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Country Report

Pakistan

March 2006

The Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ United Kingdom

Pakistan at a glance: 2006-07

OVERVIEW General Pervez Musharraf, the president and chief of army staff, who first came to power in a military coup in 1999, will continue to preside over an elected parliament and prime minister throughout the forecast period. General Musharraf retains the power to dismiss the parliament and prime minister and impose full military rule. He also currently has the support of a majority in parliament and of a loyal prime minister, Shaukat Aziz. Pakistan is scheduled to hold parliamentary elections by October 2007, and an electoral college is due to choose a president in the same year. General Musharraf's supporters in parliament are likely to be re-elected and he is likely to win the 2007 presidential election. The government's continued support of the US's global "war on terror" will raise political tensions with the opposition parties. Militant groups in the North West Frontier Province and Baluchistan continue to try to undermine federal rule. Despite the impact of the earthquake that hit northern Pakistan in October 2005, the economy will perform strongly with GDP growth forecast at 6.5% in fiscal year 2005/06 (July-June) and 6% in 2006/07. Inflation remains the biggest threat to the economy.

Key changes from last month

Political outlook • The opposition has refused to join a parliamentary committee to monitor

earthquake relief and rehabilitation work. The opposition has objected to the fact that the Earthquake Relief and Rehabilitation Agency is headed by a serving general.

Economic policy outlook • In February the president of Pakistan Telecommunication, Junaid Khan,

announced that the government was preparing a legal document transferring a controlling stake in the company to the UAE's Etisalat.

Economic forecast • The Economist Intelligence Unit has revised its forecast for Pakistan's current-

account deficit on the basis of newly released data. The deficit is now forecast to rise to 2.2% of GDP in 2006 and 2.5% in 2007, from an estimated 1.3% of GDP in 2005.

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Pakistan 1

Country Report March 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006

Contents

Pakistan

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2006-07 7 Political outlook 8 Economic policy outlook 9 Economic forecast

12 The political scene

17 Economic policy

21 The domestic economy 21 Economic trends 22 Agriculture 24 Manufacturing 25 Infrastructure 27 Financial and other services 28 Tourism

28 Foreign trade and payments

List of tables 8 International assumptions summary 9 Gross domestic product by expenditure 11 Forecast summary 16 Earthquake aid pledges 21 Inflation 27 External trade 28 Imports by major commodity 28 Remittances from overseas workers 29 Foreign-exchange reserves

List of figures 12 Gross domestic product 12 Consumer price inflation

Pakistan 3


Pakistan March 2006

Summary

General Pervez Musharraf, the president and chief of army staff (who first came to power in a military coup in 1999), will continue to preside over a democratically elected parliament and prime minister throughout the forecast period. In his capacity as chairman of the National Security Council, he retains the power to dismiss parliament and the prime minister. Nevertheless, General Musharraf currently has the support of a majority in parliament and of a loyal prime minister, Shaukat Aziz. Pakistan is scheduled to hold parliamentary elections by October 2007, and an electoral college is due to choose a president in the same year; General Musharraf's supporters in parliament are likely to be re-elected and he is likely to win the 2007 presidential election. Despite the devastating earthquake that hit in October 2005, the economy will perform strongly with GDP growth forecast at 6.5% in fiscal year 2005/06 (July-June) and 6% in 2006/07. Inflation remains the biggest threat to the economy.

The opposition parties have refused to join a parliamentary committee to monitor relief and rehabilitation work following the earthquake. The insurgency in Baluchistan continues. An operation against the al-Qaida terror network in Waziristan went wrong and several civilians were killed, angering locals. The third round of Pakistan-India dialogue began in January.

A post-earthquake aid conference held in the capital, Islamabad, in November saw Pakistan receive over US$5.9bn in grant and loan pledges. The government is preparing for the legal transfer of Pakistan Telecommunication to its new UAE-based owners, Etisalat. The State Bank of Pakistan (the central bank) has appointed a new governor and released its latest monetary policy statement.

Real GDP growth is estimated to slow to around 6.5% in 2005/06. Inflation is high and averaged 8.4% in the first half of 2005/06. Textiles have so far failed to benefit from the global liberalisation of trade in the sector. Mobile telephony continues to boom.

In the first half of 2005/06 Pakistan's exports performed strongly, rising by 24% year on year, but a rising import bill ensured that the trade deficit reached US$5.6bn in the same period. In December 2005 Pakistan and China signed a precursor to a wider free-trade agreement.

Editors: Ravi Bhatia (editor); Caroline Bain (consulting editor) Editorial closing date: February 28th 2006 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Outlook for 2006-07

The political scene

Economic policy

The domestic economy

Foreign trade and payments

4 Pakistan


Political structure

Islamic Republic of Pakistan

Federal parliamentary democracy (since October 2002), although the military retains a controlling role. Effectively, a quasi-dictatorship

General Pervez Musharraf is president and chief of army staff. A former banker, Shaukat Aziz, is prime minister and head of the government

Bicameral legislature: the National Assembly (the lower house) was elected in October 2002. Of the 342 seats, 272 are elected on a first-past-the-post basis. Of the remainder, 60 are reserved for women and ten for non-Muslim minorities. These are allocated on the basis of proportional representation to parties that win more than 5% of the directly elected seats. The Senate (the upper house) contains 100 senators. Of these, 22 each are elected by the four provincial assemblies; eight are tribal representatives and four are representatives from the lower house

Elections for Pakistan's four provinces were held in October 2002. The provinces enjoy considerable autonomy, but this is causing tensions with the central government. The Muttahida Majlis-i-Amal (the coalition of Islamic parties) performed strongly in the provincial elections; it now governs in the North-West Frontier Province, and governs in alliance with the Pakistan Muslim League (Quaid-i-Azam), or PML (Q), in Baluchistan

Elections for the national and provincial assemblies were held on October 10th 2002; each assembly is elected for a five-year term. The next National Assembly election is due in October 2007. Elections for the Senate took place in February 2003. The next Senate elections are due in February 2008

Although supporters of General Musharraf are in a majority, no single party won an outright majority in the October 2002 general election, and two months passed before the former prime minister, Zafarullah Jamali, was elected with a majority of one vote. He was backed by his party, the PML (Q), as well as by independents and defectors from the Pakistan People's Party and the Pakistan Muslim League (Nawaz). In June 2004 Mr Jamali was forced to resign by supporters of General Musharraf, and was replaced with an interim prime minister, Chaudhry Shujaat Hussain. He was succeeded by the current prime minister, Shaukat Aziz, in August 2004

Pakistan Muslim League (Quaid-i-Azam), or PML (Q); Pakistan People's Party (PPP); PML (Nawaz), or PML (N); Muttahida Majlis-i-Amal (MMA, which comprises six religious parties including Jamaat-i-Islami and Jamiat-i-Ulema-i-Islami); Muttahida Qaumi Movement (MQM); National Alliance (comprising several small parties led by the Millat Party); Awami National Party (ANP); Tehrik-i-Insaf (TI); Jiye Sindh Qaumi Mahaz

President & chief of army staff General Pervez Musharraf Prime minister & finance & economic affairs minister Shaukat Aziz Commerce minister Humayun Akhtar Khan Foreign minister Khurshid Kasuri Interior minister Hayat Sherpao Privatisation & investment minister Abdul Hafeez Shaikh

Shamshad Akhtar

National Security Council

Central bank governor

Form of state

The executive

National legislature

Provincial government

National elections

National government

Main political organisations

Official name

Pakistan 5


Economic structure

Annual indicators

2001a 2002a 2003 a 2004 a 2005b

GDP at market prices (PRs bn)c 4,163 4,402 4,823 5,533 6,548a

GDP (US$ bn)c 71.2 71.5 82.3 96.2 110.7a

Real GDP growth (%)c 2.6 3.2 5.0 6.4 7.8a

Consumer price inflation (av; %) 3.1 3.3 2.9 7.4 9.1

Population (m) 144.6 147.7b 150.7 b 153.7 b 156.4

Exports of goods fob (US$ m) 9,131.0 9,832.0 11,869.0 13,297.0 16,023.4

Imports of goods fob (US$ m) -9,741.0 -10,428.0 -11,978.0 -16,693.0 -20,400.2

Current-account balance (US$ m) 1,878.0 3,854.0 3,573.0 -817.0 -1,419.8

Foreign-exchange reserves excl gold (US$ m) 3,640.0 8,078.0 10,941.0 9,799.0 10,033.0

Total external debt (US$ bn) 31.7 33.7 36.4 35.7 b 38.9

Debt-service ratio, paid (%) 24.7 17.9 16.0 20.8 b 11.3

Exchange rate (av) PRs:US$ 61.93 59.72 57.75 58.26 59.51a

a Actual. b Economist Intelligence Unit estimates. c Fiscal years (ending June 30th).

Origins of gross domestic product 2004/05a % of total Components of gross domestic product 2004/05a % of total

Agriculture 21.6 Private consumption 80.0

Mining & manufacturing 20.2 Government consumption 7.8

Electricity, gas & water supply 2.5 Fixed investment & stockbuilding 16.9

Construction 2.3 Exports of goods & services 15.3

Services 53.4 Imports of goods & services -19.9

Principal exports 2004/05ab US$ m Principal imports 2004/05ab US$ m

Cotton fabrics 1,863 Machinery & transport equipment 5,956

Knitwear 1,632 Mineral fuels etc 4,295

Bedwear 1,450 Chemicals 3,604

Cotton yarn & thread 1,058 Manufactures 2,258

Rice 933 Food & live animals 1,087

Main destination of exports 2004/05a % of total Main origins of imports 2004/05a % of total

US 24.0 Saudi Arabia 12.3

UAE 7.6 China 8.9

UK 6.2 UAE 8.3

Afghanistan 5.2 US 7.6

Germany 4.8 Japan 7.0

a Fiscal years (July-June). b Customs basis.

