RESTRICTED
WORLD TRADE WT/BOP/W/17
30October 1996
ORGANIZATION(96-4581)
Committee onBalance-of-Payments Restrictions
1996 CONSULTATION WITH PAKISTAN
Background Paper bytheSecretariat
1. Thispaper hasbeenprepared inaccordance withparagraph 12oftheUnderstanding onthe
Balance-of-Payments Provisions oftheGATT 1994.
I. Previous consultation withPakistan
2. Beginning in1960, theGATT Committee onBalance-of-Payments Restrictions heldeleven
fullconsultationswithPakistan(thelastfullconsultationwasheldin1989).Ninesimplifiedconsultations
were heldin1973, 1975, 1977, 1980, 1982, 1985,1987, 1992 and1994. The1994 consultations,
under simplified procedures, were heldinconjunction withtheTrade Policy Review.
3. During the1994 consultations, theCommittee commended Pakistan fortheimplementation
ofitsmacroeconomic adjustment andstructural reform programme initiated in1988, which included
asubstantial liberalization oftheimport régime. Italsorecognized thatPakistan 'sbalance-of-payments
position remained under pressure andthatimprovements registered in1993/94 didnotnecessarily reflect
asustainable trend. TheCommittee welcomed Pakistan 'swillingness torevise itsnotification onthe
listofitems subject toimport restrictions forbalance-of-payments reasons (L/6830).1TheCommittee
decided torecommend totheCouncil thatPakistan bedeemed tohavefulfilled itsobligations under
Article XVIII:12(b) for1994. Italsodecided thatthenextregular consultation withPakistan should
beafullconsultation.
II. Main changes inPakistan 'strade andexchange ratepolicies since thelastconsultation
4. Asnoted inthedocumentation forthe1994 consultation, import licensing forgoods noton
theRestricted orNegative listswasabolished in1991, theRestricted listabolished in1994 andthe
Negative listreduced to75items. Inexchange forimproved market access fortextiles incertain
importing markets, Pakistan removed textile items from theNegative ListinJanuary 1995.
5. Tariff reform overthelastfewyears hasincluded thereduction ofthemaximum tariff(excluding
carsandalcoholic drinks) to65percentandthereduction ofthenumber oftariff rates to13.In
April1995,theGovernmentwithdrewtheexemptionfromsalestaxon46importedandlocallyproduced
goods andinOctober introduced a10percentregulatory duty. TheGovernment plans tophase out
alltaxanddutyexemptions overthenexttwotothree years.
6. Pakistan hasuntil2000tobring itscustoms valuation regime intoconformity withtheinvoice-
based WTO rules. Itcontinues touseImport Trade Prices todetermine thedutybase.
1Arevised listofimport restrictions forbalance-of-payments purposes hasbeensubmitted bytheGovernment
ofPakistan (WT/BOP/N/14).WT/BOP/W/17
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7. TheCentral Bank ofPakistan continues tosettheexchange rate,withtheU.S.dollar asthe
intervention currency, oftherupee viathe"managed float" system introduced in1982. Therupee was
devalued inJuly1993, October 1995 andagain inSeptember 1996. Exchange controls havebeen
liberalized inrecent years; on1July1994, Pakistan formally accepted theobligations ofArticle VIII
(sections 2,3and4)oftheIMF'sArticles ofAgreement. Restrictions onthecapital account arestill
inplacealthough,accordingtotheauthorities,thecapitalaccountwaseffectivelyliberalizedin1985-1986
withtheintroduction ofForeign Exchange Bearer Certificates (FEBCs).
III. Macroeconomic andTrade Developments
Background
8. In1992, widespread floods andavirusattack, which hadaserious impact oncotton production,
resulted ina30percentfallofcotton output in1992/93 aswellasinunprecedented damages tothe
country 'sinfrastructure. Since theeffects ofthevirus werefeltinthecotton production until1994,
therecovery ofGDP wasrelatively slow. Asaconsequence, realGDP growth dropped from7.7per
centin1991/92 to2.3percentin1992/93. Theslowdown ingrowth reflects theheavy dependence
ofthePakistan economy ontheperformance oftheagricultural sector andinparticular oncotton
production.
9. Asaresult ofthe1992/93 crisis, boththefiscal andbalance ofpayments positions deteriorated.
Althoughtheauthoritiessucceededinreducingboththeexternalimbalanceandthebudgetdeficitthrough
tightfinancial policies, preliminary figures for1995/96 showasignificant increase inthecurrent account
deficit andaslight increase inthebudget deficit.
