Wayzata World Factbook 1996

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U.S. DEPARTMENT OF STATE PAKISTAN: 1994 COUNTRY REPORT ON ECONOMIC POLICY AND TRADE PRACTICES BUREAU OF ECONOMIC AND BUSINESS AFFAIRS PAKISTAN Key Economic Indicators (Millions of U.S. dollars unless otherwise noted) FY1992 FY1993 FY1994 1/ Income, Production and Employment: GDP (current prices) 49,044 51,813 52,877 Real GDP Growth (pct.) 7.7 2.3 4.0 GDP Share by Sector: (pct.) Agriculture 26.1 24.2 23.9 Power/Gas Distribution 3.5 3.7 3.7 Manufacturing 17.8 18.3 18.6 Construction 4.1 4.2 4.2 Services 2/ 48.0 49.1 49.1 Rents N/A N/A N/A Financial Services N/A N/A N/A Government/Health/Education N/A N/A N/A Net Export of Goods & Services N/A N/A N/A Real GDP Per Capita (USD) 422 428 426 Labor Force (millions) 32.97 33.97 34.98 Unemployment Rate (pct.) 5.85 5.85 5.85 Money and Prices: Money Supply (M2) 4,525 3,345 3,088 Commercial Interest Rate (pct.) 3/ 15.5 18.0 16.8 Saving Rate (pct. of GDP) 17.1 13.6 15.4 Investment Rate (pct. of GDP) 20.1 20.7 20.1 Retail Inflation (cpi - annual pct. change) 12 month average basis 9.6 9.3 11.2 Wholesale Inflation (wpi - annual pct. change) 12 month average basis 9.3 7.1 15.0 Exchange Rate (rupee/USD) Official (FY avg.) 24.7 25.9 29.4 Parallel 25.5 27.9 32.2 Balance of Payments and Trade: Total Exports (FOB) 6,762 6,782 6,715 Exports to U.S. 891 948 1,003 Total Imports (FOB) 8,998 10,049 8,549 Imports from U.S. 977 942 931 Aid from U.S. 4/ 40 20 0 Aid from Other Countries 2,471 2,493 2,481 External Public Debt 18,384 20,810 22,761 Debt Service Payments 5/ 2,199 2,332 2,285 Foreign Exch. Reserves (FY end) 952 461 2,305 Trade Balance -2,236 -3,267 -1,834 Trade Balance with U.S. -86 6 72 N/A--Not available. 1/ Pakistan's fiscal year (PFY) is July 1 - June 30. PFY 1994 data covers period July 1, 1993-June 30, 1994. 2/ Includes banking, insurance, commerce, housing, storage, transportation, communication and other services. 3/ Average annual interest rate on commercial bank loans to private sector borrowers. 4/ Aid from U.S. in 1993 consisted exclusively of PL-480 funds. 5/ Excludes interest on short-term loans and IMF charges. Source: Pakistan Economic Survey 1993/94 and State Bank Report 1993/94. 1. General Policy Framework Pakistan has been on a generally steady course toward market liberalization and structural reform for the past five years. These efforts intensified in response to a deteriorating financial situation which developed in 1992/93, and as a result of the efforts of the interim government headed by former Prime Minister Moeen Qureshi (July-October 1993). Qureshi, an apolitical technocrat, pushed forward a number of economically sound but politically difficult initiatives and set a high standard for subsequent political governments. A three-year agreement concluded by the present government with the International Monetary Fund (IMF) in early 1994 provides a policy framework and economic targets that have helped the Government of Pakistan (GOP) stay that course. 2. Exchange Rate Policy The Pakistan rupee has been on a managed float since 1982; the central bank regularly adjusts the value of the rupee against a basket of major international currencies and uses the U.S. dollar as an intervention currency to determine other rates. The black market in foreign exchange has largely disappeared since private foreign exchange transactions are now legally sanctioned. There is an informal parallel market for foreign exchange that is not illegal. On this parallel market, there is a modest premium for attractive foreign currencies; the premium, which has decreased over the past year, generally amounts to approximately an additional .7 to 1.5 rupees per dollar (or roughly two to five percent). In 1993-94, the GOP removed several additional foreign exchange restrictions. Effective July 1, 1994, the rupee became fully convertible on current account under IMF rules. Exchange rate reforms instituted in 1991 had essentially created convertibility on the capital account. Exchange rate policy under the managed float has contributed to an improvement in Pakistan's trade performance. Following a two-stage devaluation totaling about nine percent in July 1993, and a tightening of fiscal and monetary policy, the value of the rupee has stabilized. In a series of incremental adjustments between late July 1993 (29.85 rupees to the dollar) and late October 1994 (30.62 rupees), the rupee has depreciated against the dollar by less than three percent. 3. Structural Policies A succession of Pakistani governments over the past six years has implemented structural reform policies which have made the economy more free and market-oriented. The two principal political parties agree on the direction of economic policy, and shifts in government have, consequently, had remarkably little impact on the overall liberalizing trend. One principal element of structural reform has been trade liberalization. The GOP is now engaged in a sweeping tariff reduction program to force domestic firms to improve their competitiveness and take advantage of Uruguay Round benefits. From the Pakistani perspective, the key aspect of the Uruguay Round is the integration of textile trade into the GATT. The GOP is aware that, in order to benefit from global trade liberalization, Pakistan must shift to