6 Pakistan


Quarterly indicators 2004 2005 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 QtrOutput Manufacturing index (1999/2000=100) 162.1 153.3 143.5 166.5 184.9 177.8 170.8 n/aManufacturing index (% change, year on year) -8.4 19.5 15.2 19.4 13.8 16.0 19.0 n/aPrices Consumer prices (2000=100) 113.5 116.2 119.5 122.1 124.3 127.7 129.9 132.0Consumer prices (% change, year on year) 5.0 7.2 9.1 8.4 9.5 9.9 8.7 8.1Wholesale general (2000=100) 122.1 125.2 124.1 125.9 129.7 133.5 137.7 n/aWholesale general (% change, year on year) 8.1 11.6 8.8 5.5 6.2 6.6 11.0 n/a

Financial indicators Exchange rate PRs:US$ (av) 57.42 57.67 58.58 59.37 59.12 59.44 59.72 59.78Exchange rate PRs:US$ (end-period) 57.51 58.13 59.21 59.12 59.12 59.72 59.72 59.83Discount rate (end-period; %) 7.50 7.50 7.50 7.50 7.50 9.00 9.00 9.00Money market rate (av; %) 1.76 2.16 3.48 3.41 4.74 5.72 8.13 8.74Treasury bill rate (av; %) 1.69 n/a 2.71 3.55 4.82 7.62 8.07 8.22M1 (end-period; PRs bn) 1,422.4 1,498.5 1,511.7 1,687.4 2,318.0 2,356.6 2,153.5 n/aM1 (% change, year on year) 24.8 23.7 21.3 21.6 63.0 57.3 42.5 n/aM2 (end-period; PRs bn) 2,333.5 2,486.6 2,515.8 2,731.1 2,796.6 2,954.8 2,944.0 n/aM2 (% change, year on year) 17.8 19.6 18.6 20.5 19.8 18.8 17.0 n/aStockmarket KSE 100 index (end- period;

Nov 1st 1991=1,000) 5,107 5,279 5,218 6,218 7,770 7,450 8,226 9,557Sectoral trends Cotton yarn production ('000 tonnes) 476.7 487.1 490.1 519.3 533.8 570.7 625.0 n/aCotton fabric production (m sq metres) 168.1 170.9 166.9 132.2 218.8 209.4 244.1 n/aForeign trade (PRs bn) Exports fob 173.60 196.63 204.47 181.67 217.41 250.54 247.88 n/aImports cif -223.49 -293.94 -252.93 -275.62 -328.28 -366.25 -391.03 n/aTrade balance -49.89 -97.31 -48.45 -93.95 -110.87 -115.71 -143.15 n/aForeign payments (US$ m) Merchandise trade balance -526 -594 -782 -1,494 -1,050 -1,188 n/a n/aServices balance -466 -677 -584 -857 -976 -876 n/a n/aIncome balance -498 -646 -526 -693 -470 -697 n/a n/aNet transfer payments 1,671 1,724 2,006 2,125 2,140 2,388 n/a n/aCurrent-account balance 181 -193 114 -919 -356 -373 n/a n/aReserves excl gold (end-period) 11,639 11,192 10,762 9,799 10,716 10,599 10,152 10,033

Sources: State Bank of Pakistan, Statistical Bulletin; IMF, International Financial Statistics.

Pakistan 7


Outlook for 2006-07

Political outlook

General Pervez Musharraf, the president and chief of army staff, will continue to preside over an elected parliament and prime minister throughout the forecast period. General Musharraf, who first came to power in a military coup in 1999, retains the power to dismiss the parliament and prime minister (and thereby impose full military rule) in his capacity as chairman of the National Security Council. Nevertheless, the fact that the army currently presides over the political framework ensures a high degree of political stability. General Musharraf has the support of a majority in parliament and of a loyal prime minister, Shaukat Aziz. Pakistan is scheduled to hold parliamentary elections by October 2007, and an electoral college is due to choose a president in the same year. Thanks to the president's strong hold on the key levers of power, General Musharraf's supporters in parliament are likely to be re-elected, and he is expected to win the 2007 presidential election. The opposition, although weak, is severely critical of his rule. The government's continued support of the US's global "war on terror" will raise political tensions with the opposition parties, and militant groups in Waziristan and Baluchistan continue to try to undermine federal rule.

The main risk to political stability is the threat that General Musharraf or Mr Aziz could be assassinated by one of a number of radical militant groups. General Musharraf has survived two assassination attempts already, one in late 2003 and the other in 2004, and Mr Aziz escaped a bomb attack in July 2004. Ongoing insurgencies in the western provinces of Baluchistan and the North West Frontier Province (NWFP), as well as ethnic conflict between Shias and Sunnis, provide fertile ground for the recruitment of potential assassins. If the president were to be assassinated, it is likely that either the prime minister, the chairman of the Senate (the upper house of parliament) or another senior general would take over as head of government. Under such a scenario, a state of emergency would be declared for an interim period, but it is likely that stability would be restored within a year of such an event.

Discontent at the slowness of the relief effort following the devastating earth-quake that hit northern Pakistan in October 2005 has fuelled antipathy towards the government and the army in the NWFP and Pakistani-administered Kashmir, leading some in the region to turn to militancy. Earlier, criticism from the UK government following the July 2005 bombings in the British capital, London, relating to Pakistan's failure to prevent madrassas (Islamic schools) from teaching extremist views, led General Musharraf to order all foreign students studying at such institutions to leave the country. This has infuriated Islamic teachers, and is likely to lead to the radicalisation of some groups of former students. In addition, opposition and Islamist leaders allege that local elections held in August-September 2005, during which over 40 people died in poll-related violence, were rigged. Militant groups in Kashmir have criticised General Musharraf's peace overtures to India, and insurgents in Baluchistan

Domestic politics

8 Pakistan


and Waziristan have been angered by operations undertaken against them by the army.

The parliamentary opposition consists of the Alliance for the Restoration of Democracy (ARD), made up of a coalition of the Pakistan People's Party (PPP) and the Pakistan Muslim League-Nawaz, or PML-N, on the one hand, and the coalition of religious parties, the Muttahida Majlis-i-Amal (MMA), which remains popular in the NWFP and Baluchistan, on the other. Both the ARD and the MMA have been highly critical of General Musharraf's rule in general, and of his handling of the earthquake relief effort in particular. The MMA is the leading political force in the NWFP, and has begun to capitalise on discontent at the federal government's inadequate response to the earthquake. However, the opposition remains weak, largely because key leaders remain in exile, and it is unlikely to succeed in wresting political control from General Musharraf during the forecast period.

Relations between Pakistan and its long-standing rival, India, have been improving since a low point in 2002, and despite occasional setbacks and negative statements released by either side to the press, relations are forecast to improve and deepen throughout the forecast period. Both sides will continue to go beyond general peace statements to discuss conflict-avoidance initiatives and deepen relations via establishing transport, sporting, and people-to-people links. In December and January a new bus service and rail link were established between Amritsar, in India, and Lahore, in Pakistan. However, this positive development was followed by a war of words over Pakistan's attempt to quell an insurgent uprising in Baluchistan.

Pakistan's relations with the US and its allies will remain strong throughout the forecast period, and, in a sign of continuing good relations, the US president, George W Bush, paid a visit Pakistan in early March 2006. Nevertheless, problems remain. US Central Intelligence Agency operations on Pakistani soil have led to the death of several civilians, and this has angered large parts of the public. Islamic parties continue to oppose Pakistan's alliance with the US, and militants have targeted US civilians.

Economic policy outlook

Inflation is high at present, and could undermine macroeconomic stability and the prospects for economic growth. Action to stem inflation has come late, and a failure to control price rises remains the main policy risk in 2006-07. Inflation apart, Pakistan's policymakers have in the past few years created an environment within which the private sector has begun to thrive. These policy measures include substantial privatisation, reforms in the banking sector, utility sector reform and efforts to reduce red tape. The need to improve Pakistan's social infrastructure is now the focus of the administration's policy agenda.

Government spending targets in fiscal year 2005/06 (July-June) are likely to be exceeded as a consequence of the earthquake that struck Kashmir and the NWFP in October 2005. Although foreign governments have been increasing

Policy trends

Fiscal policy

International relations

Pakistan 9


their commitments to the reconstruction effort, much of the burden will inevitably fall on Pakistan's government. The apparent preference of donors to fund longer-term rehabilitation suggests that pressure on government finances later in the forecast period may be eased by donor assistance. In early November the government decided to postpone the purchase of 75 F-16 fighter aircraft from the US, thereby reducing expenditure. On the revenue side, the main tax-collecting body, the Central Board of Revenue, has not managed to raise its tax take over a sustained period of time (although the latest figures have improved). The burden of taxation remains skewed, falling heavily on large-scale manufacturing. Substantive reform and a widening of the tax base are needed if Pakistan is to avoid a fiscal squeeze, but the government is likely to be only partly successful in achieving these objectives. On balance, the Economist Intelligence Unit expects the fiscal deficit to amount to 4.1% of GDP in 2005/06, before easing to 3.3% of GDP in 2006/07.