10. Inresponse tothedeterioration oftheexternal position, thePakistan authorities adopted a
stabilization program thatwasoriginally supported bytheIMFandbythemeasures under itsstandby
arrangement.Theauthoritiesintroducedinthecourseof1995andearly1996variousmeasuresincluding
adevaluation oftherupee, by7percentinOctober 1995, anadjustment inpetroleum prices, budgetary
revenue measures, expenditure cuts,andatightened credit policy. Steps havealsobeentaken toward
divestment inthetelecommunications, energy andinfinancial sectors. After asuccessful start,however,
thestabilization program hasrunintodifficulties andiscurrently under review.
Output andprices
11. Domestic production hasbeenprojected bytheIMFtoregister asharp recovery in1995/96.
TherealGDP isestimated bytheIMFtohavegrown by6.1percentcompared to4.4percentin
1994/95, reflecting asignificant acceleration inthegrowth ofindustrial output from 3.6percenton
1994/95 to6.1percentin1995/96 andthecontinued strong growth oftheagricultural sector, with
anincrease inthegrowth ratefrom5.9percentin1994/95 to6.7percentin1995/96. Thegrowth
intheservices sector came shortoftheGovernment 6.1percenttarget butthegrowth wasalsostrong -
5.8percentin1995/96, compared to4.1percentin1994/95.
12. Onthedemand side,growth wasfuelled byallthreecomponents offinaldemand -consumption,
investment andexports. Theshare ofconsumption inGDP increased from84.1percentin1994/95
to85.6percentin1995/96, reflecting anincrease inbothprivate andpublic consumption. Theshare
ofgross domestic investment inGDP increased from 18.7percentin1994/95 to19.6percentin
1995/96 asaresult ofhigher private investment. Theshare ofpublic investment decreased from
8.3percentofGDP in1994/95 to8.1percentin1995/96. Atthesame time, theshare ofexports
inGDP increased from 13percentin1994/95 to13.2percentin1995/96.WT/BOP/W/17
Page3
13. Theimproved performance oftheagricultural sector wasduetoanexpansion of7.8percent
incrops and5.6percentinlivestock production, andthefishing andforestry sector recovered from
itsnegative growth (-2percent)in1994/95, growing at1.1percentin1995/96. The1995/96 cotton
crop, which amounted to10.6million bales, wassubstantially bigger thanthe1994/95 crop(8.7million
bales), albeit lower thanforecasted bytheauthorities.2Theslower thanexpected growth ofcotton
production gaverisetoincreased competition among buyers -inthedomestic spinning industry, which
traditionally usesaround 80percentofthedomestic production -andtriggered complaints thattoo
much rawcotton wasexported -resulting inprice increases. Thesituation inthericemarket wasalso
somewhat improved since thericecrop-halfofwhich isexported -was15percenthigher thanin
1994/95.
14. Industrialrecoverywasstrongacrossallsectors.Theimprovedperformanceinindustryreflected
therecovery ofthemanufacturing sector (from 3.6percentin1994/95 to6.1percentin1995/96),
inmining andquarrying (from -4.3in1994/95 to8.3percentin1995/96) aswellasintheconstruction
andenergysectors(from1.0percentto4.5percentandfrom11.1percentto13.4percentrespectively
2EIU, Pakistan Country Report ,3rdquarter 1996.WT/BOP/W/17
Page4
between 1994/95 and1995/96). However, therecovery inthelarge-scale manufacturing sector was
disappointing, withanincrease inthegrowth ratefrom 0.5percentin1994/95 to3.1percentin
1995/96, short ofthegovernment 's6percenttarget.
15. Atthesame time, itappears thatthePakistan authorities succeeded incontaining theworst
oftheinflationary pressures despite thedevaluation andimport surcharges (Chart B).Thegrowth
ofconsumer prices slowed down from13percentin1994/95 to10.8percentin1995/96 (end-to-end
period). Thisimprovement followed three consecutive years ofprogressive increase intherateof
inflation, duetovarious supply constraints, aswellasdemand-pull factors. The1995/96 improvement
wasmainly theresult ofatightened monetary policy andofimproved supply conditions, priceincreases
inthecotton market notwithstanding.
