Federation, Tajikistan, Turkmenistan, Ukraine 
          and Uzbekistan.Europe
19.5America
8.4
Europe
19.9America
7.9Europe
28.5America
28.5
Europe
29.2America
28.0
 WT/TPR/S/193 Trade Policy Review 
Page 16 
 
 
(b) Direction of trade 
37. There has been little export market diversif ication during the peri od under review.  The 
United States and EC remain by far Pakistan's pr incipal markets, accounting for over half of exports 
in 2006 (Chart I.2).  Partly reflecting the na rrow export base, concentrated in low-value-added 
products and few markets, the shares of exports to  Asian, American, and European markets have 
remained largely unchanged.  The share of imports from the Middle East fell during the period, while 
Asian, European, and American shares rose.  The EC, UAE, Saudi Arabia, China, Japan, Kuwait, and 
the United States, the main sources, accounted for over two thirds of imports in 2006. 
(ii) Services trade 
38. Pakistan's traditional deficit on services trade ro se substantially from 0.4% of GDP in 2001/02 
to 2.9% in 2006/07, falling from 3.5% in 2005/06  (Table I.1).  Services exports totalled 
US$4,120 million and imports US$8,245 million in 2006/07  (Table I.4).  It records deficits on its 
major traded services, especially transportation (freight ), travel (personal) and other business services, 
except for communications and government services. 
Table I.4 
Trade in services, 2001-07 
(US$ million) 
Service 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 
Exports 
Transportation .. 808 864 1,062 1,080 .. 
Passenger .. 521 512 636 656 .. 
Freight .. 109 127 112 124 .. 
Other .. 178 225 314 300 .. 
Travel .. 92 164 177 216 .. 
Business .. 0 1 6 8 .. 
Personal .. 92 163 171 208 .. 
Communications .. 275 204 331 198 .. 
Construction .. 0 12 24 16 .. 
Insurance .. 21 19 25 29 .. 
Financial .. 17 21 39 70 .. 
Computer and IT .. 23 41 47 72 .. 
Royalties and licence fees .. 8 10 13 33 .. 
Other business services .. 281 202 285 391 .. 
Personal, cultural, recreational .. 0 1 1 1 .. 
Government services n.i.e. .. 1,187 1,106 1,315 1,663 .. 
Total 1,916 2,712 2,644 3,319 3,769 4,120 
Imports 
Transportation .. 1,519 1,754 2,280 2,865 .. 
Passenger .. 238 274 404 453 .. 
Freight .. 938 1,183 1,617 2,085 .. 
Other .. 343 297 259 327 .. 
Travel .. 494 1,198 1,172 1,411 .. 
Business .. 1 55 169 57 .. 
Personal .. 493 1,143 1,003 1,354 .. 
Table I.4 (cont'd) Pakistan WT/TPR/S/193 
 Page 17 
 
 
Service 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 
Communications .. 45 38 59 101 .. 
Construction .. 0 18 6 143 .. 
Insurance .. 72 81 101 131 .. 
Financial .. 65 77 77 133 .. 
Computer and IT .. 0 12 27 44 .. 
Royalties and licence fees .. 23 47 107 99 .. 
Other business services .. 323 534 2,502 2,953 .. 
Personal, cultural, recreational .. 0 0 7 6 .. 
Government services n.i.e. .. 173 201 274 315 .. 
Total 2,214 2,714 3,960 6,612 8,201 8,245  
Services balance -298 -2 -1,316 -3,293 -4,432 4,125 
.. Not available. 
Source:  State Bank of Pakistan,  Statistical Bulletin , various years;  and Pakistani authorities . 
(7) TRENDS AND PATTERNS IN FOREIGN INVESTMENT  
39. Boosted by greater openness and privatization, foreign direct investment (FDI) rose from 
0.7% of GDP in 2001/02 (US$484.7 million) to 3. 5% (US$5.1 billion) in 2006/07, mostly from 
non-privatization investment.56  FDI was equivalent to 13.0% of gross fixed capital formation in 
2005.57  FDI inflows have been highest in teleco mmunications and information technology, and 
financial business services (Chart I.3).  The main FDI sources in 2006/07 were the EC (the 
Netherlands and the United Kingdom), the United Stat es, and China (Chart I.3).  Private portfolio 
investment also rose substantially in 2006/07 to US$1.8 billion or 1.3% of GDP (US$0.4 billion in 
2005/06) and exceeded public portfolio investment of US$1.5 billion for the first time since 2002/03.  Pakistan's stock of inward FDI amounted to US $10.4 billion in 2005 (equivalent to 8.8% of GDP).
58  
Outward FDI is minimal (US$71 million in 2005/06).  
40. Despite increased FDI inflows, the UNCTAD classifies Pakistan as an "under performer" 
with "low FDI potential and performance".59  Pakistan's latest (2003-05) rankings (out of 
141 countries) were 102nd on the Inward FDI Performance Index, and 128th on the Inward FDI 
Potential Index.  It is ranked 87th (out of 128) in its Outward FDI Performance Index.    
 