In January 2006 the State Bank of Pakistan (SBP, the central bank), released its twice-yearly monetary policy statement for January-June 2006. It states that despite the impact of the earthquake, as well as constraints imposed by high energy prices, the economy continued to expand rapidly, and inflation continues to threaten the economy. Core inflation (which excludes oil and food) decreased only marginally from 7.6% in July 2005 to 7.3% in January 2006. The SBP stated that there was a clear need to maintain a tight monetary policy stance in the light of the persistent upward pressure on core inflation. The bank kept its discount rate at its existing level of 9% (it was raised to this level in April 2005). Some monetary tightening is expected in 2006, while in 2007 interest rates will remain on hold.

Economic forecast

International assumptions summary (% unless otherwise indicated)

2004 2005 2006 2007

Real GDP growth World 5.1 4.5 4.2 4.0

US 4.2 3.5 2.7 2.5

China 10.1 9.9 8.8 8.0

EU25 2.4 1.7 2.1 2.2

Exchange rates ¥:US$ 108.1 110.1 112.5 104.5

US$:€ 1.24 1.24 1.25 1.34

SDR:US$ 0.68 0.68 0.68 0.65

Financial indicators ¥ 2-month private bill rate 0.00 0.00 0.11 0.51

US$ 3-month commercial paper rate 1.48 3.49 5.13 4.69

Commodity prices Oil (Brent; US$/b) 38.5 54.7 60.0 55.3

Cotton (US cents/lb) 62.0 55.1 55.0 58.0

Food, feedstuffs & beverages (% change in US$ terms) 8.5 -0.2 -0.5 -2.3

Industrial raw materials (% change in US$ terms) 21.0 10.4 -1.3 -10.7

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

International assumptions

Monetary policy

10 Pakistan


Economic growth in the US, Pakistan's largest export market, is forecast to slow to an annual average rate of 2.6% in 2006-07, from 3.5% in 2005. US growth, along with persistently strong (albeit slower) growth in China and India, will underpin world GDP growth (at purchasing power parity exchange rates) of 4.1% a year in 2006-07, creating a buoyant environment for Pakistani exports. As tensions between the US and Iran persist over Iran's nuclear expansion efforts, oil prices will remain volatile—high international oil prices will be the biggest external threat to Pakistan's economy. Crude oil prices (dated Brent Blend) are expected to rise from an average of US$54.7/barrel in 2005 to US$60/b in 2006, and to fall back to US$55.3/b in 2007.

Gross domestic product by expenditure (PRs m at constant 1999/2000 prices; % change year on year in brackets unless otherwise indicated; fiscal years ending June 30th of year indicated)

2004a 2005 a 2006b 2007b

Private consumption 3,153.9 3,684.4 4,029.7 4,296.5

(8.2) (16.8) (9.4) (6.6)

Public consumption 393.0 401.9 417.9 432.6

(2.1) (2.3) (4.0) (3.5)

Gross fixed investment 628.8 638.5 677.5 721.5

(-4.4) (1.5) (6.1) (6.5)

Final domestic demand 4,175.7 4,724.8 5,125.1 5,450.6

(5.5) (13.2) (8.5) (6.4)

Stockbuilding 77.0 79.1 21.0 22.0

(0.1) (0.0) (-1.2) (0.0)

Total domestic demand 4,252.7 4,803.9 5,146.1 5,472.6

(5.5) (13.0) (7.1) (6.3)

Exports of goods & services 802.0 862.7 935.7 1,027.7

(-1.5) (7.6) (8.5) (9.8)

Imports of goods & services -601.6 -866.9 -969.5 -1,080.8

(-8.6) (44.1) (11.8) (11.5)

Foreign balance 200.4 -4.2 -33.8 -53.1

(1.1) (-4.6) (-0.6) (-0.4)

GDP 4,453.1 4,799.7 5,112.3 5,419.5

(6.4) (7.8) (6.5) (6.0)

a Actual. b Economist Intelligence Unit forecasts.

Real GDP growth is forecast to slow in 2005/06 and 2006/07, but will still be relatively strong, at 6.5% and 6% year on year respectively, driven by the continued expansion of textile production and other manufacturing output. The strength of the industrial sector also means that growth in services output should remain buoyant. Agricultural growth, although sound, is expected to be far less rapid in 2005/06 and 2006/07 than in 2004/05, which experienced exceptional harvests. Reconstruction in earthquake-hit areas will boost investment over the forecast period, provided international aid commitments are honoured. However, higher interest rates, although helping to rein in inflation, will constrain GDP growth. Private consumption growth will slow to 9.4% in 2005/06 and further to 6.6% in 2006/07 after its phenomenal expansion, up by 16.8%, in 2004/05. The import boom will moderate, but import growth will continue to outstrip export growth. The main domestic policy risks to the economy include a possible reversal of economic reforms (perhaps caused by a

Economic growth

Pakistan 11


political crisis) or a much sharper than expected tightening of monetary policy (triggered by a surge in inflation).

Inflationary pressures have been rising strongly since 2004, and remain the biggest threat to economic growth. Monetary tightening by the central bank undertaken in April 2005 (when the SBP raised benchmark interest rates by 150 basis points to 9%) has so far not had a substantial effect on inflation. Year-on-year consumer price inflation fell from a peak rate of 11.1% in April 2005 to 7.9% in November, but then rose again to 8.5% in December and 8.8% in January. Core inflation (excluding food and energy) fell steadily from a peak of 7.9% in April 2005 to 7.3% in January 2006. Part of the reason for the persistent inflationary pressure is that wholesale price inflation has remained high since August 2005; it stood at 11% in December, and 10.8% in January 2006. Nevertheless, a decline in aggregate demand (owing to a slowdown in economic growth) and an improvement in food supplies will contribute to a fall in inflation in the forecast period, partly offsetting some of the upward pressure on the domestic price level caused by high international oil prices. On balance, consumer price inflation is expected to ease from an estimated 9.1% in 2005 to 8.8% in 2006 and 6.7% in 2007 as efforts by the central bank and the government to control price rises eventually begin to bear fruit.

The Pakistan rupee averaged PRs59.5:US$1 in 2005. The local currency will depreciate against the US dollar and the euro in 2006 and 2007, largely as result of the widening current-account deficit. Nevertheless, inflows of foreign aid and remittances from Pakistanis working overseas are expected to continue to support the currency. The rate of the Pakistan rupee's depreciation against the US dollar could be faster than forecast if the domestic political situation deteriorates, or if international oil prices rise much further.

In 2004/05 a 16% year-on-year rise in the value of merchandise exports (customs basis) was overshadowed by a staggering 32% growth in imports. In 2006 and 2007 high international oil prices, as well as rising volumes of imports, will prevent the import bill from falling sharply. Exports are likely to continue their robust growth over the next two years. Textile exports will continue to post strong growth, owing to the abolition of textile and garment export quotas for World Trade Organisation member countries at end-2004. Nevertheless, recent data show that exports have not boomed in the post-quota environment. This may, however, be a temporary phase—countries such as Pakistan that offer an integrated manufacturing base which enables buyers to meet orders quickly should see an increase in exports. Pakistan has both a raw-material base and a complete production chain, which should enable it to benefit from this structural change in the market. Nevertheless, the trade deficit is likely to widen. Inflows of remittances will provide some support to the current account, but the services deficit will widen during the forecast period as strong GDP growth boosts demand for imported business services. Overall, the current-account deficit is expected to widen from US$1.4bn (1.3% of GDP) in 2005 to US$3.2bn (2.5% of GDP) in 2007.

Exchange rates

Inflation

External sector

12 Pakistan


Forecast summary (% unless otherwise indicated)

2004 a 2005 b 2006c 2007c

Real GDP growthd 6.4 7.8 a 6.5 6.0

Industrial production growthd 14.1 10.7 7.1 7.0

Agricultural production growthd 2.2 7.5 a 4.0 2.3

Unemployment rate (av) 6.5 b 6.6 6.3 6.2

Consumer price inflation (av) 7.4 9.1 8.8 6.7

Consumer price inflation (year-end) 7.4 10.1 7.7 6.1

Short-term interbank rate 2.7 6.8 a 6.9 6.9

Central government balance (% of GDP)d -2.8 -3.3 -4.1 -3.3

Exports of goods fob (US$ bn) 13.3 16.0 18.9 21.6

Imports of goods fob (US$ bn) -16.7 -20.4 -24.0 -27.0

Current-account balance (US$ bn) -0.8 -1.4 -2.6 -3.2

Current-account balance (% of GDP) -0.8 -1.3 -2.2 -2.5

External debt (year-end; US$ bn) 35.7 b 38.9 41.2 44.4

Exchange rate PRs:US$ (av) 58.3 59.5 a 60.5 62.8

Exchange rate PRs:¥100 (av) 53.9 54.1 a 53.8 60.1

Exchange rate PRs:€ (av) 72.5 74.1 a 75.8 84.0

Exchange rate PRs:SDR (av) 86.3 88.0 a 89.1 96.2

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Fiscal years ending June. 30th

Pakistan (a) Asia excl Japan

Gross domestic product(% change, year on year)

Pakistan (a) Asia excl Japan

Consumer price inflation(av; %)

(a) Fiscal years ending June 30th.

0

1

2

3

4

5

6

7

8

2001 02 03 04 05 06 07

2

3

4

5

6

7

8

9

10

2001 02 03 04 05 06 07

The political scene

When Pakistani-administered Kashmir and parts of the North West Frontier Province (NWFP) were struck by a massive earthquake on October 8th last year, the president, General Pervez Musharraf, and his government came under fire for not responding to the tragedy quickly enough. Since then the problems of relief and rehabilitation have largely been streamlined. However, the political fallout from the earthquake is visible.