Balance ofPayments
16. Thebalance ofpayments situation ofPakistan sharply deteriorated in1995/96 asthecurrent
account deficit surged from3.6percentofGDPin1994/95 to6.6percent(including official transfers)
while netinternational reserves decreased fromabout 13weeks ofimports in1994/95 toonly8.2weeks
ofimports in1995/96. Higher netcapital inflows didnotcompensate fortheworsening ofthecurrent
account which reflected asignificant deterioration inboththetrade balance andtheservices balance
aswellasadecline inworkers 'remittances.
Current account
17. Thecurrent account balance deterioration in1995/96 wasprofound. Thedevaluation ofthe
rupee andtheintroduction ofanimport surcharge inOctober 1995could notprevent thecurrent account
deficit from reaching US$4.5 billion in1995/96, thussurpassing thelevelofUS$3.3 billion inthe
"crisis" yearof1992/93 (Table 1).Between 1994/95 and1995/96, thetrade deficit surged from
US$2.3 billion toUS$3.7 billion, netimports ofservices soared fromUS$2.6 billion toUS$3.2 billion,
while workers 'remittances -mainly from oil-producing countries -dropped from US$1.9 billion to
US$1.5 billion. Thedeepening ofthetradedeficit wasmainly duetoan18percentgrowth ofimports
reflecting theacceleration indomestic growth ofoutput anddemand while export performance remained
sluggish. According toofficials, themainproblem oftheexport sector wasthecontinuing depreciation
oftheIndian rupee which adversely affected thecompetitiveness ofPakistan exports.WT/BOP/W/17
Page5
18. Exports increased from US$7.9 billion in1994/95 toUS$8.3 billion. Growth inexports of
cotton manufactures slowed (from 21.9to8.3percent). partly asaconsequence oftherising cost
ofcotton yarn, theindustry 'smainrawmaterial. While theshare ofcotton manufactures intotalexports
steadily increased from47.8percentto52.2percentbetween 1990and1995, theshare ofrawcotton
decreased; thepercentage ofrawmaterials -mostly rawcotton -intotalexports declined from10.1per
centin1990 to3.8percentin1995 (Table 2).3Agricultural exports performed wellin1995 with
theirshare intotalexports rising from 12percentin1994, to15.6percentin1995.
3Ingeneral,textilesandclothingtogetheraccountedfor72percentofPakistan'sexportsin1995(75.5percent,
in1994) compared toonly66percentfiveyears earlier (1990).WT/BOP/W/17
Page6
Table 1-Pakistan -Selected indicators ofbalance ofpayments, 1991/92-1995/96
1991/92 1992/93 1993/94 1994/95Prel.
1995/96
(Inmillions ofUSdollars)
Current account balance excluding official transfers1-1,499 -3,687 -1,965 -2,484 -4,458
Trade balance -2,236 -3,267 -2,000 -2,537 -3,666
Exports, f.o.b. 6,762 6,782 6,685 7,759 8,300
Imports, f.o.b. -8,998 -10,049 -8,685 -10,296 -11,966
Services (net) -2,224 -2,748 -2,354 -2,384 -3,183
Private transfers (net) 2,961 2,327 2,390 2,437 2,391
ofwhich: workers 'remitances 1,468 1,562 1,446 1,866 1,461
Official transfers (net) 450 361 314 321 214
Current account balance -1,050 -3,326 -1,651 -2,163 -4,244
Capital account21,179 2,738 3,236 2,401 3,794
Public andpublicly guaranteed 363 1,554 1,129 592 1,045
Medium- andlong-term 766 815 915 1,032 910
Project andnonproject aid 966 846 793 624 647
Commercial bank andIslamic Development
Bank -165 -42 132 284 256
Other3-35 11 -10 126 7
Short-term -403 739 214 -471 135
Commercial bank andIslamic Development
Bank -133 315 290 -8 54
Other4-270 424 -76 -462 81
Private sector, total 816 1,184 2,105 1,741 2,629
Private nonbank 1,083 866 1,769 1,832 1,914
Direct investment 343 310 360 440 1,106
Portfolio investment 219 137 289 1,090 202
Private unguaranteed loans 559 786 792 313 404
Other, including errors andomissions -13 -367 328 -11 202
Deposit money banks -267 318 336 -91 715
Foreign currency accounts -61 62 413 60 526
Other5-206 256 -77 -151 189
Overall balance 130 -589 1,585 238 -450
Financing -130 589 -1,585 -238 450
Netinternational reserves (increase -) -352 512 -1,882 -349 414
State Bank ofPakistan -431 613 -1,788 -391 636
Deposit money banks679 -101 -94 42 -222
Memorandum item:
End-year gross official reserves71,038 462 2,302 2,745 2,053
(inweeks ofc.i.f. imports) 5.5 2.2 12.6 12.9 8.2
(Inpercent ofGDP)
