World Trade Organization - Home page - Global trade
World Trade
Organization |RESTRICTED | |
| | |
| |WT/TPR/S/193 |
| |10 December 2007 |
| |(07-5393) |
| | |
|Trade Policy Review Body | |
| |
|TRADE POLICY REVIEW |
| |
|Report by the Secretariat |
| |
|PAKISTAN |
|This report, prepared for the third Trade Policy Review of Pakistan, has been drawn up by the WTO Secretariat|
|on its own responsibility. The Secretariat has, as required by the Agreement establishing the Trade Policy |
|Review Mechanism (Annex 3 of the Marrakesh Agreement Establishing the World Trade Organization), sought |
|clarification from Pakistan on its trade policies and practices. |
| |
|Any technical questions arising from this report may be addressed to Mr. Sergios Stamnas (tel.: 022 739 |
|5382). |
| |
|Document WT/TPR/G/193 contains the policy statement submitted by Pakistan. |
| |
Note: This report is subject to restricted circulation and press embargo until the end of the first session of the meeting of the Trade Policy Review Body on Pakistan.
CONTENTS
Page
SUMMARY OBSERVATIONS ix
(1) Economic Environment ix
(2) Trade Policy Framework x
(3) Trade Policy Developments xi
(4) Sectoral Policy Developments xiii
(5) Outlook xv
I. Economic environment 1
(1) Introduction 1
(2) Recent Economic Performance 2
(i) Growth, employment, and poverty 2
(ii) Inflation 5
(3) Main Macroeconomic Policy Developments 6
(i) Monetary and exchange rate policy 6
(ii) Fiscal policy 8
(4) Main Structural Policy Developments 8
(i) Tax and expenditure reforms 9
(ii) Privatization 10
(iii) Governance 10
(iv) Financial sector and capital market reforms 11
(v) Labour market 11
(5) Balance-Of-Payments Developments 12
(i) Current and trade accounts 12
(ii) External debt 13
(6) Developments in Merchandise Trade 13
(i) Merchandise trade 13
(ii) Services trade 16
(7) Trends and Patterns in Foreign Investment 17
(8) Outlook 18
II. trade policy regime: framework and objectives 19
(1) Overview 19
(2) General Constitutional and Institutional Framework 19
(3) Trade Policy Formulation And Implementation 20
(i) Objectives and strategies 20
(ii) Institutional and legal framework 21
(iii) Advisory bodies 22
(iv) Main trade laws and regulations 23
(4) Trade Agreements and Arrangements 24
(i) World Trade Organization 24
(ii) Regional and other preferential arrangements 26
Page
(5) Foreign Investment Regime 31
(i) Incentives 31
(ii) Bilateral investment treaties (BITs) and double taxation agreements 32
Annex II.1: Trade-related Technical Assistance (TRTA) 34
iII. trade policies and practices by measure 36
(1) Introduction 36
(2) Measures Directly Affecting Imports 37
(i) Registration and documentation requirements 37
(ii) Tariffs 39
(iii) Customs valuation, minimum import prices and preshipment inspection 47
(iv) Other levies, charges and taxes 48
(v) Import prohibitions, quotas, restrictions, and licensing 49
(vi) State trading 52
(vii) Government procurement 52
(viii) Local-content requirements and indigenization programmes 53
(ix) Contingency measures 54
(x) Standards and other technical requirements 55
(3) Measures Directly Affecting Exports 58
(i) Registration, documentation, clearance, inspection and minimum prices 58
(ii) Export duties and taxes 59
(iii) Export prohibitions, restrictions, and licensing 59
(iv) Export subsidies 60
(v) Duty and tax concessions 63
(vi) Export-processing zones 66
(vii) Export finance, guarantees, and insurance 66
(viii) Export promotion 67
(4) Measures Affecting Production and Trade 68
(i) Taxation 68
(ii) Production assistance 72