Despite strong attempts at persuasion by the government, the political opposition has refused to participate in a parliamentary committee to monitor relief and rehabilitation work. Much of the work is being carried out by

Earthquake relief efforts continue to face difficulties

Pakistan 13


the Earthquake Relief and Rehabilitation Agency (ERRA), which is headed by Major-General Nadeem Ahmed. The opposition has objected to the appointment of a serving army officer to the post, and has demanded that the government change the terms of reference of the parliamentary committee before it will agree to join the government's relief efforts. The government, after initial attempts to woo the opposition, has now dropped the idea of co-opting it into the relief programme.

On the positive side, after initial disappointment at the limited extent of inter-national financial relief, the government's efforts to arrange a donors' conference in the capital, Islamabad, on November 19th 2005 bore fruit. It managed to secure promises worth US$5.9bn, more than the US$5.2bn that had been assessed as being needed. Foreign countries also sent relief workers and personnel to help rescue and relief missions. NATO contributed a 1,000-member force, mostly consisting of engineers, doctors and paramedics, to help in the relief work. But the presence of NATO troops caused the political opposition, especially the religious parties, to accuse the government of allowing these troops to engage in gathering intelligence on members of the al-Qaida international terror network. The government was partly to blame for having failed to take the opposition into confidence regarding NATO's relief work or to use the media effectively to explain the nature and composition of the NATO contingent and its work. However, earthquake victims welcomed the NATO troops' efficient relief and rehabilitation work.

On February 1st all NATO troops left Pakistan after fulfilling their specified tasks. However, administrative problems in conducting the massive relief operation persist. The situation is much better than in the immediate aftermath of the earthquake, but the refusal of the opposition to help the government continues to make things difficult. The vacuum is being filled by non-governmental organisations (NGOs) and other voluntary organisations that continue to work without becoming embroiled in the political controversy.

Baluchistan province, which has been politically volatile since early 2005, has become a major political issue since the federal government decided to launch an anti-insurgency paramilitary operation there following the December 14th 2005 rocket attack on General Musharraf by tribal rebels in the Kohlu district of Baluchistan. (General Musharraf was in Kohlu to address a political rally and to enlist support for various development schemes—such as the Gwadar port project, enlargement of cantonments (military areas), and construction of roads and bridges—that are being resisted by some powerful tribal chiefs and other sub-nationalist elements.) Tension in the province escalated after a former prime minister, Chaudhry Shujaat Hussain, set up a 29-member parliamentary committee in September 2005 to determine Baluchistan's provincial rights and to comment on its traditional tribal structure. The committee was divided into two subcommittees, one of which was mandated to examine the political situation in the province and make recommendations to improve it, while the other was to look into Baluchistan's relations with the federal government. The first subcommittee submitted its report in November; the second was due to submit its report, but events in Baluchistan caught up with it even as its members were trying to come up with a formula for the sharing of power

Troubles in Baluchistan province simmer

14 Pakistan


between the federal and provincial governments that would be acceptable to all sides.

Since the attack on General Musharraf, however, the situation has undergone a radical change. The parliamentary committee is now in abeyance, and the federal government has deployed troops in the troubled districts to quell the insurgency. Human rights groups allege that the army has committed atrocities and that civilians have been killed; the federal government denies this. However, there is evidence that the government has used helicopter gunships in certain areas. As part of its strategy to intimidate the troublesome tribal chiefs—Nawab Akbar Bugti, Nawab Khair Baksh Marri and Sardar Ataullah Mengal in particular—the government seems to have decided to disengage from the province politically and to prioritise the restoration of law and order. The government is also bringing back into Baluchistan those tribal groups that were thrown out of the province by order of Mr Akbar Bugti. The government is extending covert support to these groups. It hopes, by doing so, to create alternative centres of power to undermine the authority of the rebellious chiefs. Television is also being used to air the views of people who are opposed to the tribal structures in Baluchistan and who want the chiefs removed.

However, General Musharraf's policy of refusing to engage in political dialogue until the insurgency in Baluchistan has been controlled may prove too narrow an approach. The problems in Baluchistan go beyond the issue of the militant tribal chiefs. They relate to a feeling in the oil- and gas-rich province that it has been treated unfairly by the federal government. Critics have argued that a better option for General Musharraf would be to combine the use force (or the threat of it) wherever necessary with a political process recommended by the parliamentary committee on Baluchistan. Nonetheless, an assessment by some commentators that the situation in Baluchistan could flare up and that the army might prove unable to contain the insurgency are too alarmist. The level of violence is low, and tribal attacks are sporadic. Moreover, the opposition political parties remain too weak to use Baluchistan as a means to engineer the collapse of the government.

Three US missiles fired from a US Central Intelligence Agency (CIA) Predator unmanned flying vehicle at three houses in the Damadola village in the Bajaur district of the NWFP hit their target, but the Pakistani media reported that intelligence behind the operation was flawed and that the result was the death of 18 people, including four children. The strike followed an earlier attack in Saidgai village in North Waziristan, which led to the death of eight people and was widely condemned. General Musharraf said that the US government had not informed Pakistan before mounting the attack. Reports suggest that the drone was called in to make the strike after US ground intelligence indicated that the second most influential figure in the increasingly diffuse al-Qaida network, Ayman Al Zawahiri, was in the area. Although Pakistani authorities conceded that some "foreigners" (a euphemism for al-Qaida members) had been present in the area, they said that the targets had not been selected with sufficient care.

A US operation against al-Qaida in Waziristan misfires

Pakistan 15


The attack created tension between Pakistan and the US. On the Pakistani side, statements conflicted. Although the government representative in Bajaur said that there were some al-Qaida members in the area and that some of these had died in the attack, the prime minister, Shaukat Aziz, who was in the US at the time, said that there was no question of the presence of any "foreigners" in the area and condemned the strike. Later, General Musharraf categorically stated that Pakistan had not been informed about the strike on its soil, but admitted that "foreigners" had been present when the strike was carried out. A report in the Los Angeles Times, US daily newspaper, on January 31st revealed that, despite protests from other nations, the US was expanding its effort to kill suspected terrorists with drone-fired missiles as it pursued al-Qaida. The report implied that the US would not hesitate to strike whenever and wherever it had intelligence regarding the presence of al-Qaida members. On December 1st, Abu Hamza Rabia, the senior international operations commander of al-Qaida, was killed in Mir Ali, the second-largest town in North Waziristan. Mr Rabia's death was also confirmed by General Musharraf after US and Pakistani intelligence officers performed DNA tests on the body. The Pakistani authorities said that Mr Rabia died as a result of an accidental explosion in the house that he was in. Other reports and eyewitness accounts, however, suggest that he was killed by a missile fired from a US drone that also set off the munitions stored in the house.

Commentators in the Pakistani media have argued that a pattern is developing in the US strategy to deal with decentralised al-Qaida members, namely that the US will act on unconfirmed tip-offs. When these come from Pakistani intelligence, the Pakistani government is informed of an impending operation. But when the information is passed on by US ground intelligence in Afghanistan, which employs Afghan nationals who move across the Afghan-Pakistani border, the US may not wait to obtain permission from the Pakistani authorities before striking.

The third round of the Pakistan-India dialogue process started with two days of talks at foreign secretary level in the Indian capital, New Delhi, on January 17th-18th. Just weeks before the meeting to review the process and carry it forward, India chose, through a formal statement issued by India's Ministry of External Affairs on December 27th, to express concern over the situation in the Pakistani province of Baluchistan. It stated that "the government of India has been watching with concern the spiralling violence in Baluchistan and the heavy military action, including use of helicopter gunships and jetfighters by the government of Pakistan to quell it. We hope the government of Pakistan will exercise restraint and take recourse to peaceful discussions to address the grievances of the people of Baluchistan." The statement initiated a war of words between the two sides, with Pakistan telling India that it had no business interfering in Pakistan's internal affairs. Pakistan added that given India's own record of military operations in Kashmir and the north-eastern Indian states, and its suppression of armed insurgencies, the Indian government needed to focus on its own problems rather than issuing statements that were not in keeping with the spirit of dialogue.

Progress on rapprochement with India is slowing

16 Pakistan


Soon after, in an interview with a US news organisation, CNN, General Musharraf accused India of meddling in Pakistan's internal affairs. Indian media reports suggested that the Indian government had decided to raise the Baluchistan issue by way of retaliation against the pressure that Pakistan was exerting over Kashmir. However, pro-government analysts in India argued that, in keeping with India's size and clout in the region, internal stability in neighbouring countries must be India's concern and that the Indian authorities were thus within their rights in trying to influence the behaviour of these states. This analysis was in keeping with comments made by the Indian prime minister, Manmohan Singh, at the 13th South Asian Association for Regional Co-operation (SAARC) summit in the Bangladeshi capital, Dhaka, regarding failing states in India's neighbourhood.

In the wake of these developments between Pakistan and India and the fact that the last two rounds of talks between the two countries have not achieved much in terms of resolution of outstanding issues, there is concern on both sides that the dialogue process could stall or even go into reverse. However, the recent foreign secretary-level talks have shown that although differences persist and the atmosphere may have been sullied by the war of words between the two sides, neither country is prepared to go back to the pre-dialogue situation, which witnessed the threat of war and near-total disengagement. Both sides realise that dialogue is the only way to proceed, even if progress is slow.