Current account before official transfers -3.1 -7.1 -3.8 -4.1 -6.9
Current account balance -2.1 -6.4 -3.2 -3.4 -6.6
Exports, f.o.b. 13.8 13.1 12.9 12.8 13.2
Imports, f.o.b. -18.4 -19.5 -16.7 -17.0 -18.5
Services (net) -4.6 -5.3 -4.5 -3.9 -4.9
Private andofficial transfers 7.0 5.2 5.2 4.6 4.0
Capital account 2.5 5.3 6.2 4.0 5.9
1 Inthedatafor1991/92, defense-related external debtservice payments areincluded inimports.
2 Thecapital account asdefined inthisreport excludes official transfers andincludes changes inthemedium- andlong-term netforeign
assets ofthedeposit money banks.
3 Includes Foreign Currency Bearer Certificates andEurobond issue ofUS$148 million in1994/95.
4 Includes netsales ofForeign Exchange Bearer Certificates andDollar Bearer Certificates.
5 Mainly holdings ofexport bills.
6 Changes inforeign exchange holdings.
7 Excludes gold.
Source: IMF; Pakistan.WT/BOP/W/17
Page7
19. Thestrong growth ofimports in1995wasbroadly based. Thehigher import billreflected increased
imports ofmachinery, transport equipment, chemicals, ironandsteel, paper andpaperboard, milkand
milkfood, andotherfood(Table 3).Thegrowth ofmanufactured imports reflected strong growth inimports
ofcapital goods, which inturnwasduetotherecovery ofdomestic investment.
Table 2-Pakistan -Commodity composition ofmerchandise exports, 1990-1995
1990 1991 1992 1993 1994 1995
(Inmillion ofUSdollars)
Agricultural products 1,080 1,236 1,423 955 886 1,272
Food 516 672 722 652 726 959
Rawmaterials 564 564 701 303 160 313
Mining products 87 111 105 82 68 93
Oresandminerals 16 15 16 14 11 13
Fuels 71 96 89 68 57 80
Nonferrous metals 0 0 0 0 0 0
Manufactures 4,393 5,151 5,759 5,822 6,398 6,773
Ironandsteel 0 1 0 0 1 0
Chemicals 25 24 33 32 45 55
Other semi-manufactures 355 315 295 286 308 321
Machinery andtransport equipment 56 66 65 51 34 44
Automotive products 3 7 5 4 3 2
Office andtelecom equipment 4 5 2 2 2 1
Other machinery andtransport equipment 49 54 58 45 29 41
Textiles 2,663 3,200 3,590 3,507 3,985 4,256
Clothing 1,014 1,209 1,443 1,558 1,578 1,611
Other consumer goods 281 336 331 387 446 486
Other 13 19 17 19 18 20
Total merchandise exports 5,573 6,517 7,304 6,878 7,370 8,158
(Inpercent oftotal)
Agricultural products 19.4 19.0 19.5 13.9 12.0 15.6
Food 9.3 10.3 9.9 9.5 9.9 11.8
Rawmaterials 10.1 8.7 9.6 4.4 2.2 3.8
Mining products 1.6 1.7 1.4 1.2 0.9 1.1
Oresandminerals 0.3 0.2 0.2 0.2 0.1 0.2
Fuels 1.3 1.5 1.2 1.0 0.8 1.0
Nonferrous metals 0.0 0.0 0.0 0.0 0.0 0.0
Manufactures 78.8 79.0 78.8 84.6 86.8 83.0
Ironandsteel 0.0 0.0 0.0 0.0 0.0 0.0
Chemicals 0.4 0.4 0.5 0.5 0.6 0.7
Other semi-manufactures 6.4 4.8 4.0 4.2 4.2 3.9
Machinery andtransport equipment 1.0 1.0 0.9 0.7 0.5 0.5
Automotive products 0.1 0.1 0.1 0.1 0.0 0.0
Office andtelecom equipment 0.1 0.1 0.0 0.0 0.0 0.0