 
                                                      
56 Privatization proceeds in 2006/07, at US$266 million were substantially below the 2005/06 figure 
(US$1.54 billion).  Greenfield FDI am ounted to US$4.9 billion in 2006/07, up  from US$2.0 billion in 2005/06. 
57 UNCTAD (2006), p. 315. 
58 UNCTAD (2006). 
59 UNCTAD (2006). WT/TPR/S/193 Trade Policy Review 
Page 18 
 
 
Financial
 business 
services
18.2
Communications
37.0Petroleum refining
3.0
Power  3.8Oil & gas exploration
10.6
Trade  3.4Food, beverages
 & tobacco  10.4Chart I.3
FDI inflows by sector and origin, 2006/07
Sector
Source:  State Bank of Pakistan (2007), Statistical Bulletin , September.  Viewed at: http://www.sbp.org.pk/reports/
               stat_reviews/index.htm;  and Board of Investment, Government of Pakistan.  Viewed at:   http://www.pakboi.               gov.pk/forign-invest.htm.Origin
Total FDI:  US$5,124.9 millionPer cent
Other 
10.5
Construction  3.1
EC25
33.6United Arab 
Emirates
12.9Saudi Arabia
2.0United States
17.8
Switzerland
3.4
Australia
1.4
Other
13.2 China
13.9Japan
1.3
 
(8) OUTLOOK  
41. Real GDP growth is expected to exceed the 7% target in 2007/08;  official forecasts are for 
real growth of 7.2% and inflation of 6.5%.60  Gross investment and national savings are expected to 
rise to 23.8% and 19.3% of GDP, and the current acc ount deficit to fall to 4.0% of GDP.  The fiscal 
deficit is also forecast to decline to 4.0% of  GDP.  The Government acknowledges that improving 
macroeconomic stability and undertak ing additional microeconomic re forms, including enhancing the 
business and investment environment, are paramount in achieving its annual GDP growth target.  Challenges include controlling inflation, fiscal c onsolidation (including raising tax revenues), 
containing the external current account deficit, obtai ning foreign financing consistent with external 
debt sustainability, and increasing official external reserves.
61  Further trade and investment 
liberalization, including resisting protectionist pressures, along with other structural reforms should 
help productivity, thereby improvi ng the international competitiveness of Pakistan's businesses.  Its 
future economic performance will also depend on  world growth and the success of its exporting 
industries, especially the ability of textiles and clothing exporters to meet added competition in third markets from efficient producers, without global quot as.  To achieve this, Pakistan needs to improve 
efficiency, which critically depends on domestic po licy reforms, as does its ability to realize the 
benefits of any multilateral or bilateral market opening abroad. 
                                                     
 
60 IMF projections based on monetary and fiscal tightening are for continued real annual growth of 
6.5-7.0% until 2010/11 with inflation slowly easing to 5% in 2009/10 (IMF, 2006b). 
61 IMF (2006b), p. 11.