1. General Policy Framework

Pakistan is a relatively poor country, but has the resources and entrepreneurial skill to support rapid economic growth. In fact, real growth of Gross Domestic Product (GDP) averaged 6.2 percent per year over the decade of the 1980's, with moderate inflation. Serious fiscal imbalances, however, arose due to structural problems in the economy, including chronic losses by state-run industrial units; an inefficient, debt-ridden, nationalized banking sector; widespread evasion and corruption in the tax system; administrative and financial barriers to trade and investment; and a host of inefficiencies created by bureaucratic interference in economic decision-making. As a result, Pakistan's budget and current account deficits reached unsustainable levels by decade's end. In FY 1989, the government launched a four-year, IMF-sponsored structural adjustment program to reduce the deficits to manageable levels.

The budget deficit, which exceeded eight percent of GDP in FY 1991, has been financed through domestic borrowing (treasury bills, long-term bonds, a national savings scheme, and compulsory bank lending) and external financing (both commercial and concessional loans). With IMF assistance, deficit financing has been rationalized with the introduction of an auction system for government securities, elimination of costly on-tap debt instruments, and tighter control over borrowing from the State Bank of Pakistan (the central bank). Defense was the largest spending category in the FY 1991 budget, consuming 29 percent of total expenditures. Development was second, with 28 percent of expenditures, and debt service was third, with 22 percent.

For FY 1991, the Government has adopted stringent fiscal and monetary policies designed to reduce the budget deficit to 4.8 percent of GDP. This will entail cuts in the Government's non-defense expenditures, new direct and indirect tax measures to expand revenues, and increases in administered prices to reduce subsidies. To restore monetary discipline, the Government has substantially reduced central bank holdings of government debt, increased commercial bank reserve requirements, raised its discount rate on government securities, and eliminated a subsidized rediscount scheme for cotton procurement. The Government continues to rely on credit ceilings as its primary monetary policy tool, but plans to shift to a market-based system utilizing interest rates to allocate credit once there is sufficient depth in the new securities markets to permit open market operations.

The Pressler Amendment to the Foreign Assistance Act requires that the President certify each year that "Pakistan does not possess a nuclear explosive device and that the proposed U.S. assistance program will reduce significantly the risk that Pakistan will possess a nuclear explosive device." The President did not make that certification in October 1990 nor in October 1991. Hence the U.S. was unable to provide new economic assistance or any military aid in FY 1991. However, under Pressler, AID can continue a "windup program" of aid monies obligated prior to FY 1991.

2. Exchange Rate Policies

Pakistan's exchange rate policy is based on a managed float, with the State 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 rupee has depreciated about 25 percent against the dollar over the last two fiscal years, a major factor behind Pakistan's recent export growth.

Foreign exchange controls were significantly liberalized during FY 1991. 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 profits and capital without prior state bank approval. Similar liberal remittance procedures were extended for the first time to foreign portfolio investment in Pakistan's capital market. Other measures make it easier for individuals and firms to obtain foreign exchange for a variety of specific purposes. The Government's objective is to make the Pakistan rupee freely convertible once economic conditions make it possible to do so.

3. Structural Policies

In FY 1991, the newly-installed government of Prime Minister Nawaz Sharif launched an ambitious program of privatization, deregulation, and economic reform aimed at reducing structural impediments in the economy. Despite resistance from the bureaucracy and labor unions, within a year the Government had successfully denationalized several industrial units and financial institutions, and was actively seeking buyers for the rest. With assistance from the U.S. Agency for International Development and other donors, the Government was making plans to privatize two multi-billion dollar utilities, the Pakistan Telecommunications Corporation (PTC) and the Water and Power Development Authority (WAPDA). In all cases, bidding was open to foreign investors, though foreign investment in Pakistani banks is permitted on a non-repatriable basis only.

The Government retains considerable power to control prices in many sectors of the economy. The use of direct price controls has been largely eliminated, although prices in the pharmaceuticals industry remain under control. Foreign drug companies can register products in Pakistan only at a price acceptable to the government. In some cases, companies have opted not to introduce products to the Pakistan market because the price established by the Government was too low. In FY 1991, however, prices for some pharmaceuticals and other products were raised significantly, enabling manufacturers to restore profitability in several lines.

Although direct price controls are no longer prevalent, public sector entities involved in banking, manufacturing, services, and trade frequently influence market prices in accordance with government policy or political considerations. These corporations use government stocks to affect market prices for essential commodities if the prices vary greatly from the government-fixed support price. Other state-owned corporations can set prices for their products with little regard to generating a positive return on equity. Examples include fertilizer, tractors, steel products and castings, and cement. This is especially true for wheat and edible oil (ghee), where the Government's artificially low prices stimulate consumption and smuggling to neighboring countries where prices are less controlled. As a 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.