Other machinery andtransport equipment 0.9 0.8 0.8 0.7 0.4 0.5
Textiles 47.8 49.1 49.2 51.0 54.1 52.2
Clothing 18.2 18.6 19.8 22.7 21.4 19.7
Other consumer goods 5.0 5.2 4.5 5.6 6.1 6.0
Other 0.2 0.3 0.2 0.3 0.2 0.2
Source: WTO.WT/BOP/W/17
Page8
Table 3-Pakistan -Commodity composition ofmerchandise imports, 1990-1995
1990 1991 1992 1993 1994 1995
(Inmillions ofUSdollars)
Agricultural products 1568 1352 1762 1731 2008 2688
Food 1276 1031 1412 1385 1452 2049
Rawmaterials 292 321 350 346 556 639
Mining products 1791 1810 1840 1940 1865 2195
Oresandminerals 156 200 198 171 138 143
Fuels 1529 1513 1525 1657 1624 1890
Nonferrous metals 106 97 117 112 103 162
Manufactures 3987 5297 5746 6048 4982 6632
Ironandsteel 269 289 315 350 331 443
Chemicals 1212 1390 1466 1564 1463 1986
Other semi-manufactures 305 346 357 331 363 433
Machinery andtransport equipment 1882 2917 3257 3459 2535 3387
Automotive products 390 433 537 966 341 389
Office andtelecom equipment 236 200 288 343 245 308
Other machinery andtransport equipment 1256 2284 2432 2150 1949 2690
Textiles 126 129 125 100 77 122
Clothing 1 1 1 1 1 2
Other consumer goods 192 225 225 243 212 259
Other 10 24 15 21 42 189
Total merchandise imports 7356 8483 9363 9740 8897 11704
(Inpercent oftotal)
Agricultural products 21.3 15.9 18.8 17.8 22.6 23.0
Food 17.3 12.2 15.1 14.2 16.3 17.5
Rawmaterials 4.0 3.8 3.7 3.6 6.2 5.5
Mining products 24.3 21.3 19.7 19.9 21.0 18.8
Oresandminerals 2.1 2.4 2.1 1.8 1.6 1.2
Fuels 20.8 17.8 16.3 17.0 18.3 16.1
Nonferrous metals 1.4 1.1 1.2 1.1 1.2 1.4
Manufactures 54.2 62.4 61.4 62.1 56.0 56.7
Ironandsteel 3.7 3.4 3.4 3.6 3.7 3.8
Chemicals 16.5 16.4 15.7 16.1 16.4 17.0
Other semi-manufactures 4.1 4.1 3.8 3.4 4.1 3.7
Machinery andtransport equipment 25.6 34.4 34.8 35.5 28.5 28.9
Automotive products 5.3 5.1 5.7 9.9 3.8 3.3
Office andtelecom equipment 3.2 2.4 3.1 3.5 2.8 2.6
Other machinery andtransport equipment 17.1 26.9 26.0 22.1 21.9 23.0
Textiles 1.7 1.5 1.3 1.0 0.9 1.0
Clothing 0.0 0.0 0.0 0.0 0.0 0.0
Other consumer goods 2.6 2.7 2.4 2.5 2.4 2.2
Other 0.1 0.3 0.2 0.2 0.5 1.6
Note: Percentages maynotaddupbecause ofroundings.
Source: WTO
20. Thegeographic structure ofPakistan 'strade flows hasbeenundergoing aslowchange which
continued in1995(Table 4).Traditional markets ofPakistan -theEuropean Union, theUnited States
andJapan -stillaccount formore than50percentoftotalexports buttheirshare hasbeendropping.
Incontrast, thenewly industrialized countries -Hong Kong, Taiwan, Singapore andtheRepublic ofWT/BOP/W/17
Page9
Korea -havebecome increasingly important toPakistan exporters. Ontheimport side,mostimports -
wellabove 40percent-stilloriginate inthethreeindustrial regions -theEuropean Union, theUnited
States andJapan buttheirshare hasalsobeensomewhat dropping. Ontheother hand, themarket
share ofMalaysia isdramatically expanding.