Since 2003 General Musharraf has stressed the necessity of building dams and water reservoirs. In that year he set up two committees, a technical committee and a senate committee, to look into the issue. Last December General Musharraf raised the issue of building a dam at Kalabagh, upstream on the Indus river in Punjab province. This prompted a hostile reaction from opposition and subnationalist parties, which are opposed to the dam project as they believe that it will reduce water supplies to their region. In addition, the Muttahida Qaumi Movement (a major ally of General Musharraf's ruling Pakistan Muslim League in Sindh province), which is the leading opponent of the dam, threatened to quit the Sindh government if General Musharraf went ahead with dam. Meanwhile the chief minister of Sindh, Arbab Ghulam Rahim, said that he would support the building of the dam only if the government could forge a consensus between all interested parties.

But consensus has been impossible to achieve on the issue of water-sharing. Sindh, the lower riparian, has traditionally accused the upper riparian, Punjab province, of "stealing" its water. Sindhis are convinced that new dams on the Indus will deprive Sindh of its present share of water. Consequently, General Musharraf's promises and reassurances have fallen on deaf ears. The technical committee's report recommended a dam in the Northern Areas, rather than at Kalabagh. In the wake of the protests and the report, in a national televised address General Musharraf appeared to backtrack on the dam project, and this has quietened the protestors for the time being.

A mooted dam project runs into opposition

Pakistan 17


Economic policy

In mid-November the president, General Pervez Musharraf, called for other countries to contribute to the total of US$5.2bn needed to help to rebuild the areas affected by the October 2005 earthquake that hit northern Pakistan. The US$5.2bn estimate comes from UN agencies, the World Bank, the Asian Development Bank (ADB) and the Pakistani government, and comprises US$3.5bn for reconstruction, US$1.5bn for relief and US$200m for rehabilitation. More than 73,000 people died in the quake, and around 3m were left homeless.

Around 75 countries and organisations attended the donors' conference in the capital, Islamabad, in November, following which the prime minister, Shaukat Aziz, announced that Pakistan had received pledges amounting to US$5.9bn, of which US$3.9bn was in the form of soft loans and the remainder consisted of grants. The ADB pledged US$1bn, and the World Bank promised US$1.1bn. Saudi Arabia offered US$573m and the Islamic Development Bank (IDB) promised US$501m, while the US said that it would give US$510m and the UK offered US$226m. The IMF had earlier pledged US$375m, but the government has not confirmed whether it will accept the IMF's funds, owing to the strict repayment schedule to which they would be subject.

Earthquake aid pledges (US$ m)

Total Loans GrantsWorld Bank 1,070 1,065 5Asian Development Bank 1,000 920 80Saudi Arabia 573 320 253

US 510 – 510Islamic Development Bank 501 500 1.6

IMF 375 375 –UK 226 – 226

Source: Government of Pakistan

In mid-December the World Bank approved a US$400m emergency credit facility for Pakistan to help with rehabilitation and reconstruction work in the earthquake-devastated regions. The package comprises US$220m for housing reconstruction, US$85m for livelihood support, US$85m for import financing and US$10m for capacity-building. The credit facility has a ten-year grace period, and matures in 35 years. The ADB's pledge of US$1bn in funds includes US$105m in budgetary support. The ADB had already set up Pakistan Earthquake Funds (PEF), with an initial contribution of US$80m. The PEF is intended to pool assistance and support relief efforts. The IDB funds are to be used to rebuild public infrastructure, including housing, education, health, water, sanitation, roads and communications networks.

The US pledged US$50m in relief funds immediately following the earthquake, which was used to pay for shelter and medical supplies. Of the US$510m provided for relief and reconstruction at the conference, US$300m consisted of grant assistance and US$110m of military in-kind support for relief operations, while US$100m will be donated to private organisations. In addition, the US president, George W Bush, asked five of the US's most prominent corporate

The foreign aid conference is a success

18 Pakistan


chief executive officers to lead a private fundraising effort for the newly created South Asia Earthquake Relief and Reconstruction Fund.

Saudi Arabia is providing SR500m (US$133m) in grants and another SR700m in concessionary loans. The grant assistance will be used mainly for the reconstruction of hospitals, roads and schools. The concessionary loans will go towards development programmes in Pakistan. The Saudi Development Fund has said that it is willing to allocate SR500m to finance exports of non-oil Saudi products such as housing materials, agricultural equipment, and steel structures for transmission lines.

China announced that it will construct a hospital in Balakot in the North West Frontier Province (NWFP), besides providing other relief materials. China will also assist in the renovation of the Karakoram Highway in NWFP, establish seismic centres in Pakistan and provide US dollar loans on concessional terms. In late November the Australian prime minister, John Howard, announced a further US$37m in assistance, on top of an earlier donation of US$10m. Around US$5m of the additional assistance will be used for emergency relief and will be delivered by the Australian government aid agency, AusAID, and UN agencies, while the remainder will be used for reconstruction.

In late January the Central Board of Revenue (CBR) released revenue data revealing that tax revenue was buoyant in the first half of fiscal year 2005/06 (July-June). Overall revenue collection rose by 23.1% year on year to PRs323.1bn (US$5.4bn). Direct tax revenue rose by 32.9%, indirect tax revenue was up by 18.9% and sales tax takings increased by 20.8%. Customs duty rose by 20.1%, but income from excise duties was up by just 7.4%. Provisional figures for the first seven months of 2005/06 suggest that revenue collection remained strong in January. The CBR collected PRs361.6bn in that period, PRs3bn above the seven-month target. However, the report of the State Bank of Pakistan (SBP, the central bank) on the first quarter of the fiscal year adds a word of caution. Although in that quarter the CBR improved revenue collection by 21% year on year, 76% of the increase was accounted for by trade-related revenue, owing to strong imports.

The increase in revenue collection comes despite a reduction in tax rates in 2005/06. Tax rates for public companies were cut from 39% to 35%, and those for private companies were reduced from 39% to 37%. A strong performance by the corporate sector contributed to the revenue increase, but tax reform—intensive monitoring coupled with voluntary compliance using self-assessment—appears to be beginning to make an impact on revenue collection. But despite the fact that the revenue targets for all the major federal taxes were hit, the tax/GDP ratio in Pakistan still remains one of the lowest in the region. According to the CBR chairman, Abdullah Yusuf, a study is being carried out at national level to ascertain how much each sector is contributing to federal taxes.

In February Juanid Khan, the president of the country's largest telephone provider, Pakistan Telecommunication (PTCL), announced that the government was preparing a legal paper transferring a controlling stake in the company

PTCL is in the process of being transferred to Etisalat

Increased imports lead to a higher tax take

Pakistan 19


to the UAE-based Emirates Telecommunications Corporation (Etisalat) for US$2.6bn. The agreement gives Etisalat a 26% stake in PTCL as well as management control. The transfer is expected to take place in the first half of 2006.

PTCL's privatisation was approved in June 2005, but Etisalat failed to deposit 70% of the bid amount by the required time. The deadline was extended and the privatisation minister, Abdul Hafeez Shaikh, visited the UAE to expedite the deal. On January 6th 2006 it was announced that an agreement had been reached with some amendments to the original contract. Opposition members of parliament have complained that the deal appears to lack transparency.

Pakistan's telecommunications market is growing rapidly, albeit from a low base. Only about 17% of Pakistan's 150m people have fixed-line or mobile phones. PTCL has more than 7.5m users. The sale reduces the government's stake in PTCL to 62%, and that share is expected to fall again with plans to sell another 25% over the next five years, according to the Privatisation Commission.

Following the disbursement of the final tranche of US$97.2m under the IMF poverty reduction and growth facility (PRGF) on February 3rd, the Fund reminded the government of the need for the "successful divestment" of a small bank, Rupali Bank. According to the IMF, this will improve market sentiment and facilitate the implementation of the wider bank-restructuring programme. A roadshow for Rupali Bank took place in February in Malaysia, India, Karachi, Dubai and the UK. The government has also sought expressions of interest from potential local and foreign buyers to acquire a 67% stake in the bank. The Privatisation Commission plans to sell the stake in the first half of this year.

The Privatisation Commission also plans to privatise Pakistan Steel Mills (PSM), and to sell 51% stakes in Pakistan Petroleum (PPL), Sui Northern Gas Pipelines (SNGPL) and Sui Southern Gas (SSGC). There are, however, concerns that the privatisation of SSGC may be hampered by the deteriorating security situation in Baluchistan.

On January 30th the opposition in the Senate (the upper house) raised concerns about the privatisation process and asked the government to consult parliament about the privatisation of PTCL and PSM. The Pakistan People's Party (PPP) stated that it was not opposed to privatisation but that it did oppose the speed at which privatisation was taking place. The PPP suggested that successful bidders for PSM might, for example, be more interested in the 4,500 acres of land that the company owns near Karachi port than in continuing steel production, and could consider asset-stripping. The prime minister, however, argued that the opening of the telecoms industry to the private sector had stimulated economic growth, attracted investment of over US$2bn and created over 10,000 jobs.

In January the government appointed a replacement for the retiring head of the State Bank of Pakistan (SBP, the central bank), Ishrat Hussain. The new SBP governor, Shamshad Akhtar, has worked for the ADB, where she was head of the South-east Asia department, and previously worked for the World Bank. The appointment was hailed as significant, since Ms Akhtar is the first female

The SBP appoints a new governor and releases its MPS

Several other privatisations are planned

20 Pakistan


head of the SBP. Women hold only a very small number of government posts in Pakistan.