(iii) State-owned enterprises 75
(iv) Competition and consumer policy 77
(v) Intellectual property rights (IPR) 77
IV. trade policies by sector 80
(1) Overview 80
(2) Agriculture, Livestock, Forestry, and Fisheries 81
(i) Features 81
(ii) Policy framework and developments 82
(iii) Main subsectors 86
(3) Mining and Energy 89
(i) Mining 89
(ii) Energy 90
(4) Manufacturing 94
(i) Policy developments 94
(ii) Food processing 95
(iii) Textiles and apparel 95
(iv) Engineering sector 96
Page
(5) Services 99
(i) Financial services 100
(ii) Communications 104
(iii) Transport 108
(iv) Information technology and software development 110
REFERENCES 111
APPENDIX TABLES 117
Page
CHARTS
I. ECONOMIC ENVIRONMENT
I.1 Product composition of merchandise trade, 2001 and 2006 14
I.2 Direction of merchandise trade, 2001 and 2006 15
I.3 FDI inflows by sector and origin, 2006/07 18
III. TRADE POLICIES AND PRACTICES BY MEASURE
III.1 Distribution of MFN tariff rates, 2001/02 and 2007/08 41
III.2 Average applied MFN and bound tariff rates, by HS section, 2001/02 and 2007/08 42
III.3 Tariff escalation by 2-digit ISIC industry, 2001/02 and 2007/08 44
IV. TRADE POLICIES BY SECTOR
IV.1 Tariff averages by 2-digit ISIC category, 2001/02 and 2007/08 83
TABLES
I. ECONOMIC ENVIRONMENT
I.1 Selected macroeconomic indicators, 2001-07 3
I.2 Basic economic and social indicators, 2001-07 4
I.3 Balance of payments, 2001-07 12
I.4 Trade in services, 2001-07 16
II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
II.1 Main ministries and agencies responsible for trade-related issues, 2007 22
II.2 Main changes in trade-related legislation, 2001/02 to end-September 2007 24
II.3 WTO notifications, 2001 to end-September 2007 25
II.4 Investment incentives, 2007 32
III. TRADE POLICIES AND PRACTICES BY MEASURE
III.1 Pakistan's tariff structure, 2001/02 and 2004/08 40
III.2 Preferential rules of origin and tariffs in trade agreements, 2007 46
III.3 Anti-dumping actions, as at July 2007 54
III.4 Sectoral export subsidies, 2006/07 62
III.5 Duty drawback rates on exports, 2006/07 64
III.6 Concessionary rates of WHT on imports, 2006/07 71
III.7 Income tax concessions assisting producers generally, 2006/07 72
III.8 Main state-owned enterprises and privatization plans, May 2007 76
IV. TRADE POLICIES BY SECTOR
IV.1 Procurement/support prices of agricultural commodities, 2001-07 85
IV.2 Tariff increases to protect engineering activities, 2005/06 and 2006/07 97
Page
APPENDIX TABLES
I. ECONOMIC ENVIRONMENT
AI.1 Contingent government liabilities, 2003/07 119
III. TRADE POLICIES AND PRACTICES BY MEASURE
AIII.1 Main duty and tariff exemptions and concessions, March 2007 120
AIII.2 Tariff concessions and exemptions for designated/authorized persons, March 2007 123
AIII.3 End-use tariff exemptions/concessions March 2007 126
AIII.4 Prohibited imports of second-hand plant, machinery and equipment, 2006/07 128
AIII.5 Restricted imports, 2006/07 129
AIII.6 Regulated exports, 2006/07 133
AIII.7 Privatizations from August 2000 to May 2007 134
SUMMARY OBSERVATIONS
PAKISTAN'S ECONOMIC GROWTH HAS BEEN IMPRESSIVE SINCE ITS PREVIOUS TRADE POLICY REVIEW IN 2002, MAINLY AS A RESULT OF ITS RELATIVELY OPEN TRADE AND INVESTMENT REGIMES, GENERALLY ACCOMMODATIVE MACROECONOMIC POLICIES AND STRUCTURAL REFORMS. MOREOVER, PAKISTAN'S RANKING ON THE UN HUMAN DEVELOPMENT INDEX HAS RISEN FROM "LOW" TO "MEDIUM". POVERTY HAS FALLEN IN LINE WITH THE GOVERNMENT'S 2003 POVERTY REDUCTION STRATEGY, ALTHOUGH INCOME INEQUALITY HAS WIDENED SLIGHTLY AND RURAL POVERTY REMAINS HIGH.
