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TITLE:  PAKISTAN ECONOMIC POLICY AND TRADE PRACTICES
DATE:  FEBRUARY 1994
AUTHOR:  U.S. DEPARTMENT OF STATE

                             PAKISTAN

                     Key Economic Indicators
      (Billions of Pakistani rupees unless otherwise noted)

                                  FY91 /1   FY92      FY93
Income, Production,
 and Employment

GDP (nominal)                     1,022     1,202     1,359
GDP by sector (pct.)
  Agriculture                      25.7      26.2      24.4
  Manufacturing                    17.7      17.8      18.3
  Services /2                      48.8      47.9      48.9
Real GDP Growth Rate (pct.)         5.6       7.7       3.0
Real GNP Per Capita (US$)         409       414       414
Labor Force (millions)            31.8       32.8     33.8
Unemployment Rate (pct.)            6.3       6.3       6.3


Money and Prices

Money Supply (M1)                   304       357       404
Comm. Interest Rates (pct.)/3      11.0      15.5      18.0
Saving Rate (pct. of GNP)          13.8      14.5      15.2
Investment Rate (pct. of GNP)      18.5      19.9      20.1
Consumer Price Index
 (annual pct. change)              12.7       9.6       9.1
Wholesale Price Index
 (annual pct. change)              11.7       9.3       8.4
Exchange Rate
  Official (FY Avg.)              22.4      24.7      25.9
  Parallel (est.)                 23.5      25.5      27.9


Balance of Payments and Trade
 (millions of U.S. dollars)

Total Exports (FOB)                5,902     6,762     6,780
  Exports to U.S.                    665       856       676
Total Imports (FOB)                8,385     8,998    10,040
  Imports from U.S.                  915       971       770
Aid from U.S.
 (U.S. FY commitments)/4           0         0         0
Aid from other countries
 (Non-military Commitments)        4,000     3,349     2,805
External Public Debt              16,573    17,361    18,423
Debt Service Payments /5           1,316     1,513     1,519
Foreign Exchange Reserves
- (End of fiscal year)               492       952       348
Balance of Payments                  -75      -763    -1,441


Notes:

1/  Pakistan's Fiscal Year (FY) is July 1 - June 30.  For
    example, FY 93 runs from July 1, 1992 to June 10, 1993.
2/  Includes Banking, Insurance, Commerce, Housing, Storage,
    Transportation, Communications and other Services.
3/  Average annual interest rate on commercial bank loans to
    private sector borrowers.
4/  U.S. fiscal year basis.  Effective October 1, 1990, new
    civilian assistance and all military aid for Pakistan
    withheld pending a presidential certification under the
    Pressler Amendment to the Foreign Assistance Act.
/5  Excludes interest on short-term loans and IMF charges.



1.  General Policy Framework

    The political uncertainty which gripped Pakistan for much
of 1993 had an inevitable effect on the country's economic
situation.  GDP growth, which had averaged 6.2 percent per year
during the 1980s and early 1990s, fell to 3.0 percent during
the fiscal year which ended on June 30, 1993.  Exports actually
declined 1.7 percent during Pakistani fiscal year 92-93, while
imports increased 9.25 percent.  Official foreign exchange
reserves, which had been just under $1 billion at the beginning
of the year, fell precipitously and were equivalent to just a
few days of import cover by mid-summer.  Pakistan was facing an
economic crisis by the time the caretaker administration of
Prime Minister Moeen Qureshi took over in July.

    The interim government introduced far-reaching economic
reform measures to put the economy back on track.  In a move to
stimulate exports and slow down imports, the Pakistani rupee
was devalued 9.5 percent against the dollar.  Prices for
certain key commodities were raised, and agricultural income
was brought into the tax net for the first time in Pakistan's
history.  The government signed on to a $370 million IMF
standby program and laid the groundwork for future substantial
enhanced structural adjustment facility (ESAF) and extended
fund facility programs.  The State Bank of Pakistan (the
central bank) was granted more autonomy in the formulation of
monetary policy.  In September, the government announced a
comprehensive trade reform package, aimed at creating a more
export-oriented, neutral-protection structure by simplifying
the system and introducing more transparency.  The top duty
rate will drop from the current 92 percent to 50 percent over a
three-year period, and concessions will be reduced.