Table 4-Pakistan -Direction ofTrade, 1990-1995
1990 1991 1992 1993 1994 1995
(Inmillions ofUSdollars)
Imports
European Union (15) 1771 2291 2548 2372 2293 2754
United States 944 942 979 907 869 1093
Japan 875 1243 1330 1515 833 1254
Fuelexporting countries11358 1046 1390 1651 1699 2201
NICs2559 549 660 801 588 784
China 337 358 421 437 422 515
Malaysia 244 383 418 493 659 988
Other countries 1268 1671 1617 1564 1534 2115
Total imports 7356 8483 9363 9740 8897 11704
Exports
European Union (15) 2004 2107 2192 2194 2393 2487
United States 693 747 933 1006 1161 1231
Japan 457 520 560 502 538 552
Fuelexporting countries1480 766 948 859 749 907
NICs2698 996 1069 859 1067 1206
Other countries 1241 1381 1602 1458 1462 1775
Total exports 5573 6517 7304 6878 7370 8158
(Inpercent oftotal)
Imports
European Union (15) 24.1 27.0 27.2 24.4 25.8 23.5
United States 12.8 11.1 10.5 9.3 9.8 9.3
Japan 11.9 14.7 14.2 15.6 9.4 10.7
Fuelexporting countries118.5 12.3 14.8 17.0 19.1 18.8
NICs27.6 6.5 7.0 8.2 6.6 6.7
China 4.6 4.2 4.5 4.5 4.7 4.4
Malaysia 3.3 4.5 4.5 5.1 7.4 8.4
Other countries 17.2 19.7 17.3 16.1 17.2 18.1
Exports
European Union (15) 36.0 32.3 30.0 31.9 32.5 30.5
United States 12.4 11.5 12.8 14.6 15.8 15.1
Japan 8.2 8.0 7.7 7.3 7.3 6.8
Fuelexporting countries 8.6 11.8 13.0 12.5 10.2 11.1
NICs212.5 15.3 14.6 12.5 14.5 14.8
Other countries 22.3 21.2 21.9 21.2 19.8 21.8
1 Thefuelexporting countries are:Algeria, Indonesia, Iraq,Islamic Republic ofIran,Kuwait, Libyan Arab Jamahiriya, Nigeria,
Qatar, Saudi Arabia, United Arab Emirates.
2 NICs refer to:Hong Kong, Republic ofKorea, Singapore andTaiwan.
Note: Percentages maynotaddupbecause ofroundings.
Source: WTOWT/BOP/W/17
Page10
Capital Account
21. Despite asubstantial increase inforeign capital inflows in1995/96, external financing was
notsufficient tooffset thesharply increased current account deficit. Thecapital account surplus
decreased from itspeakof6.2percentofGDP in1993/94 to4percentin1994/95 rebounding to
5.9percentofGDP in1995/96 reflecting growth inbothpublic andprivate sector foreign lending
andinvestment.PublicandpubliclyguaranteedforeigncapitalincreasedfromUS$0.6billionin1994/95
toUS$1.4 billion in1995/96 reflecting achange intheshort-term andmedium- andlong-term foreign
capital inflows. Netshort-term government andgovernment-guaranteed borrowing fluctuated inthe
lastfewyears, decreasing fromanetinflow ofUS$0.2 billion in1993/94 toanetoutflow ofUS$0.4
billion in1994/95 before increasing toanetinflow ofUS$0.1 billion in1995/96. Medium- andlong-
termgovernment andgovernment-guaranteed debt-themostimportant component ofpublic foreign
capital inflows -hassteadily increased since thebeginning ofthe1990s, accounting formore than
90percentofpublic foreign debtandforabout aquarter oftheincrease inpublic foreign capital between
1994/95 and1995/96. Theriseinprivate foreign capital inflows fromUS$1.7billion toUS$2.6 billion
between 1994/95 and1995/96 reflected mainly anincrease inforeign direct investment andinforeign
currency deposits inbanks. Thenetinflow ofprivate non-bank capital inflows remained fairly stable
inthelastthreeyears, increasing slightly fromUS$1.8 billion in1993/94 toUS$2 billion in1995/96.
However, thecomposition ofthese foreign capital inflows significantly changed withoffsetting
movements inportfolio anddirect investment. Following asurge fromUS$0.3 billion in1993/94 to
US$1.1 billion in1994/95, portfolio investment dropped toUS$0.2 billion in1995/96. Incontrast,
foreign direct investment, nearly tripled toUS$1.1 billion in1995/96 from theaverage annual level
ofabout US$0.4 billion in1991/92-1994/95.
22. Insum, theincrease inthecurrent account deficit in1995/96 wasonlypartly financed bythe
increase inpublic andprivate capital inflows. Itresulted inthedeterioration oftheoverall balance
andadecrease innetinternational reserves byUS$0.4 billion. Thelevelofofficial reserves excluding
gold, which increased from 2.2weeks ofimports inthe"crisis" yearof1992/93 to12.7weeks in
1993/94 andto12.8weeks in1994/95, declined toonly8.2weeks ofimports in1995/96.