During the period under review, trade policies have been liberalized in several important areas. In particular, customs procedures have been greatly improved, overall tariff protection considerably reduced, tariff bindings increased, and intellectual property rights strengthened. In some other areas, however, trade liberalization has slowed; for example, support for production and exports has increased. Pakistan's economic fundamental have improved considerably during the period under review and would now seem reasonably sound. At the same time, structural weaknesses, including infrastructural bottlenecks, excessive regulatory controls and labour market rigidities as well as problems concerning governance, have inflated the costs of doing business.
Continued trade liberalization and other productivity-boosting structural reforms to address these weaknesses together with steps to reduced political uncertainty would help improve Pakistan's international competitiveness, especially for sensitive sectors (such as textiles and clothing), and thus the prospects for sustained economic growth.
1 Economic Environment
Pakistan's improved macroeconomic policies have contributed to strong economic growth (7% in 2006/07) and lower unemployment (6.2% at the end of 2006). Nevertheless, inflation (7.8% in 2006/07) has exceeded targets, largely due to belated monetary tightening to curb the economy's overheating, and the resulting real appreciation of the rupee since 2003/04 may have contributed to the erosion of Pakistan's international competitiveness. Despite monetary tightening, the effectiveness of monetary policy remains hampered by a widening fiscal deficit, greater reliance on government borrowing from the State Bank of Pakistan (SBP), and increasingly generous SBP concessionary credits to the industrial export sectors (especially textiles and clothing). Better alignment of monetary and fiscal policies as foreshadowed in the 2005 Fiscal Responsibility and Debt Limitation Act (FRDLA), whose intent is to generate "revenue surpluses" from mid 2008 onwards, should help achieve greater macro stability.
Fiscal reforms have focused mainly on public expenditure, which dropped from 18.3% in 2001/02 to 17.6% of GDP in 2006/07, possibly insufficient to meet Pakistan's developmental needs. Tax reforms are aimed at, inter alia, improving the administration and collection of taxes, which amounted to only 10.5% of GDP. This low level of taxation in relation to GDP constrains spending on infrastructure and other social priorities. The administratively complex tax system is largely the outcome of widespread exemptions and incentives that erode the tax base and facilitate avoidance, if not evasion (registered taxpayers account for only 1.5% of the population). The resulting weak fiscal governance also leaves considerable scope for widespread administrative discretion. The Medium Term Budgetary Framework is being implemented progressively to improve budgeting, and to help meet the FRDLA targets, which include lowering the public debt-to-GDP ratio progressively to 60%, an objective attained ahead of schedule in 2005/06.
Pakistan's external trade deficit reached 6.8% of GDP in 2006/07. This deficit, aggravated by rising negative balances on services trade, has been partially financed by workers' remittances (amounting to 3.8% of GDP in 2006/07). Current account deficits (4.8% of GDP in 2006/07), reflecting a re-emergence of a shortfall in national savings relative to investment, have been met by capital account surpluses, largely from record net inward FDI. Rising gross official reserves during the review period have not kept up with import growth; import cover had fallen before rising to 5.5 months in 2006/07. Public external debt, still substantial at US$38.7 billion in 2006/07, has dropped considerably to 26.9% of GDP, as has the debt service ratio to 12.6% of current earnings (from exports and private transfers). Most debt is with Paris Club creditors, bilateral donors and multilateral institutions.
Pakistan still depends heavily on textiles and clothing exports (two thirds of total exports in 2005/06), which have faced stronger competition in major markets since quotas relating to the Agreement on Textiles and Clothing were abolished in 2005. Little export diversification away from low value-added products or in markets has occurred since 2001/02. The main change in merchandise trade patterns has been the rising share of mining and agriculture exports. The United States and the European Communities remain Pakistan's main export markets.