2.  Exchange Rate Policies

    Pakistan's exchange rate policy is based on a managed
float, with the central bank regularly adjusting the value of
the rupee against major international currencies, using the
U.S. dollar as an intervention currency to determine other
rates.  The Pakistani rupee was devalued about 9.5 percent
against the dollar in July 1993, in a move designed to make
Pakistani exports more competitive and to curb soaring
imports.  Over the past few years, foreign exchange controls
have been significantly liberalized.  Individuals and firms 
resident in Pakistan may now hold foreign currency bank
accounts and freely move foreign currency into and out of the
country.  Companies with foreign direct investment (other than
foreign banks) may remit profit and capital without prior
central bank approval.  Similar liberal remittance procedures
were extended for the first time to foreign portfolio
investment in Pakistan's capital market.  Other measures made
it easier for individuals and firms to obtain foreign exchange
for a variety of specific purposes.  The government's objective
is to make the Pakistani rupee freely convertible once economic
conditions make it possible to do so.


3.  Structural Policies

    The Pakistani economy has undergone significant reform over
the past five years under successive governments.  There is
remarkably little difference between the basic economic
policies of the two major political parties, and the general
economic agenda has been to establish a dynamic, open-market
economy in which Pakistani firms are competitive in both global
and domestic markets.  Reforms were initiated in three
principal areas:  trade liberalization through the reduction of
tariff and non-tariff barriers; encouraging foreign and
domestic private investment through deregulation and relaxation
of capital and exchange controls; and the dismantling of state
control over key areas of the economy through privatization. 
The government has sold 70 of the 115 state-owned industrial
enterprises initially slated for privatization.  Two
previously-nationalized commercial banks were also sold to the
private sector, and two of the remaining three are also
scheduled to be privatized.  The government is also planning to
privatize two giant state-owned enterprises, Pakistan
Telecommunications Corporation (PTC) and the Water and Power
Development Administration (WAPDA), the state electric
utility.  In all cases, bidding is open to foreign investors,
although foreign investment in Pakistani banks is permitted on
a non-repatriable basis only.

    Despite market-based reforms, the government retains
considerable power to manage prices in many sectors of the
economy.  The use of direct price controls has been largely
eliminated, although prices in such industries as oil and gas
and pharmaceuticals remain under control.  Foreign drug
companies can register products in Pakistan only at prices
acceptable to the government.  In some cases, companies have
opted not to introduce products into the Pakistani market
because the prices established by the government were too low.
Similar pricing policies have discouraged foreign investment in
natural gas exploration and development as well.  During 1993,
however, the government moved to liberalize pricing policies in
several sectors, including the petroleum sector, in order to
encourage foreign investment.

    Although direct price controls are no longer prevalent,
public sector entities involved in banking, manufacturing,
services, and trading frequently influence market prices in
accordance with government policy or political considerations. 
These corporations may use government stocks to affect market
prices for essential commodities when prices vary significantly
from the government-fixed support prices.  The state-owned 
corporations can set prices for their products with little
regard to generating a positive return on equity.  Examples
include fertilizer, tractors, and steel products.  This is
especially true for wheat, where artificially low prices raise
consumption and lead to smuggling to neighboring countries
where prices are higher.

    As part of its structural adjustment program, the
government has begun to rationalize public sector prices.  In
addition, the on-going privatization program will reduce or
eliminate the economic leverage of many firms now in the public
sector and the government's incentive to control prices.  Over
the past two years, the government has sold most of the
state-owned ghee factories.  As a result the public sector
share of the ghee (vegetable oil) industry has dropped from
nearly total dominance to about 15 percent of the market, and
the government no longer sets the retail price of the product. 
The cement industry has undergone a similar transformation.