23. Thelevelofexternal debtremained stable ataround 44percentofGDPin1995/96. However,
theexternal debtservice asaratioofforeign exchange earnings declined from34.9percentin1994/95
to33.9percentin1995/96 onaccount oflower repayments ofprincipal, particularly ofshort-term
loans from commercial banks.
Macroeconomic adjustment
Savings -Investment Balances
24. Thedeterioration oftheexternal current account deficit corresponded toawidening ofthe
internal saving-investment imbalance. Thiswaspartly duetoarecovery inthedomestic investment
rateandtoasharp decline intherateofbothdomestic andnational savings in1995/96. Following
adecreasefrom19.4percentofGDPin1993/94to18.7percentin1994/95,grossdomesticinvestment
increased to19.6percentofGDP in1995/96. Atthesame time, gross national savings havebeen
falling asapercentage ofGDP since 1993/94. Thishasreflected afallintheshare ofprivate-sector
savings inGDP, despite amodest increase intheshare offoreign income transfers (Table 5).WT/BOP/W/17
Page11
Table 5-Pakistan -Savings andinvestment balance, 1991/92-1995/96
(Percentage ofGDP)
1991/92 1992/93 1993/94 1994/95 1995/96
Gross national savings 17.1 13.6 15.7 14.6 12.7
Private 17.4 12.1 13.1 12.6 10.2
Public -0.3 1.5 2.6 -2.0 -2.5
Gross domestic investment 20.1 20.7 19.4 18.7 19.6
Private 11.4 11.6 11.1 10.4 11.5
Public 8.8 8.9 8.0 8.5 8.1
Savings-Investment -3.1 -7.1 -3.7 -4.0 -6.9
Private 6.0 0.5 2.0 2.2 -1.3
Public -9.1 -7.6 -5.7 -6.3 -5.6
Current account balance -3.1 -7.1 -3.8 -4.0 -6.6
Source: IMF, Pakistan authorities.WT/BOP/W/17
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Public Finance
25. Themost visible achievements inmanaging thegovernment finances andcorrecting fiscal
imbalances since 1992-93 havebeenthereduction offiscal deficit through measures toimprove the
taxandnon-tax revenue bases andcontain thegrowth ofnon-productive government expenditures.
Theoverall fiscal deficit which was8.0percentofGDPin1992-93 hasgradually beenbrought down
to5.0percentin1995-96. The1996-97 budget hasproposed continuation offiscal efforts forthe
fourth yearinsuccession aspartofitsintensifying efforts tobring thecountry 'soverall fiscal deficit
to4.0percentofGDP.Thebudgetarydeficithasbeenbroughtdownbybothmobilizingmoreresources
aswellasreducing expenditures. During 1996-97 government revenues areexpected toincrease to
18.6percent. Theshare ofdirect taxes intotaltaxes hasbeengradually rising withreduction in
government reliance oncustom related taxes. Thetaxadministration hasbeenstrengthened toincrease
thetaxyieldandremove thedistortion ofthetaxsystem. Growth ofgovernment expenditure hasbeen
contained from about 26percentofGDP in1992-93 to23percentin1995-96 andisexpected to
fallfurtherto22.6percentin1996-97.Reductioningovernmentexpenditurehasbeenachievedthrough
cutsinbothcurrent anddevelopment expenditures. Development expenditures havebeenreduced
from5.7percentofGDP in1992-93 to4.0percentin1995-96. However, thebudget 1996-97 has
proposed anincrease indevelopment expenditure to4.2percentofGDP. Current expenditure has
alsobeenreduced from 20.3percentofGDP in1992-93 to19percentin1995-96 andafurther to
18.5percentin1996-97 (Table 6).
26. Another source ofconcern istheincrease ingovernment borrowing fromthedomestic banking
system which affects thegrowth ofmoney supply andinflation. Domestic financing increased from
Pakistan rupees 67.5billion in1993/94 to81.5billion in1995/96 while thenetexternal financing of
thebudget deficit hasremained more orlessunchanged overthelastfiveyears -between Pakistan
rupees 24billion to28billion. Moreover, thegovernment hasincreasingly relied onnon-bank sources
offinancing, which increased fromabout Pakistan rupees 20billion in1992/93 toanannual average
ofabout Pakistan rupees 51billion intheperiod of1993/94-1995/96.