tariffs in those industrial sectors, especially textiles, which are now protected by import bans or quotas. The GOP is also reducing the maximum "all inclusive" tariff rate from 92 percent in 1993-94 to 70 percent at the start of the 1994-95 fiscal year. The maximum tariff rate is scheduled to be further reduced to 45 percent at the start of the 1995-96 fiscal year and to 35 percent one year later. A second pillar of structural reform has been the dismantling of state control over key sectors of the economy through privatization. The GOP's role in the economy continues to shrink. In 1990, the public sector, which includes many enterprises which were nationalized in the 1970s, accounted for about 30 percent of value added in manufacturing. As of October 1994, the GOP has sold off nearly 80 of its original list of 118 public industrial companies and plans to advertise the remaining units over the next few months. The GOP is also in the process of identifying additional units for privatization and encouraging private sector participation in the power generation and distribution, mining, utilities, insurance, banking, and airlines industries. With World Bank technical assistance, the government is setting up regulatory bodies to permit privatization of various utilities. The GOP is proceeding with a phased divestiture of Pakistan Telecommunications Corporation (PTC) and has already sold the first tranche of PTC vouchers. It is also moving forward with plans to sell two thermal power plants and one area electricity board as the first stage in the privatization of the Water and Power Development Authority (WAPDA), which provides over 80 percent of Pakistan's electricity. Portions of Pakistan's two natural gas distribution companies are also slated for divestiture. 4. Debt Management Policies Pakistan's foreign debt continues to increase and the debt-service ratio is forecast to exceed 30 percent of export earnings in 1995. High fiscal and current account deficits over the past several years were financed by a steady increase in external debt, which reached $28 billion in 1993. This debt level was 16 percent higher than the previous year and entailed a debt-service ratio of 27.3 percent of export earnings. Pakistan has consistently met its debt service obligations in a timely fashion, even during the foreign exchange crisis of July 1993, when foreign exchange reserves dipped to $185 million, or just over one week's worth of imports. 5. Significant Barriers to U.S. Exports Pakistan has traditionally maintained a complex system of indirect taxes in the trade sector. High basic tariffs, additional surcharges, a variety of excise taxes, and a sales tax, with different applicability on domestic and foreign goods, combined to distort prices in domestic markets. These tariffs, established for protectionist reasons and to raise revenue, had largely become counterproductive. Many tariff rates were so high that they served principally to stimulate smuggling and corruption. Revenue collections were similarly undermined by many exemptions and concessions, both formal and informal. Pakistan has significantly liberalized its restrictive import regime by reducing tariffs and somewhat streamlining import and export rules. However, despite efforts to streamline the import process, there continue to be complaints about complex customs clearance practices, which slow entry of goods and provide numerous opportunities for discretionary decision-making by a variety of relatively low-level bureaucrats. 6. Export Subsidies Policies Pakistan seeks to encourage exports through rebates of import duties, sales taxes, and income taxes, as well as through concessional export financing. The GOP has an export processing zone (EPZ) scheme, under which industrial units producing value-added items are exempt from payment of customs duties, sales tax, and iqra (an Islamic education tax) surcharge on imports, provided that the industrial unit exports 50 percent of the value of its production in the first two years and 60 percent in the third year and beyond. One EPZ, in Karachi, is currently in operation. These policies appear to apply equally 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 is a member of the World Intellectual Property Organization (WIPO) and a party to two major international intellectual property rights conventions: the Berne Convention and the Universal Copyright Convention. However, it is not a party to any major conventions on patent protection. While the United States has a Treaty of Friendship and Commerce with Pakistan which guarantees national and most-favored nation (MFN) treatment for patents, trademarks and industrial property, intellectual property rights enforcement in Pakistan remains weak. Infringement on copyrights and trademarks and the lack of coverage of product patent protection remain serious U.S. concerns. As such, in accordance with the intellectual property rights provisions of the Omnibus Trade and Competitiveness Act of 1988, Pakistan was placed on the Special 301 "watch list" in May 1989. Since that time the United States has continued to encourage Pakistan to extend laws covering intellectual property protection and to provide adequate enforcement. Copyrights: U.S. firms have complained that, although Pakistan is a member of the Universal Copyright