Pakistan's investment framework has hardly changed since its previous Review. Only a few sectors (e.g. media, tourism, and air transport) remain closed to foreign investment or subject to restrictions. Investment incentives are available to all, including foreign, investors. Boosted by greater openness and privatization, FDI rose substantially, from 0.7% of GDP in 2001/02 to 3.5% in 2006/07. Inflows originated largely from the United States, EC, and China, and were channelled mainly into telecommunications, information technology, and financial business services. Privatization, considered a key factor in promoting efficiency and private-sector-led growth, is being revitalized.
2 Trade Policy Framework
Pakistan is an original WTO Member and grants at least MFN treatment to all trading partners. However, many imports from India remain prohibited, although there has been some progressive liberalization, and trade with Israel is banned.
Trade is an important part of Pakistan's development and poverty-reduction strategy. Vision 2030, adopted in May 2005, aims to turn Pakistan into a developed country by 2030 through rapid and sustainable development by, inter alia, deploying knowledge-intensive import items. Overall, trade policy has been focused on reducing protection, achieving a more outward-oriented trade regime, obtaining better market access for Pakistan's exports, and promoting greater integration into the global economy through increased economic efficiency, and thus international competitiveness, which would contribute to export-led growth.
Since the last Review, there have been few major changes in the institutional framework for formulating and implementing trade-related policies. The Trade Development Authority, which focuses on product and market diversification, progressively replaced the Export Promotion Bureau; the role of the independent National Tariff Commission (NTC) was re-directed from that of the Government's main tariff-setting advisory body to that of the entity responsible for contingent protection. The NTC no longer advises on imposition of "regulatory" duties.
Customs and tax provisions are incorporated at budget time in the annual Finance Act; customs regulations enter into force after being posted on the Central Board of Revenue website. Legislative changes were made in some areas (e.g. customs, and key services like finance, energy, and telecommunications) with more under way or pending.
Pakistan has participated actively in the Doha Round and attaches high priority to an effective rules-based trading system. Nevertheless, its trade policy has focused recently on regional trade liberalization by deepening and expanding existing plurilateral commitments (e.g. with SAFTA, OIC, D-8 and ECO). At the same time, it has been expanding its network of bilateral free-trade agreements, including with China, Iran, Malaysia, Mauritius, and Sri Lanka. While Pakistan's agreements appear to be largely in response to their global proliferation, more gains might be expected from unilateral and multilateral trade liberalization.
Pakistan participates in the Global System of Trade Preferences among Developing Countries (GSTP) and the GATT Protocol Relating to Trade Negotiations Among Developing Countries, and receives GSP preferences. However, as its main exports (textiles and clothing) are classified as "sensitive products", they receive limited EC GSP preferences and are generally ineligible for such preferences in other major markets (e.g. the United States and Japan).
Pakistan has submitted WTO notifications in certain areas (e.g. tariffs, anti-dumping, safeguards, technical barriers to trade, subsidies and countervailing measures, state trading, and intellectual property); nonetheless, some notifications have not been updated (e.g. on agricultural support and export subsidies) by the end of June 2007 more than 12 regular notifications were outstanding (notably those on import licensing procedures, agriculture, and services). Pakistan has benefited from numerous trade-related technical assistance activities, including on notification requirements, provided by the WTO.
3 Trade Policy Developments
The tariff is Pakistan's main trade policy instrument and, despite widespread concessions, an increasing source (about one fifth) of tax revenue, due mainly to import growth. Unilateral tariff reduction programmes largely ceased in 2002/03 and gave way to "piecemeal" reforms. Almost all rates are ad valorem, which significantly enhances transparency. The tariff comprises seven main bands (29 in total), ranging from zero to 90%; peak rates, mainly on alcoholic beverages and automotive items, have dropped from 250%. The average applied MFN tariff rate was reduced from 20.4% in 2001/02 to 14.5% in 2007/08; nevertheless, in 2006/07 it rose slightly to 15% (owing to increases on some 600 industrial items), before dropping to its 2007/08 level (mainly as a result of the re-introduction of zero tariffs). Since 2001/02, applied MFN tariffs have declined most on agricultural products (WTO definition), falling continuously from 22.1% to 14.8% in 2007/08 (14.5% on non-agricultural goods).