Money andcredit
27. In1995/96, thegrowth rateofdomestic liquidity wasonlyslightly reduced fromitslevelin
previous years, andthesources ofliquidity expansion shifted significantly backtonetdomestic asset
expansion. Following anacceleration in1994/95, thegrowth rateofdomestic liquidity decreased to
14.2percentin1995/96. Thesingle source ofliquidity growth in1995/96 wastheexpansion ofnet
domestic assets which increased bytheequivalent of19.5percentduring theyear. Mainly asaresult
ofthedeterioration inthebalance ofpayments, netforeign assets contracted by4.5percentfromthe
initial levelofdomestic liquidity inthefiscal year. Thecontinuous expansion ofcredit tobudgetary
support since 1993/94 wasthesource ofmain concerns. Bank credit forbudgetary support, which
accounts forthelargest share ofcredits totheGovernment, accelerated, increasing inthelasttwoyears
fromRs7.5toRs48.1million while theexpansion ofclaims onthenongovernment sectors slowed
down.WT/BOP/W/17
Page13
Table 6-Pakistan -State Budget Aggregates, 1990/91-1995/96
1991/92 1992/93 1993/94 1994/95Prel.
1995/96
(Inbillions ofPakistan rupees)
Total revenue 232.9 241.1 272.3 322.9 392.1
Tax 164.4 178.4 208.7 257.9 300.3
Nontax 51.7 61.1 61.6 60.0 81.1
Other116.9 1.6 2.0 5.0 12.0
Total expenditure 322.8 349.0 364.3 428.3 501.2
Current (including unidentified)2236.2 273.6 292.6 345.9 414.0
Development386.6 75.4 71.7 82.3 87.2
Budget deficit -89.8 -107.9 -92.0 -105.4 -109.1
Financing 90.0 107.9 92.0 105.4 109.1
External 22.6 25.4 25.2 29.4 27.6
Domestic 67.4 82.2 66.8 76.0 81.5
Bank 70.3 63.6 12.5 28.1 30.5
Nonbank -3.1 18.9 54.3 49.9 51.0
ofwhich: Privatization proceeds5... ... ... 6.1 ...
(Inpercent ofGDP)
Total revenue 19.2 18.0 17.4 17.3 18.0
ofwhich: Tax 13.6 13.3 13.3 13.8 13.8
Total expendiure 26.6 26.0 23.2 23.0 23.0
Current219.5 20.4 18.7 18.5 19.0
Development37.1 5.6 4.6 4.4 4.3
Budget deficit -7.4 -8.0 -5.9 -5.6 -5.7
Federal -7.5 -7.6 -6.5 -6.2 -5.5
Provinces 0.1 -0.4 0.7 0.5 -0.2
Memorandum items:
Surplus ofautonomous bodies
(inbillion ofPRs)6... 20.0 23.3 18.3 1.5
Dev. expenditure outside budget
(inbillion ofPRs)6... 44.2 38.3 39.5 34.9
Overall public sector balance
(inpercent ofGDP) ... -9.8 -6.8 -6.8 -7.3
1 In1991/92 thisconsists mainly ofthesurplus oftheautonomous bodies which wereincluded intheconsolidated budget. Thereafter,
theyconsists solely ofprivatization proceeds. Beginning in1994/95, privatization proceeds arenotfullytreated asrevenue, with
theexcess overtheagreed amounts reflected aspartofnonbank financing.
2 Excludes partofthecurrent expenditures which form partofthepublic sector development program.
3 Includes capital expenditure, netleending, andthecurrent outlays under thePSDP.
4 Differs frombudgetary support shown inthemonetary accounts duetothechange inthecoverage ofthebanks which areused
forthepurpose ofmeasuring thebudget deficit. Thischange consisted ofincluding twoprovincial banks under thesupervision
ofSBP.
5 Seefootnote 1.
6 In1991/92, thebudget definition comprises thefederal andprovincial governments (including railways andpostoffice) and
autonomous bodies--WAPDA (Water andPower Development Authority), OGDP (OilandGaseDevelopment Corporation), NFC
(National Fertilizer Corporation ofPakistan), PTVC (Pakistan Television Corporation), andPTC(Pakistan Telecommunications
Corporation). Beginning in1992/93, theoperations ofthefiveautonomous bodies areexcluded fromthebudget coverage reflecting
theincreasingly independent nature ofthese corporations. In1995/96 includes losses ofpublic sector banks.
Source: IMF, Pakistan authorities.