In late January the SBP issued its Monetary Policy Statement (MPS). Despite the October earthquake and the impact of high energy prices, the SBP reported that the economy continued to perform well in the first half of 2005/06, although GDP growth is expected to slip slightly below target for the full year. Both large-scale industry and agriculture performed above expectations in 2004/05, but are likely to underperform this year. The SBP will continue to keep monetary policy tight in the face of high inflation. The SBP argued in the MPS that tight monetary policy had contributed to a reduction in inflation from 9% year on year in July 2005 to 8.5% in December, but noted that core inflation (excluding food and energy) had barely changed, falling from 7.6% to 7.4% in the same period. The bank stated that it would continue to monitor inflation as it attempted to achieve the dual objectives of controlling inflation and promoting economic growth. Additional policy tightening appears likely.

According to the SBP, the drivers behind growth in the second half of 2005 will support the economy in first half of 2006. Aggregate demand has remained strong, underpinned by consumer and corporate spending. Government spending has also picked up, with the government borrowing to accommodate spending related to rescue and relief efforts as well as rehabilitation needs in earthquake-affected areas. The manufacturing sector has dominated the rise in private credit growth. Consumer lending has also increased significantly, while the SBP noted that remittances are playing an increasingly important role in financing economic activity.

Private-sector credit growth combined with strong government borrowing led to a sharp expansion of net domestic assets, up by 12.9% year on year, in the second half of 2005. Counterbalancing this surge in credit growth has been the decline in net foreign assets, which limited broad money (M2) growth to a moderate 8% during the period. The net foreign asset position has been affected by exceptional growth in the merchandise trade deficit, which reached US$3.8bn in July-December 2005, a year-on-year rise of 66%. The current-account deficit reflects the impact of high international oil prices, and of rising imports of industrial and office machinery as well as cars and a variety of raw materials for making consumer and capital goods.

According to the MPS, the government's net budgetary borrowing reached PRs101.8bn (US$1.7bn) as of January 7th 2006, a 260% year-on-year rise. Net government borrowing has already surpassed the 2005/06 target of PRs98bn, largely owing to the need to import relief goods following the October earthquake, and the government is therefore likely to miss its 2005/06 budget deficit target of 3.8% of GDP. The government has also imported foodstuffs in an attempt to control food price inflation. According to the SBP, the fiscal deficit in the first quarter of 2005/06 stood at 0.5% of GDP, compared with 0.4% in the first quarter of 2004/05. Government expenditure rose by 21% year on year, reflecting a 59% rise in development spending and an 18% rise in current expenditure.

Pakistan 21


In December the ADB announced that it would provide a US$205m loan package to extend access to social services in Baluchistan, Pakistan's most backward region. The loan is intended to improve education, health, water supply and sanitation. The scheme aims to improve managerial capacity within social services, and to improve both access to services and also their quality. The ADB has also provided a US$5m grant to target public health in the province. The ADB hopes to reduce vaccine-preventable diseases among children and to cut deaths from malaria and tuberculosis. Meanwhile, a US Congressional Research Service report released in November stated that the US will have provided Pakistan with direct assistance worth US$3.4bn in 2002-06. Around US$1.5bn of this is security-related aid.

The domestic economy

Economic trends

Expectations that economic growth will slow significantly in fiscal year 2005/06 (July-June) are rising. A fall in growth rates in the large-scale manufacturing and textile sectors, coupled with an agricultural slowdown, persistent inflation and high oil prices have led the Asian Development Bank (ADB) to forecast growth of 6.5% in 2005/06, down from 8.4% in 2004/05. In the first quarter of 2005/06, growth in large-scale manufacturing stood at 8.7% year on year, after growing by 24.9% in the same period of 2004/05. Growth in textiles and food slowed to 7.2% (from 29.6%) and 10% (from 13.5%) respectively. However, other sectors, including construction, power and services (particularly telecommunications), are still performing strongly. Rising external trade has benefited retail and wholesale trade.

The State Bank of Pakistan (SBP, the central bank)) has also cut its growth forecast from 7% to 6% owing to lower factory production. The president of the Karachi Chamber of Commerce and Industry (KCCI), Haroon Farooki, argued that the SBP's tight monetary policy is harming production and deterring companies from investing. Nonetheless, the prime minister, Shaukat Aziz, said in December that Pakistan was enjoying an economic upturn, owing to structural reforms, prudent macroeconomic policy, fiscal discipline and policy stability. He said that liberalisation, deregulation and privatisation have increased investor confidence.

In November the IMF said that Pakistan's macroeconomic performance was expected to remain strong, despite persistent inflation and external pressures. In two staff reports for 2005 it suggested that monetary policy needed to be tightened in the short term to tackle inflation. The Fund also argued that economic indicators suggested poverty was falling. Further increases in health and education spending are nevertheless needed in order to achieve the UN Millennium Development Goals (MDGs).

The IMF said that Pakistan's medium-term outlook was favourable, but suggested that ambitious growth targets required a substantial increase in investment, including from the private sector. It said that although public

Growth is forecast to slow to around 6.5%

The ADB provides a loan to Baluchistan

22 Pakistan


investment had been increased to ease bottlenecks in transportation, irrigation and energy, weak governance in some public sector institutions remained a problem. The Fund argued that institutional reforms undertaken over the past five years (including the fiscal responsibility law and greater independence for the central bank) had laid the basis for non-inflationary growth.

Consumer price inflation averaged 8.4% in the first half of 2005/06, down from an average of 9.3% in 2004/05. Despite the slowdown, core inflation (excluding food and fuel) has remained steady, and does not appear to have responded to monetary tightening. Consumer price inflation fell to 8.3% year on year in October and 7.9% in November, but picked up to 8.5% in December and 8.8% in January. Improvements in food supply resulted in a decline in the food component of consumer price inflation from 15.7% in April to 5.8% year on year in November, but prices then rose again, puzzling the central bank. The non-food component of inflation has risen, to stand at 9.2% in January 2006. The high price of oil is a leading cause of rising prices, with the fastest price rises being recorded in the transport and communications sector, where prices rose by 19.9% year on year in December 2005. House rents are also increasing, rising by 10.3% year on year in December. The government will be concerned too about the potential impact of rising food prices, particularly if expectations of a worse harvest this year are borne out.

Inflation (% change, year on year)

2005 2006 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec JanConsumer price inflation 8.5 10.0 10.3 11.1 9.8 8.7 9.0 8.4 8.5 8.3 7.9 8.5 8.8Wholesale price inflation 5.6 6.7 6.3 7.7 6.0 6.2 9.4 11.7 11.9 11.2 10.9 11.0 10.8

Source: Federal Bureau of Statistics, Government of Pakistan.

0

2

4

6

8

10

12

14

Jan2005

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan06

Consumer price inflation Wholesale price inflation

Inflation(% change, year on year)

Source: Federal Bureau of Statistics, Government of Pakistan.

Agriculture

There are increasing indications that agriculture will not perform as well in 2005/06, after recording strong growth of 7.5% year on year in 2004/05.

Agricultural growth is estimated to slow in 2005/06

Despite monetary tightening, inflation remains high

Pakistan 23


Production of most major crops is likely to fall: output of the four major crops—cotton, wheat, rice and sugarcane—grew by 17.3% in 2004/05. Although rice production appears steady, early indications suggest that sugarcane production is likely to fall by 10%. Disputes between sugarcane mills and farmers over pricing resulted in many farmers switching production to other crops, such as oilseed. In its first quarter report for 2006, the SBP says that agricultural growth may meet the 4.8% target for 2005/06 provided that the rabi (spring) crop is strong. However, this would require greater water availability: there are concerns that this may not be as high as it was in the kharif (autumn) season, when water supply was above normal for the first time in six years.

Pakistan's Federal Committee on Agriculture had initially set a cotton production target of 12m bales for 2005/06, but raised this to 15m bales following the strong performance in 2004/05, when 14.5m bales were produced. In October 2005 the estimate was lowered to 12.5m bales, but even this now appears ambitious as a result of late sowing, pest infestation and unseasonable weather. Assuming that the target is met, Pakistan's cotton industry would face a shortfall of around 2.5m bales, to be met either through imports or by the release of stocks held by the Trading Corporation of Pakistan. As of January 1st 2006, 11.2m bales had been produced, down by 14% from the 13.1m bales produced by the same point last year.

Wheat output, too, seems under threat, with reports that the area sown to wheat has fallen significantly, primarily because of a delay in harvesting crops on land on which wheat is subsequently cultivated. Low levels of water availability in some areas and reported shortages of fertiliser are also con-tributing to expectations of reduced output and higher import requirements, and are thus raising the risk of an increase in inflation. Efforts are under way to deregulate fertiliser imports to prevent shortages.

According to the SBP's first quarterly report, the earthquake that struck in October 2005 may harm wheat production capacity in the North West Frontier Province (NWFP). In 2004/05 Pakistan produced 21.6m tonnes of wheat, leading the government to set a target of 22m tonnes for 2005/06. The SBP report stated that wheat had been sown on 6.2m ha—74% of the target area, and about 1% less than in the corresponding period of 2005. The 7% decline in wheat cultivation in NWFP was particularly marked. Wheat cultivation also fell in the Punjab: the SBP attributed this to late harvesting of cotton, rice and sugarcane.

The inflationary impact of a poor wheat harvest is significant. Hoarding of wheat and delays in wheat imports have contributed to a rapid rise in the price of flour in the past few years, although increased opium production in Afghanistan has also meant that a significant proportion of Pakistani wheat is exported to Afghanistan to make good that country's shortfall.

In December 2005 Pakistan joined the Cairns Group of agricultural exporters as the group's 18th member. The commerce minister, Humayun Akhtar Khan, announced the move at a World Trade Organisation (WTO) conference. The group was formed in 1986 to lobby for the elimination of farm subsidies and import tariffs in developed countries. Mr Khan stated that Pakistan had among

24 Pakistan


the lowest agricultural trade barriers in the world, and called on other countries to lower their protection levels. Pakistan is also a member of the G20 group of developing nations, which has similar aims to those of the Cairns Group.