    Pakistan has always been a regular importer of wheat.  In
the last several years, however, the imbalance between demand
and supply necessitated imports of significant amounts of u.s.
wheat.  Credit guarantees from the U.S. Department of
Agriculture's Commodity Credit Corporation (GSM-102) have been
used to finance most of these wheat purchases.  About 70
percent of the vegetable oil consumed in Pakistan is also
imported.  Vegetable oil imports are roughly 85 percent palm
oil, mostly from Malaysia, and 15 percent soybean oil, almost
all from South America.  Pakistan will import $40 million in
U.S. soybean oil in 1993 under a PL-480 title I program.

    In Pakistani FY 1992, the government introduced a package
of modest tax measures designed to expand the tax net and
improve collections.  Sales taxes were imposed for the first
time on products at the wholesale and commercial import
stages.  A capacity-based system for excise duties and a fixed
tax on small business incomes were implemented to reduce
opportunities for evasion or collusion with tax collectors. 
Withholding taxes were introduced for several categories of
income in order to increase and speed up the flow of revenue.

    But Pakistan's inefficient tax system captures only a small
proportion of the taxable revenues in the country and is
heavily dependent on indirect taxes on trade and commodities. 
Tax collection is hindered by widespread evasion, and
corruption among tax officials is common.  As a result of these
factors, tax revenues have not kept pace with the growth of the
economy or with government spending.  Nearly 85 percent of FY
1992-93 gross revenues were generated by customs and excise
duties, sales taxes, surcharges and non-tax revenue.  Only
about 15 percent came from direct taxes on income and wealth,
collected principally from salaried urban residents who make up
less than ten percent of the labor force.  However, the
caretaker government made tax reform one of its major
objectives and went after tax evaders with a vengeance.  In an
historic move, the government also levied taxes on the
agriculture incomes of big landowners for the first time. 
Effective this fiscal year, the agriculture income tax is
expected to bring about 1.5 percent of total landowners into
the tax net.  Though the actual revenue generated is likely to
be modest, the move symbolizes a big step toward greater equity
in the taxation structure.  Although agriculture accounts for
26 percent of Pakistan's GDP, taxation of agricultural income
historically has been blocked by the large landowners who
dominate the national assembly.


4.  Debt Management Policies

    Despite a generally conservative approach to external
borrowing, Pakistan's total external debt has grown in recent
years in response to large current account deficits and
associated financing needs.  Total external debt at the end of
June 1993 (the most recent statistics available) consisted of
the following:


Total External Debt                 19.2
 (US$ billions)

-  Medium/Long term debt            17.9
     Consortium                      8.1
     Multilateral                    7.6
     Non-consortium                  1.7
     SBP Private Debt                0.5
   Short-term Debt                   0.4
   IMF Credits                       0.9

    Pakistan's debt service ratio was about 23 percent of
export earnings in FY 1993.  Pakistan has a sound credit rating
and has consistently met its debt service obligations on time,
even during the foreign exchange crisis of summer 1993.

    Despite the government's efforts to liberalize the trade
regime and incentives to exporters in FY 1993, the trade
performance fell short of government projections.  Due to
increased purchases of edible oil, motor vehicles and wheat,
imports rose nine percent over FY 1992.  Exports in FY 1993
dropped by two percent over FY 1992, primarily due to lower
international prices for cotton.  The increased trade deficit
resulted in an increase in the current account deficit, which
according to provisional estimates was $3.5 billion in FY
1993.  Pakistan's approach to foreign borrowing has a direct
effect on imports from the United States.  In reviewing bids
from foreign suppliers for development projects, the government
is frequently more sensitive to credit terms than to price and
quality.  This often puts suppliers from countries which offer
highly concessional financing (Japan, France, Germany, the U.K.
and others) in an advantageous position vis-a-vis U.S.
competitors.


5.  Significant Barriers to U.S. Exports

    Import licenses:  In recent years, Pakistan has
significantly reformed its restrictive import regime largely at
the urging the IMF and the World Bank.  Import license
requirements were eliminated for all "freely importable goods"
(i.e., items not on the government's restricted or negative
lists), except machinery and millwork, goods financed with
foreign assistance, some public sector imports, and imports
from India.  All imports, however, continue to be subject to a
six percent license fee, which annually generates about $350
million in revenues.  The numbers of items on the restricted
and negative lists have recently been reduced.  Items remaining
on these lists are restricted for reasons of religion, national
security, luxury consumption, or reciprocity, or they are
capital and consumer goods banned to protect local industry.