Pakistan's coverage of bound tariffs has risen considerably as a result of rectifications and modifications of its Schedule of Commitments involving textiles items; 97.2% of tariff rates are now fully bound and 0.8% partially bound (36.6% were fully or partially bound in 2001/02). Most bindings exceed applied MFN rates and average bound levels are more than four times the average applied rate; this reduces predictability, especially in agriculture where gaps are wider, by providing substantial leeway to raise applied tariffs. This option has been used to raise rates, especially in 2006/07. Pakistan eliminated its last breach in bindings noted at its last Review (on aluminium waste and scrap) in 2007/08. The transposition of its binding commitments into the HS07 tariff nomenclature is pending.
"Regulatory" import duties have been used temporarily to provide extra protection to some goods during the review period; however, no such duties are in place currently. Domestic taxes (sales, excise, and income withholding taxes) seemingly discriminate against imports, are distorting, administratively complex (e.g. some require the setting of minimum values to levy the tax) and therefore lack transparency. The capital value tax (CVT) on motor-vehicle imports was merged with the tariff in 2007/08. Import levies fund development boards (e.g. the Pakistan Oilseed Development Board). Recourse to anti-dumping action has risen, but no other contingency measure has been in use.
Pakistan applies the transaction value for customs valuation purposes; reference prices seem to be used to check declared values. Declared transaction values reportedly apply to 90-95% of imports. Customs' general merchandise "take over" provisions (i.e. purchase of under-invoiced merchandise by Customs at the declared value) have been used in one case (motorcycle parts since October 2006) to guard against under-invoicing. MFN tariffs of 20% on certain cement products are based on specified world prices. Special customs valuation procedures apply to motor vehicles.
Customs is being reformed and automated, with clearance times generally shortened from 7-10 days to 6-8 hours. Enhanced risk management has lowered physical inspection rates from 100% to 4% of imports (2% of exports). Pre-shipment inspection applies to various types of used machinery/equipment for health or safety reasons. Smuggling is rife, but being reduced.
Import prohibitions have been removed (e.g. on cotton waste) or relaxed (especially on used machinery/equipment and iron and steel waste/scrap) since the last Review. Prohibitions and import licensing remain mainly for health, safety, security, religious or environmental reasons. Commercial imports of used vehicles are prohibited to promote the domestic industry. Imports of alcoholic beverages are banned for religious reasons, although these are brewed locally for non-Muslims by a private monopoly. Some imports eligible for tariff exemptions/concessions require ministerial or other governmental agency approval. Only public sector or industrial users can import some items (e.g. pesticide ingredients). A few import quotas exist (e.g. for used refrigerated trucks).
Pakistan's standards do not distinguish between foreign and domestic products and are being harmonized to international standards; about two thirds of its 27,000 national standards are aligned to international standards (e.g. ISO). Only specified food colouring can be imported. Imported foodstuffs, including ingredients, must have at least 50% of their original shelf life left on importation. Pakistan still has no uniform labelling and marking system. Administration of SPS arrangements, while generally internationally recognized, seems complicated.
Prohibited exports focus on health, social, religious, or environmental protection under international treaties (e.g. CITES), but also cover mainly wood and timber. Wheat and fertilizer (including urea) exports are licensed but effectively banned, while certain other exports (e.g. vegetable ghee and cooking oil) must meet specified conditions. Other export requirements have been eased, but certain export contracts (e.g. cotton and urea) must be registered. Mandatory minimum export prices on rice and cotton yarn have been removed. A temporary ban was applied to cement exports in 2006 owing to domestic shortages.
While export taxes are prohibited under the customs legislation, "regulatory" duties apply periodically to some exports (e.g. 15% on sugar), especially when there are domestic shortages. More-profitable exporters benefit from paying income withholding tax levied at a rate of 1% of f.o.b. export value (before the 2007/08 Budget, rates ranged from 0.75% to 1.5%) instead of income tax. A surcharge of 0.25% of the f.o.b. export value finances the Export Development Fund. Export quality inspections remain either mandatory (e.g. cotton) or encouraged, including by monetary inducements (e.g. freight subsidy).