In the past, Pakistan was an occasional importer of wheat. The country's wheat production has lagged behind population growth, however, and for the past several years, Pakistan has imported significant amounts of U.S. wheat. Credit guarantees from USDA's Commodity Credit Corporation (GSM-102) have been used to finance most of these wheat purchases. Moreover, between 70 and 80 percent of the vegetable oil consumed in Pakistan is imported. Vegetable oil imports are roughly 75 percent palm oil, mostly from Malaysia, and 25 percent soybean oil from Brazil and the United States. U.S. soybean oil imports are also financed under Commodity Credit Corporation (GSM-102) guarantees. U.S. soybean oil accounts for about 10 percent of total vegetable oil imports.

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. Nearly 90 percent of FY 1991 gross revenues were generated by sales taxes, excise duties, surcharges and non-tax revenue. Only about 10 percent came from direct taxes on income and wealth, collected principally from salaried urban residents who make up less than 10 percent of the labor force. Income from agricultural land is not taxed. Although agriculture accounts for 26 percent of Pakistan's GDP, taxation of agricultural income is blocked by the large landowners who dominate the National Assembly. Tax collection is hindered by widespread evasion; 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.

In FY 1992, the Government introduced a package of innovative 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. The Government is counting on these measures, plus other steps taken in fulfillment of its FY 1992 agreement with the IMF, to substantially reduce the budget deficit this fiscal year.

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 1990 (the most recent statistics available) consisted of the following (billions of U.S. dollars):

Pakistan's debt service ratio was about 22 percent of merchandise export earnings in FY 1991. Pakistan has a sound credit rating and has consistently met its debt service obligations on time. Despite a sharp increase in oil import costs during FY 1991, due to effects of the Gulf crisis, exceptionally strong export growth, a remarkably small rate of increase in imports, and better than expected remittances from overseas workers enabled the Government to reduce its current account deficit by nearly $400 million, to $1.5 billion. In FY 1992, continued strong trade performance may further reduce the current account deficit, easing demand for new borrowing. The Government's September 1991 agreement with the IMF will give it access to as much as $300 million in balance of payments assistance from the Fund this fiscal year.

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, UK, and others) in an advantageous position vis-a-vis U.S. competitors. This also tends to offset the advantage U.S. products would otherwise derive from the depreciation of the U.S. dollar against major currencies.

5. Significant Barriers to U.S. Exports

Import Licenses: In recent years, Pakistan has significantly reformed its restrictive import regime, largely at the urging of the IMF and World Bank. In FY 1991, import license requirements were eliminated for all "freely importable goods" (i.e., items not on the Government's restricted or negative lists), except certain machinery and millwork (mainly textiles related), goods financed with foreign assistance, some public sector imports and imports from India. All imports, however, continue to be subject to a 6 percent import license fee, which annually generates about $350 million in revenues. The Government's FY 1992 Trade Policy Act reduced the restricted list to 14 items and the negative list to about 100 items. Items remaining on these lists are restricted for reasons of religion, national security or reciprocity, or luxury consumption, or they are capital and consumer goods banned to protect local industries.

Services 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. Private firms are allowed to participate in insurance, but foreign insurance firms must place a portion of any service transaction with or through a local private firm or government agency. The Government refuses to license new foreign insurance firms. Pakistan recently opened its life insurance sector to private sector participation, but so far has refused the entry of foreign life insurance firms. All imports must be insured in the domestic insurance market except shipments financed by USAID programs. Foreign banks in Pakistan, including four U.S. banks, are limited to three branches each 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: bio-technology, fibre optics, solar energy equipment, computers and software, other electric equipment, and fertilizers. Pakistan's "investment priority areas" include agro-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 farm machinery, 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 minerals, insurance, and health. Foreign investment in domestic banks is permitted only on a nonrepatriable 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 processes involved are cumbersome and competing suppliers are often played off against one another. Government entities are also required to procure services such as banking and insurance from other public-sector firms, but the superior service offered by foreign banks has prompted several government agencies to ignore this rule.

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 they have negotiated.

6. Export Subsidies Policies

Pakistan actively promotes the export of Pakistani goods with concessional financing, rebates of import duties, import surcharges, sales and other taxes, and import license fees on raw materials imported for the production of export goods. In addition, high value export items, such as garments, engineering 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 maximum annual rates of up to six percent.

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. Pakistan is considering revisions to 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. Video-tape piracy is widespread; the government estimates there are over 30,000 outlets with 110,000 employees. When passed, revised copyright legislation would strengthen sanctions against piracy of printed texts, computer software, sound recordings and film works, and increase penalties for infringement.