    Service barriers:  Insurance, banking, maritime and air
transportation, and audio and visual works are all affected by
services barriers.  Portions of major service industries in
Pakistan are nationalized and run by the government.  The
government recently opened civil aviation, which had been a
monopoly of the national carrier Pakistan International
Airlines, to private competition.  Through late summer 1993,
three private carriers were flying domestically and several
others were planning to enter the market.  The government of
Pakistan's "open sky policy", announced in 1992, liberalized
access for foreign carriers to Karachi's Quaid-e-Azam
international airport, but is currently slated for review and
possible revision.  Private firms are allowed to participate in
general insurance, but foreign insurance firms must place a
portion of any service transaction with or through a local
private firm or government facility.  Pakistan has recently
opened its life insurance sector to both foreign and private
sector participation.  However, foreign insurance companies are
restricted to a 51 percent stake and the remaining 49 percent
must be offered to public through the local stock market. 
Commercial insurance for imported goods must be procured
through domestic carriers, except imported goods financed by
USAID programs.  Foreign banks in Pakistan, including three
U.S. banks, are limited to three branches each (although two
U.S. banks have recently been permitted to open fourth
branches) and are subject to certain discriminatory tax and
regulatory policies, but freely compete in both retail and
corporate banking throughout the country.

    Investment barriers:  Pakistan's political leadership
strongly supports foreign direct investment, but this message
is not always fully reflected in bureaucratic policies and
procedures.  In FY 1991, the government eliminated all federal
and provincial sanctioning requirements for new foreign
investment, except those in restricted industries (see below). 
Other rule changes gave foreign investors better access to
domestic credit facilities, eliminated controls on the movement
of foreign currency, and opened up the domestic capital market
to fully repatriable foreign portfolio investment.

    The government has designed incentive packages to attract
investment to certain "underdeveloped areas" and to key
industries - biotechnology, fiber optics, solar energy
equipment, computer and software, other electronic equipment,
and fertilizers.  Pakistan's "investment priority areas"
include energy, telecommunications, transportation,
agriculture-based industries, chemicals, mechanical
engineering, metallurgical products, machinery and equipment,
electrical/electronics, and mineral exploration and
processing.  Special permission is required for investment in
areas on a "specified list" of industries including arms and
ammunition, security printing, currency and mint, high
explosives, radioactive substances, alcohol, manufacture of
automobiles, tractors, and petroleum blending plants.  Foreign
private investment is also prohibited in agricultural land,
forestry, irrigation, real estate (including land, housing  and
commercial office buildings), radioactive materials, and
health.  Foreign investment in domestic banks is permitted on a
non-repatriable capital basis, though dividends may be remitted
overseas.

    Government procurement:  The government, along with its
numerous state-run corporations, is Pakistan's largest
importer.  Work performed for government agencies, including
purchase of imported equipment, services, etc., is awarded
through tenders that are publicly announced and/or issued to
registered suppliers.  Orders are generally placed with the
lowest bidder.  Although sales to the government can be large,
the bureaucratic procedures involved are cumbersome and
competing suppliers are often played off against each other.
Government entities must also procure services, such as banking
and insurance, from the public-sector firms.

    Customs procedures:  These are not unusually burdensome. 
Waivers of import duties are sometimes allowed for special
equipment to start up a new plant or import a new technology. 
In practice, however, importers sometimes have difficulty
convincing customs officers to honor waivers that have been
negotiated.


6.  Export subsidies policies

    Pakistan actively promotes the exports of Pakistani goods
with concessional financing and rebates of import duties and
various taxes.  In addition, high-value export items, such as
garments, engineered goods, and electronics are eligible for a
75 percent income tax rebate; other items are eligible for a 50
percent rebate.  These policies appear to be equally applied to
both foreign and domestic firms producing goods for export. 
For many exports, Pakistan's nationalized commercial banks
offer financing at concessional rates.