Exporters are also assisted via general schemes (e.g. 25% freight subsidy, SBP concessionary finance) and various sector-specific schemes (e.g. on R&D subsidy for garments and footwear, and freight subsidies). Proceeds from computer software and information technology exports are exempt from income tax. Export assistance schemes complicate Pakistan's trade regime and seemingly undermine transparency. Producers/exporters also benefit from many tariff concessions (covering 26% of lines in 2006/07) and indirect tax concessions, mainly on raw materials, intermediate inputs, and equipment, and tariff refunds up to specified limits (expressed mainly as a percentage of f.o.b. value) on many raw materials used to make specified exports. Pakistan's administratively complex duty drawback (DDB) scheme, which is based on input-output coefficients, may under- or over-compensate exporters. Registered exporters can also use the duty and tax remission for exports (DTRE) scheme to import inputs tariff and tax free. Firms located in export processing zones must export 80% of output; they are also eligible for several incentives e.g. income tax holidays. Export promotion, including by several sectoral boards (e.g. Horticulture Development and Export Board and the Software Export Board), has increased.
Despite substantial divestment, the state remains significantly involved in commercial activities (e.g. steel, engineering, and services). The state-owned Trading Corporation of Pakistan trades in major agricultural commodities (e.g. cotton, wheat, sugar, and urea), albeit non-exclusively, mainly to provide consumer food subsidies to the poor and relief in emergency situations. Some state entities may import certain raw materials exclusively at exempt/concessionary tariffs. While government procurement still supports domestic industry (e.g. through price preferences linked to value added of up to 25% for domestic suppliers, especially of engineering goods) regulatory and institutional reforms have improved transparency and management of procurement operations. Pakistan has not expressed any intention to join the WTO Agreement on Government Procurement.
Pakistan has strengthened intellectual property rights protection and enforcement (especially with regard to optical piracy) by acceding to the Paris Convention (2004), creating the Intellectual Property Organization (2005), and transferring copyright crime enforcement to the Federal Investigation Agency.
Monopoly oversight remains weak; state-owned entities are not covered by the existing legislation. Planned improvements include new legislation and the replacement of the Monopoly Control Authority with a Competition Commission. Consumer protection, mainly a provincial responsibility, is being upgraded slowly.
4 Sectoral Policy Developments
Agriculture remains the economy's mainstay although its GDP share has fallen from 24.1% to 20.9% during the review period. Agricultural productivity is low. Food security, a major but seemingly costly government priority, is based on self-sufficiency with regard to several items (e.g. wheat, rice, maize, edible oils, and sugar). As a result, sugar prices, for example, have exceeded world levels at times by up to 50-60%. Reforms since 2001/02 have raised the private sector's role in, inter alia, marketing and supplying inputs. Relatively high tariffs protect certain commodities, such as edible oils, which are subject to specific tariffs with an ad valorem equivalent of 65-70%. Some agricultural exports are covered by various controls, restrictions, and support measures, including subsidies (e.g. on freight), income tax concessions, and at times product-specific export subsidies (sugar and wheat). Market price support, occasionally involving provincial governments, was limited recently to wheat, cotton, rice, and sugar. Tobacco prices, including those for exports, are set by the Pakistan Tobacco Board. The All Pakistan Solvent Extractor's Association sets voluntary procurement prices for oil seeds. Other types of support include tax incentives (direct and indirect), concessionary credit, and irrigation, power, and fertilizer subsidies; manufacturers of urea, an important input for fertilizer production, can also buy natural gas at subsidized rates, thus lowering fertilizer prices.