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 allegations in local courts. Compulsory licenses may be applied for at any time by anyone dissatisfied with the availability and price of the patented items. Revised patent legislation was submitted to the National Assembly in late 1989, but has been remanded back to the Government for further consideration. In addition to providing product patent coverage, the United States has urged the Government to include in revised legislation an extended patent term and a limit on the use of compulsory licenses.

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 employment. Registration of a trademark can take up to three years. The Government is considering revisions to its trademark legislation and has assured the United States that infringement penalties and legislative coverage will be expanded.

The exact extent and cost to U.S. producers of piracy of their works is unknown, but appears, at least in the video-tape sector, to be significant.

8. Worker Rights

a. The 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. Unions are constrained by lengthy arbitration requirements and cooling-off periods, and by the Government's authority to ban any strike found to cause "serious hardship to the community" or prejudice to the national interest, or which continues unresolved for 30 days. Work slowdowns happen periodically and police crackdowns on workers' demonstrations are fairly common. While many unions remain aloof from party politics, it appears that the most powerful are those associated with political parties. After the PPP came to power in 1988, it successfully organized trade unions under the banner of the People's Labor Bureau (PLB). The PLB's main competitors are the Jaamat Islami's National Labor Federation and the MOM-backed labor unions. Pakistan has been criticized by the ILO for not abiding by several ratified conventions.

b. The Right to Organize and Bargain Collectively

Although workers can form associations and elect representatives to act as collective bargaining agents, current laws place limitations on their extent and effectiveness. The largest segment of the work force, employed in rural agriculture, may not organize and bargain collectively. Under the Essential Services (Maintenance) Act of 1952, union activities are restricted in sectors associated with "the administration of the state" like education, public utilities and nationalized banks. Section 15 of the industrial relations ordinance of 1969 specifically prohibits antiunion discrimination by employers. The International Labor Organization (ILO) has advised the Government that a 1980 ordinance permitting it to exempt export processing zones from the provisions of any law is inconsistent with the requirements of ILO conventions 87 and 98. An export processing zone, with its own labor regulations including regulations governing how workers may bargain collectively, is functioning in Karachi. The Government has not taken the action requested by the ILO.

c. Prohibition of Forced or Compulsory Labor

Forced labor has always been specifically prohibited by Pakistani law. There is no evidence that slavery or bonded labor has received official sanction. However, illegal cases of bonded labor appear to be common, particularly in the brick, carpet, glass, and fishing industries, as well as in agricultural and construction work in rural areas. Legislative action is being considered and some progress has been made in the courts toward abolishing bonded labor, specifically in the brick kiln industry.

d. Minimum Age for the Employment of Children

Laws exist limiting the employment of children in some industries to those over 14 or 15, but none are effectively enforced. Child labor is known throughout Pakistan primarily in the traditional framework of family farming or small business, but the abusive employment of children in nonfamily business is widespread. Although no official statistics exist, unofficial surveys and occasional press features suggest that violations of existing laws are common. The employment of children is occasionally linked with stories of bonded or forced labor and child prostitution.

e. Acceptable Conditions of Work

Labor regulations stipulating a legal minimum wage and containing worker protection (such as a maximum workweek of 54 hours, rest periods and paid annual holidays) and welfare provisions apply only to a minority of the labor force and often are not enforced. Specifically, workers in agriculture, small factories with fewer than ten employees, and small contract groups of under ten employees are not covered. Worker health and safety conditions are generally poor and the Government has moved slowly in addressing these problems.

f. Rights in Sectors with U.S. Investment

Significant investments by U.S. companies have occurred in the following sectors: petroleum, food and related products, and chemicals and related products. Although U.S. consumer goods and electronics are represented in the wholesale trade sector, they are usually marketed under agency agreements which involve little U.S. capital investment.

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 protections and entitlements. The U.S. Embassy is not aware of any case where a U.S. company has been accused of worker rights abuses. However, a complaint against multinational banks (including two U.S. banks) was filed with the ILO in 1990. The complaint alleged that these multinationals were undermining union strength by promoting a large percentage of employees into nominally managerial positions, with little responsibility or authority, in order to disqualify them from union membership.

The only significant area of U.S. investment where worker rights are legally restricted is in the petroleum sector. The oil and gas industry has been declared subject to the Essential Services (Maintenance) Act, a finding renewed at six-month intervals, which bans strikes and collective bargaining, holds up the threat of legal sanctions against worker misconduct, theoretically limits a worker's right 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 quit 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.

Source: National Trade Data Bank, Agency: U.S. Department of State