7.  Protection of U.S. Intellectual Property

    Pakistan has been on the special 301 "Watch List" since May
1989, when the country was identified for special attention
under the intellectual property provisions of the Omnibus Trade
and Competitiveness Act of 1988.  Since then, the government
has introduced legislation to revise its patent, copyright and
trademark legislation.  Pakistan is not a member of the Paris
convention for the protection of industrial property.  It is,
however, a member of the World Intellectual Property
Organization (WIPO).  The U.S. Treaty of Friendship and
Commerce with Pakistan guarantees national and most favored
nation (MFN) treatment for patents, trademarks and industrial
property rights.

    Copyrights:  U.S. companies (i.e., book publishers, film
producers) have complained that, although Pakistan is a member
of the Universal Copyright Convention, its copyright law
enforcement is ineffective and penalties for violation
extremely weak.  Videotape piracy is widespread.  The copyright
statute has recently been amended to strengthen sanctions 
against piracy of printed texts, computer software, sound
recordings and film works, and to increase penalties for
infringement.  Textile manufacturers in the United States have
also complained of infringement of their textile designs by
Pakistani firms and inadequate protection under Pakistani
intellectual property laws.

    Patents:  Pakistan's current patent law offers process
patents only, not product patents.  U.S. pharmaceutical
companies have complained that this complicates their efforts
to pursue infringement cases in local courts.  The statute
permits applications for compulsory license, although such
applications are infrequent.  The United States has urged
Pakistan to provide product patent coverage and to amend its
legislation to extend the patent term and to limit the use of
the compulsory license procedure.

    Trademarks:  Pakistan's existing law has no provision for
the registration of service marks.  Some trademark licenses
include a requirement for transfer of technology or other
economic benefit such as increased exports, foreign exchange
earnings, or increased domestic employment.  Registration of a
trademark in Pakistan can take up to three years.  The
government is now revising its trademark legislation and has
assured the United States that infringement penalties and
legislative coverage will be expanded.


8.  Worker Rights

    a.   Right of Association

    Pakistan's industrial workers have the right to form trade
unions, but labor laws place significant constraints on their
formation and ability to function effectively.  Strikes are
rare, and when they occur are usually illegal and short. 
Police do not hesitate to crack down on worker demonstrations. 
The right of unions to strike is severely constrained by
legally-required conciliation proceedings and cooling off
periods and especially by the government's authority to ban any
strike found to cause "serious hardship to the community" or
prejudice to the national interest, or in any case after it has
continued unresolved for 30 days.  Trade unions of all
political orientations are permitted, and the political
leanings of labor leaders cover the entire spectrum.  While
many unions remain aloof from party politics, it appears that
the most powerful are those associated with political parties. 
Pakistani labor federations may affiliate with international
organizations: an International Labor Organization (ILO) office
operates in Pakistan.  Pakistan has been criticized by the ILO
for not abiding by several ratified conventions.

    In 1993 two petitions were filed to remove GSP benefits
from Pakistan for failure to provide internationally recognized
worker rights, one by the AFL-CIO and one by the International
Labor Rights Education and Research Fund (ILRERF) together with
the International Human Rights Law Clinic, Washington College
of Law at American University.  The petitions were accepted for
review, a final decision is expected by mid-1994 at the end of
the 1993/94 review cycle.

    b.   Right to Organize and Bargain Collectively

    The right of workers to form associations and freely elect
representatives to act as collective bargaining agents is
established in law.  Current laws, however, place major
limitations on the extent and effectiveness of such
activities.  Industrial workers have the right to organize and
bargain collectively under the Industrial Relations Ordinance
(IRO), although large sections of the labor force do not enjoy
similar rights.  Agricultural workers, who are not defined as
"industrial workers" under the IRO, have the right to organize
and form associations, but they are not guaranteed the right to
strike, bargain collectively, or make demands on employers.
Under the Essential Services Maintenance Act of 1952 (ESA),
normal union activities are severely restricted in sectors
associated with "the administration of the state", which covers
a wide range of government services and state enterprises, such
as education, health care, oil and gas production, and
transport.