Seemingly-independent regulators oversee the energy sectors, and state participation remains significant. Majority state-owned companies (partially privatized since the last Review) produce most of Pakistan's crude oil, although more divestments is planned. Minimum Pakistani equity limits apply to companies operating in onshore oil zones, and offshore projects are subject to production-sharing contracts (with government profit shares ranging from 5% to 80%). The Oil and Gas Regulatory Authority (OGRA) sets maximum wholesale/retail prices for aviation fuel, petrol, diesel, kerosene, and light diesel oil linked to import parity using a revised pricing formula. Prices have been capped periodically to subsidize consumers (at a budgetary cost of PRs 74.5 billion by June 2006). Kerosene, diesel, and light diesel oil prices are cross-subsidized by the Petroleum Development Levy (PDL), which is imposed on various products (e.g. petrol). New licensing criterion apply to oil marketing companies; they must use locally refined products rather than imports. OGRA also sets maximum prices for various users of natural gas, the transportation, distribution, and sale of which is under a state monopoly. These operations may be unbundled progressively. Residential and some other consumers (e.g. fertilizer factories) are cross-subsidized by industrial, power, and commercial gas users. LPG prices were deregulated in 2005/06.
The National Electric Power Regulatory Authority (NEPRA) licenses power generation, transmission, and distribution, and sets tariffs. Power is subsidized; around 70% is supplied by two state-owned companies, residential users seem to be among those cross-subsidized by other consumer groups. Electricity reforms are moving towards a competitive market. The main vertically integrated state power company has been unbundled and is being privatized slowly (excluding transmission).
Industrial policy is based on accelerated industrialization, aimed at raising manufacturing's share of GDP to 30% by 2030 (19.1% in 2006/07), and diversification away from textiles and clothing. Government intervention remains directed at protecting infant and pioneer industries, using escalating tariffs and domestic support measures (e.g. tax concessions). Liberalizing trade, including imports from India, could raise industrial efficiency and thus competitiveness. Despite several textiles and clothing assistance packages (e.g. R&D grants tied to exports and freight subsidies), minimal market diversification has occurred away from the traditional EC and United States markets. Greater productivity would help Pakistan compete internationally, but reliance on government support to exports may jeopardize such efforts. The engineering sector has been reformed by replacing the local-content based "deletion" programmes (e.g. on motor vehicles) with tariff-based schemes. However, despite substantial reductions, tariffs on motor vehicles reach as much as 90%. The 2007/08 Budget contained a Five Year Pre-announced Tariff Program for Completely Built Up and Completely Knocked Down imported vehicles. A tariff-based Emerging Electronic Products Assembly Scheme (EEPAS) was introduced in 2003. The state remains heavily involved in steel and heavy engineering, which the Engineering Development Board oversees for developing "thrust" activities.
Services account for well over half of GDP; there is strong state involvement, especially in transport, communications, and life insurance. During the review period, financial sector reforms, including to prudential requirements, have enhanced bank and insurance efficiency and soundness. Privatization has transformed banking into a largely private-based system (unlike life insurance) with substantial foreign presence, even though preferential equity limits may apply to foreign licences. Reforms that opened reinsurance have been partially reversed. The monopoly of the majority state-owned telecom company on fixed domestic and international calls was terminated in 2003. Regulatory reforms are aimed at developing an open telecom access regime. Shipping and air services are relatively open, except for cabotage and foreign equity limits. Major ports are being privatized via "landlord" concessions. Road transport remains relatively restricted, but recent regional agreements have expanded transit rights; however, cabotage is banned.
5 Outlook
By and large, Pakistan's economic fundamentals would now seem to be good. Sustained growth rests upon macroeconomic stability and micro-economic reforms to improve efficiency, promote diversification, and sustain export-led growth. While much progress has been made to establish the necessary pre-conditions for such growth, more must be accomplished to further reduce downside risks to Pakistan's growth.
Future economic performance will also depend on world economic growth. Pakistan stands to gain from this provided it can improve domestic efficiency, and thus its international competitiveness. Improved efficiency depends on domestic policy reforms, as well as on Pakistan's capacity to benefit from market openings and other opportunities abroad. Successfully concluding the Doha Round could help stem Pakistan's drift to increasing export assistance and preferential trade liberalization, thereby potentially strengthening the multilateral system and facilitating its unilateral reforms. The Doha Round negotiations could also help improve the predictability and stability of Pakistan's trade and investment regime (e.g. by reducing the gap between its bound and applied tariff rates and expanding its GATS commitments).
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