Manufacturing

The SBP's first quarter report for 2005/06 notes that industrial growth is slowing. The SBP report notes that the slowdown has been broad-based, with output in sectors such as textiles, fertiliser, petroleum and electric goods falling. In the first quarter of 2005/06 large-scale manufacturing grew by 8.7% year on year, compared with 25% in the same period of 2004/05.

Pakistan's automotive sector is continuing to perform strongly. In the first half of 2005/06 car sales rose by 25% year on year and motorcycle sales were up by 24%. Sales of tractors rose by 15%, and those of trucks and light commercial vehicles were up by 40%. Although imports of new and used cars are increasing, sales of locally assembled car sales are also strong, rising to 71,027. The increasingly widespread availability of financing for car purchases remains the key driver behind higher volumes of car sales. Car production companies are increasing output to meet demand. However, demand for motorcycles far outstrips that for cars. Motorcycle sales rose to 239,443 in the first half of 2005/06, up from 193,875 a year earlier. The only slowdown was in bus sales, which fell by 34% to 454 buses in the same period. The fall in bus sales stems from the suspension of the Urban Transport Scheme (UTS, a project to expand transport routes in cities) and the rising cost of diesel.

Pakistan's all-important textile sector continues to face problems a year after the expiry of the Agreement on Textiles and Clothing (the WTO's system of global quotas for trade in textiles). Along with China and India, Pakistan was expected to be a likely beneficiary of the ending of quotas, and to some extent this has been proved correct. However, market access and infrastructure problems have prevented Pakistan from taking full advantage of the new system. The EU's decision to withdraw the General System of Preferences (GSP) from Pakistan, and its imposition of anti-dumping duties, have harmed Pakistan's textile sector. Although textile exports have risen substantially (from US$6bn in 2000 to US$9bn in 2005), the sector has not fulfilled its potential, and some smaller manufacturers have been forced to close. The poor state of infrastructure adds to the costs faced by the sector, and several government schemes to establish "garment cities" around the country have not yet got off the ground. Political concerns have deterred foreign investors from making large-scale investments in the sector.

In late January the Central Board of Revenue (CBR) introduced new assessable values for four different types of steel to protect Pakistan's domestic industry from cheap imports. The CBR also reduced the minimum value addition on which sales tax would be assessed to assist the local ship-breaking industry. According to the Pakistan Steel Melters Association, the price difference between imported steel billet from Ukraine, Turkey and Iran and local scrap metal has fallen significantly recently. The fall in the price difference between

Manufacturing witnesses a slowdown

Textiles have failed to benefit from the ending of quotas

New import duties protect local steel

Pakistan 25


the two has resulted in the closure of 22 billet manufacturers in Pakistan. The Pakistan Ship Breakers Association stated that the ship-breaking industry was also suffering owing to cheap imports of steel.

Infrastructure

In December the president of the World Bank, Paul Wolfowitz, stated that poor infrastructure, regulatory obstacles and informal barriers were exerting a substantial drag on Pakistan's rate of GDP growth. Mr Wolfowitz used the example of the Lahore-Karachi corridor, along which 95% of Pakistan's external trade passes, to demonstrate that benefits from additional trade will not be realised until infrastructure and institutions are improved: poor road conditions mean that travel times along the corridor are double what they could be, while the cost of freight insurance is three or four times higher than in Europe. Although goods produced in Lahore may be globally competitive, any advantage is lost by the time they reach Karachi. Mr Wolfowitz argued that one-third of the additional costs stemmed from poor infrastructure, and the rest were the result of regulatory obstacles and informal barriers.

The need to improve Pakistan's infrastructure appears to be moving up the government's agenda. At the beginning of December the prime minister, Shaukat Aziz, pledged to develop world-class logistics chains in Pakistan to enable the country to shift to a higher growth path. Mr Aziz made his comments while inaugurating an oil pier at Karachi port, where a deepwater terminal is nearing completion. The government plans to modernise rail, roads, sea and air infrastructure in Pakistan. In late January Mr Aziz directed that infrastructure improvements should be expedited. The government is planning to implement a North-South corridor that will improve communication links with Afghanistan and Central Asia. The scheme, costing US$5bn, involves the modernisation of Karachi port and national railways. The government also plans to improve road connections from Karachi northwards.

At a meeting of the prime minister's task force on the National Trade Corridor, Mr Aziz was told that the customs department had reduced the customs time at Karachi port to two days, resulting in projected savings of PRs4bn (US$68m) per year. A feasibility study for the National Expressway Corridor has been completed, and two high speed trains are now running daily between Karachi and Lahore and also from Karachi to Faisalabad, reducing the north-south journey time from 56 to 28 hours.

According to a World Bank report released in January 2006, the cost of upgrading Pakistan's water infrastructure would be between US$60bn and US$70bn. The report states that the poor state of Pakistan's irrigation and water infrastructure prevents the country from achieving consistently stronger economic growth rates, with many major water structures operating well beyond their intended lifetimes. The Bank argues that Pakistan does not provide realistic estimates of the annual costs of maintaining and improving irrigation and other water systems. Generally, the cost of maintaining infrastructure is equivalent to around 3% of the cost of the capital stock each year. The irrigation department in Punjab manages infrastructure worth around US$20bn, implying

Poor infrastructure remains an impediment on growth

26 Pakistan


maintenance and replacement costs of around US$600m per year. However, the government of Punjab has no replacement budget, and provides PRs1.2bn (US$20m) per year for maintenance, less than 10% of the World Bank estimate. Pakistan also suffers from very low levels of water storage capacity. Whereas the US has over 5,000 cu metres of storage capacity per person and China has 2,200 cu metres, Pakistan has just 150 cu metres per person.

According to the Pakistan Telecommunication Authority (PTA), at the end of 2005 the number of mobile-phone users in Pakistan had risen to more than 20m, almost four times more than the number of fixed-line subscribers, which stood at 5.4m. A local company, Mobilink, dominates the mobile sector with 10.4m subscribers. Ufone, a subsidiary of the Pakistan Telecommunications Company (PTCL), has 4.4m subscribers, while a Saudi-Pakistani joint venture, Al Warid, has 1.8m and Norway's Telenor has 1.6m. Other mobile service providers have less than 1m subscribers each. PTCL dominates fixed-line provision, with 5.2m subscribers. The number of mobile customers rose by 154% in 2004/05 as a result of cheaper calls and falling handset costs: mobile-phone connections are also much easier to obtain than fixed lines. The number of wireless local loop subscribers is also growing strongly. At the end of 2005, according to the PTA, there were almost 430,000 wireless local loop users. In December the minister for information technology and telecommunications, Awais Ahmed Leghari, forecast that teledensity would rise to 30% by 2009/2010. He said that he expected investment of around US$3bn-4bn over the next five years in improving telecoms infrastructure. Teledensity currently stands at around 15%, up from just 4.5% in 2003.

Between June 26th and July 3rd 2005 Pakistan's Internet system blacked out, costing Pakistan's developing information technology (IT) sector additional work and denting its reputation. The blackout stemmed from Pakistan's reliance on a single optical-fibre connection, SMW-3 (South-East Asia—Middle East—Western Europe-3). Since January 2nd 2006 Pakistan has had a back-up connection, having connected to SMW-4, a 20,000-km cable running from France to Singapore. The IT industry in Pakistan believes that the move will increase confidence in Pakistan's IT sector among foreign clients, although there were concerns that last-mile connectivity, much of which relies on copper-based lines, was in fact a greater concern in Pakistan.

In early January the government issued petroleum exploration licences to a domestic firm, Petroleum Exploration (PEL), in Sindh province. PEL plans to invest US$11.2m to carry out surveys. The government plans to award 16 new licences by April 2006, comprising nine offshore and seven on-shore blocks. Oil and gas consumption has grown at around 7% annually over the past five years, and the government wants to raise domestic production of oil to around 100,000 barrels per day (from 62,000 b/d currently), and to increase gas production to 5bn cu ft per day (from 3.3bn cu ft per day at present).

At the UN General Assembly meeting in November, Pakistan announced plans to import nuclear plants to meet its rising energy needs. Pakistan's deputy permanent representative to the UN, Aizaz Ahmad Chaudhry, said that Pakistan planned to increase its nuclear power output capacity from 425 mw now to

Mobile telephony is booming

The government plans to meetrising energy needs

Pakistan 27


8,800 mw by 2030, increasing nuclear power's share in Pakistan's energy market from 0.8% to 4.2%. Pakistan has two nuclear power plants at present, and is building a third. It has introduced a number of anti-proliferation measures, including the creation in 2000 of a Nuclear Command and Control Authority and an independent Nuclear Regulatory Authority. Pakistan's measures to monitor its nuclear energy facilities follow deep-seated concerns over the activities of its former chief nuclear scientist, Abdul Qadir Khan, who confessed in January 2004 to having been involved in nuclear proliferation to Libya, Iran and North Korea, and who is now under house-arrest.

Financial and other services

The Karachi Stock Exchange has risen significantly over the past quarter. The index, which stood at 8,864 in mid-November, soared to a record high of 11,259 on February 15th. High levels of domestic liquidity and low real interest rates have encouraged speculative inflows into the stockmarket. Foreign investment has been focused on oil companies, while the recent award of three oil exploration licences to the Oil and Gas Development Company (OGDCL) has underpinned investor interest in this firm. However, rumours of a likely correction in the market are widespread.