    c.   Prohibition of Forced or Compulsory Labor

    Forced labor is prohibited by Pakistani law.  However,
bonded labor is common in the brick, glass, and fishing
industries, as well as in agricultural and construction work in
rural areas.  As a result of ILO pressure and continuing
publicity about this issue, the Bonded Labor System (abolition)
Act was adopted in March 1992.  This is the first law
officially recognizing the existence of bonded labor in
Pakistan.  It outlaws the bonded labor system, cancels all
existing bonded debts, and forbids lawsuits for the recovery of
existing bonded debts.

    d.   Minimum Age for the Employment of Children

    Despite legal limitations, child labor is common.  Child
labor is limited by at least four separate statutes and Article
11 of the Constitution.  The confusing definition of what
constitutes a "child" was improved by the National Assembly's
adoption of the Employment of Children Act of 1991, which
defined the child as "a person who has not completed his 14th
year of age".  Although the act reiterated restrictions against
the employment of children in hazardous industries, it did
little to promote much-needed enforcement mechanisms and
remains essentially unimplemented.  While much child labor is
in the traditional framework of family farming or small
business, the abusive employment of children in larger
industries and government business is also widespread.

    e.   Acceptable Conditions of Work

    Labor regulations in Pakistan are governed by federal
statutes applicable throughout the country.  These provide for,
or require the provincial governments to provide for, a legal
minimum wage as well as certain worker protection and welfare
services.  These regulations specifically do not apply to
agricultural workers, to workers in Pakistan's numerous small
factories with fewer than ten employees, and to the small
contract groups of under ten workers into which factory work
forces are increasingly divided.

    f. Rights in Sectors with U.S. Investment

    Significant investment by U.S. companies has occurred in
the petroleum, food and related products, and chemicals and
related products sectors.  Although U.S. consumer goods and
electronics are represented in the wholesale trade sector, they
are usually marketed under agency agreements.  In general,
multinationals seem to do better than most employers in
fulfilling their legal obligations and dealing responsibly with
unions.  The industrial establishments built with U.S.
investment are all large enough to be subject to the full
provisions of Pakistani law for worker protection and
entitlements.  The U.S. Embassy is not aware of any case where
a U.S. company has been accused of worker rights abuses.

    The only significant area of U.S. investment in which
worker rights are legally restricted is the petroleum sector. 
The oil and gas industry has been declared subject to the ESA
-- a finding renewed at six-month intervals.  The ESA bans
strikes and collective bargaining, holds up the threat of legal
sanctions against worker misconduct, theoretically limits a
worker's rights to change employment, and gives very little
recourse to a fired worker.

    In practice, restrictions on changing employment have
apparently been used to protect the federal government's Oil
and Gas Development Corporation (OGDC) from losing its trained
manpower to private companies offering more generous benefits. 
The U.S. Embassy understands that employees who leave OGDC must
generally wait for two years before seeking other employment in
the petroleum industry in Pakistan.  Many OGDC workers,
however, have found employment abroad.  Neither the exemption
of the petroleum industry nor the total repeal of the act is
likely in the near future.


         Extent of U.S. Investment in Selected Industries

              U.S. Direct Investment Position Abroad
                on an Historical Cost Basis - 1992
                    (millions of U.S. dollars)

Category                                    Amount

Petroleum                                              99
Total Manufacturing                                     D
    Food & Kindred Products                   1
    Chemicals and Allied Products             D
    Metals, Primary & Fabricated             -1
    Machinery, except Electrical              0
    Electric & Electronic Equipment           0
    Transportation Equipment                  0
    Other Manufacturing                       0
Wholesale Trade                                         D
Banking                                               106
Finance and Insurance                                   *
Services                                                0
Other Industries                                        0

TOTAL ALL INDUSTRIES                                  245



(D)-Suppressed to avoid disclosing data of individual companies
(*)-Less than $500,000

Source:  U.S. Department of Commerce, Bureau of Economic
Analysis.

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