Convention, enforcement of its copyright law is ineffective and the penalties for violation are not severe enough. Videotape piracy is widespread and of concern to U.S. firms which are current or potential marketers of film videos in Pakistan. Pakistan recently amended its copyright statute to strengthen penalties for infringement of rights to printed texts, film works, sound recordings, and computer software; however, there has been little evidence of more vigorous enforcement. Patents: Pakistan's patent law protects processes but not products. U.S. pharmaceutical companies have complained that this regime makes it difficult to pursue infringement cases in local courts. The language of the statute permits applications for compulsory licenses, although this seldom happens in practice. The United States has urged Pakistan to provide product patent coverage and to amend its legislation to extend the patent term and to restrict or abolish the procedure for compulsory licensing. 8. Worker Rights a. The Right of Association The right of industrial workers to form trade unions is enunciated in statute, but in practice there are significant constraints on the formation of industrial unions and their ability to function effectively. Workers in EPZs are prohibited from forming trade unions. The Essential Services Maintenance Act permits workers in government services and state enterprises (including education, health care, oil and gas production, and transport) to form unions, but restricts some normal union activities, including the right to strike. There is no provision in Pakistani law granting the right of association to agricultural laborers. Union members make up only about 13 percent of the industrial labor force and 10 percent of the total labor force. b. The Right to Organize and Bargain Collectively The right of industrial workers to organize and freely elect representatives to act as collective bargaining agents is established in law. However, the right to bargain collectively is limited to legally constituted unions and is therefore constrained by the limitations on union formation described above. Collective bargaining occurs at the plant level. The Essential Services Act restricts collective bargaining and where the government determines to bar collective bargaining, individual wage boards (made up of industry, labor, and government members) determine wage levels. c. Prohibition of Forced or Compulsory Labor Forced labor is specifically prohibited by law and the Pakistani Constitution. However, bonded labor is reported to be common in the brick, glass, and fishing industries and to be found in rural construction and agricultural work. The Bonded Labor System (Abolition) Act, adopted in March 1992, outlawed the bonded labor system, cancelled all existing bonded debts, and forbade lawsuits for the recovery of existing bonded debts. However, the provinces have not yet developed a credible enforcement system to implement this statute. d. Minimum Age of Employment of Children Child labor is common and results from a combination of severe poverty, weak laws, and inadequate enforcement. A key factor is the absence of compulsory primary education. Child labor is limited by at least four statutes and Article 11 of the Pakistani Constitution. The Employment of Children Act, 1991, defines a "child" as "a person who has not completed his 14th year of age", prohibits their employment in hazardous industries, and generally limits the length of their workdays. Although much child labor occurs in the traditional areas of family farming or small business, it also occurs in larger industries, such as carpet making. e. Acceptable Conditions of Work Federal statutes govern labor regulations. The current monthly minimum wage is approximately $50 (1,500 rupees), but an extensive list of exempted activities limit minimum wage applicability to a minority of the work force. Statutes provide for a maximum workweek of 54 hours, rest periods, and paid annual holidays, but exempt large segments of the labor force. Enforcement of labor regulations, a responsibility of the provincial governments, has generally been ineffective. Enforcement is hampered by limited resources, corruption, and inadequate regulatory structures. In general, worker health and safety standards are poor, and little is being done to improve them. f. Rights in Sectors with U.S. Investment Sectors with U.S. investment are characterized by generally better conditions and more free exercise of worker rights than in other sectors. These sectors tend to add greater value to production and exclude sectors with particularly poor labor records (brick kilns, carpet making, traditional agriculture, and family-run small businesses). Extent of U.S. Investment in Selected Industries.--U.S. Direct Investment Position Abroad on an Historical Cost Basis--1993 (Millions of U.S. dollars) Category Amount Petroleum 71 Total Manufacturing 28 Food & Kindred Products 2 Chemicals and Allied Products 29 Metals, Primary & Fabricated -2 Machinery, except Electrical 0 Electric & Electronic Equipment 0 Transportation Equipment 0 Other Manufacturing 0 Wholesale Trade 3 Banking 152 Finance/Insurance/Real Estate (1) Services 0 Other Industries 0 TOTAL ALL INDUSTRIES 254 (1) Less than $500,000 Source: U.S. Department of Commerce, Bureau of Economic Analysis (###)