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

Jan2004

Mar May Jul Sep Nov Jan05

Mar May Jul Sep Nov Jan06

Mar

Karachi Stock Exchange KSE-100 index

Source: Bloomberg.

The prime minister has called for better accounting in the private sector, and the government is attempting to reform corporate governance through the Securities and Exchange Commission of Pakistan (SECP). As part of its financial sector reforms, the government has started to modernise corporate reporting and accounting, although the current system falls far short of international standards. One of the problems that it faces is a shortage of accountants. In early February Mr Aziz called on the Institute of Chartered Accounts of Pakistan ICAP to publicise the shortage.

The Karachi Stock Exchange continues to boom

28 Pakistan


Tourism

In December the government announced that tourists would be allowed to travel into Azad Kashmir. The minister for Kashmir affairs and northern areas, Faisal Saleh Hayat, said on December 13th that the move would boost the economy and help generate employment in the region affected by last year's earthquake. Although tourism plays only a small part in Pakistan's economy, the easing of travel restrictions between India and Pakistan is boosting tourist numbers. Around 14,000 people are currently travelling into Lahore each month; they include Indians and tourists from other countries. The bus service between the Indian capital, Delhi, and Lahore is operating at full capacity, although the recently opened bus service between Lahore and Amritsar is expected to ease the burden on the Delhi route. The six weekly flights between Lahore and Delhi are operating at close to full capacity. Sikh pilgrims are a significant source of tourism revenue to Pakistan, and Pakistan opened another bus service, between Amritsar and Nankana Sahib, from February 24th.

Foreign trade and payments

The value of Pakistan's merchandise exports rose by 23.8% year on year in the first half of fiscal year 2005/06 (July-June), to US$8.1bn. Export performance in the first six months of the year varied dramatically between sectors. Bedwear exports, for instance, rose by 84% year on year, while exports of tents and tarpaulin fell by 54.5% (although this may have been the result of demand for tents from areas hit by the October 2005 earthquake). Surgical-goods exports fell by 14.7%, despite the introduction of a beneficial taxation package for the sector. Exports of engineering product rose by 15%, those of automotive parts by 27% and of leather goods by 45%. In the same period, jewellery exports fell by 48%. Last year's strong harvest contributed to a rise in food exports. Exports of all primary products rose by 30%, and spice exports were up by 105%.

External trade (US$ m; fiscal years Jul-Jun)

1 Qtr 1 Qtr 2003/04 2004/05 % change 2004/05 2005/06 % changeExports 12,313 14,391 16.9 3,484 4,179 20

Imports 15,591 20,598 32.1 4,311 6,554 52Balance -3,279 -6,207 – -827 -2,375 –

Source: State Bank of Pakistan.

Pakistan's readymade garment exports fell by 5% year on year in December 2005 to US$107.5m, from US$113.1m in the same period of 2004. However, although Pakistan may have lost market share to China and India since the ending of the World Trade Organisation's textile export quota system at the start of 2005, the sector appears to have stayed competitive. In the first half of 2005/06 readymade garment exports grew by 53.5% year on year. Total textile product exports rose by 27.3% year on year to US$4.9bn in the first six months of 2005/06. Efforts to diversify the composition of Pakistan's exports appear not to have been successful.

Tourists will be permitted to travel to Kashmir

Pakistan's exports perform strongly

Pakistan 29


Imports by major commodity (PRs m; fiscal years Jul-Jun)

2003/04 2004/05Machinery & transport equipment 243,143 351,554Minerals & fuel 191,640 255,010

Chemicals 161,118 213,949Manufactured goods 91,509 134,012Food & live animals 29,486 64,540

Total (incl others) 897,825 1,223,079

Source: Federal Bureau of Statistics.

Despite strong exports, Pakistan's trade deficit reached almost US$5.6bn in the first half of 2005/06, reflecting a 133% year-on-year rise in the import bill. Rising oil prices and higher imports of machinery and raw materials were responsible for the increase in imports. The State Bank of Pakistan (the central bank) argued that these imports would result in higher levels of value added production in coming years, leading to import substitution. However, while the machinery category of imports is growing strongly, the largest growth within this category is that in imports of cars. In the first four months of 2005/06 car imports rose by 91% year on year.

Remittances from overseas workers (US$ m; Jul-Dec)

Origin 2004 2005Bahrain 45.7 49.4Canada 19.6 39.2

Germany 26.5 27.8Japan 3.6 3.6

Kuwait 103.5 112.2Norway 11.2 8.3Qatar 38.9 52.0

Saudi Arabia 300.4 335.2Oman 60.0 63.2

UAE 315.5 301.8UK 179.2 201.7US 587.9 586.0

Other countries 250.9 264.8Encashment & profits of FEBCsa & FCBCsb 3.2 10.0

Total 1,946.1 2,055.2

a Foreign-exchange bearer certificates. b Foreign-currency bearer certificates.


Remittance inflows have held up strongly. In the first six months of 2005/06 inflows rose by 5.6% year on year, held up by inflows from the Gulf countries. This has helped to support Pakistan's foreign-exchange reserves, which have risen slightly since November. After peaking at US$13bn at end-April 2005 reserves slipped back, owing to debt repayments and higher oil import costs. The recent revival in foreign-exchange reserves, which rose to US$11.5bn on January 21st, is likely to be linked to increased foreign assistance relating to the October earthquake and to higher levels of remittances from Pakistanis working overseas to assist family members affected by the earthquake.

30 Pakistan


Foreign-exchange reserves (US$ m)

Net reserves with

central bankNet reserves with

other banks Total2005 Nov 30th 8,891 2,450 11,341Dec 31st 9,243 2,426 11,669

2006 Jan 7th 9,062 2,449 11,510Jan 14th 9,058 2,447 11,504Jan 21st 9,070 2,455 11,525


Pakistan is enhancing its economic ties with China, and the two countries signed an early-harvest programme (EHP) in December. The EHP followed the summit meeting between the leaders of the two countries in April last year. The EHP is seen as a step towards a free-trade agreement (FTA) between the two economies: by offering a rapid reduction of tariffs on some products, it will enable each country to assess the benefits of a wider FTA. Under the EHP, more than 3,000 products had their tariffs cut from January 1st 2006. The agreement lists 486 categories of Chinese exports and 769 categories of Pakistani exports that will have zero tariffs. Products as diverse as vegetables, fruit, stone materials, textile machinery and organic chemical products, cotton fabrics and man-made fabrics are covered under the deal. Bilateral trade grew by 44% year on year in the first ten months of 2005, rising to US$3.4bn. Although Pakistan's exports to China are growing strongly, trade is heavily skewed in China's favour: China enjoyed a trade surplus of US$1.9bn in the period.

Pakistan already has an FTA with Sri Lanka, and is negotiating similar deals with Bangladesh, Nepal and Singapore. In November Pakistan signed a Framework Agreement on Comprehensive Economic Partnership (FACEP) with Indonesia, as well as a counter-terrorism pact. The Comprehensive Economic Partnership was first agreed back in 2003, and the two countries are now working towards a preferential trade agreement. Although the two are close politically, economic links are currently minimal. In 2002/03 Pakistan exported goods to Indonesia worth just US$73m, while imports were worth US$257m. Pakistan is seeking to deepen its ties with members of the Association of South-East Asian Nations (ASEAN) as it strives to become a full dialogue partner of ASEAN. Pakistan also hopes for an FTA with the US, but this is unlikely to materialise in the foreseeable future. It first has to sign a bilateral investment treaty, although this may be given impetus by the visit of the US president, George W Bush, to Pakistan in early March. In December the commerce minister, Humayun Akhtar Khan, met the US trade representative, Rob Portman, and both agreed that the bilateral treaty would be completed quickly. The process has been slowed by concerns over the impact of a treaty on Pakistan's textile sector.

Ahead of the World Trade Organisation (WTO) summit in Hong Kong in December 2005, Mr Khan announced that Pakistan would press for the elimination of all distortions and subsidies provided to farmers in developed countries. He said that Pakistan wanted the removal of tariff and non-tariff

Pakistan and China move closer to signing an FTA

Pakistan 31


barriers, fair market access and a reduction in anti-dumping duties to boost developing countries' exports. Mr Khan also called for enhanced co-operation between developing countries in the field of trade and commerce and for the opening of these countries' markets for their mutual benefit. The prime minister, Shaukat Aziz, emphasised the importance of raising Pakistan's market share in textiles, and stressed that the US and the EU should be required to bring down level of duties to provide a level playing field so that Pakistan could expand its textile exports.

As part of ongoing WTO negotiations, developing countries secured a promise from developed countries that agricultural export subsidies would be abolished by the end of 2013. There was an additional promise that a substantial part of the subsidies would be scrapped before 2011 and that there would be a parallel elimination of indirect subsidies. The EU, which provides the largest subsidies, agreed to the largest cuts in subsidies. A multi-tier formula set bigger cuts in higher tariff goods, smaller cuts for "sensitive" products produced in developed countries, and exemptions for "special" products grown in developing countries. Pakistan did not benefit in the important area of cotton subsidies: concessions on cotton were provided only to African and least-developed countries (LDCs).

At the talks, LDCs were given market access to the US and the EU for 97% of their product lines. At the urging of Pakistan and some developed countries, textiles were included in the 3% of tariff lines that would not enjoy duty-free access. Pakistan's stance was not appreciated by many LDCs. Within Pakistan, many commentators criticised the government's emphasis on textiles, suggesting that it should have focused on securing better access for agricultural products.

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