Pakistan - Policy and Performance

Trade flows

Pakistan’s exports are highly concentrated: currently the majority of exports originate in the textiles and apparels sectors. Early evidence indicates that Pakistan has so far been able to expand exports in the wake of the abolition of OECD countries’ quotas on textiles and apparel in 2005.

Imports are more dispersed, as is typical in most countries although inputs for the textile and apparel sectors (machinery, fibers, dyes and chemicals, etc.) and petroleum products make up sizeable shares of total imports.

The bulk of Pakistan’s trade is with countries outside of South Asia. This reflects in part Pakistan’s specialization in products that are also exported by its neighbors. This low level of trade also stems from a half-century of protectionist policies and political-military tensions in the region. Recent analysis commissioned by the World Bank indicates the potential for greater trade with India, notably in light manufactured products (e.g., bicycle components and fans).

Commodity Composition of Trade, 2004

Source: UN Comtrade

Direction of Trade, 2004

Source: UN Comtrade

A recent field survey conducted by the Sustainable Development Policy Institute estimated total informal trade between Pakistan and India at around $500 million per year (primarily imports from India via Dubai). Cloth, machinery (for textiles and pharmaceuticals), cosmetics and jewelry, and tires made up most of the goods imported.

Trade Strategy

Pakistan has made substantial progress over the past decade in constructing a more open and transparent trade policy regime.

• The government has reduced tariff rates across the board. The simple average ad valorem tariff rate in the 2005/06 trade policy is just under 15 percent, compared to over 50 percent in 1995.
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• Quantitative restrictions, exchange controls, and other direct state interventions into trade have been largely eliminated; ordinary customs duties are now the primary trade policy Instrument
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• Many special regulatory orders that provided discretionary exemptions to firms or industries have been eliminated, thus leveling the playing field and making the trade regime less complex.
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• The complete tariff schedule and regulatory orders affecting trade are easily accessible from government websites (see http://www.cbr.gov.pk).

• Pakistan has steadily extended the positive list which restricts the types of goods that may be legally imported from India. The list expanded from 40 items in 1983 to 687 items in 2004/5, and to 768 in 2006.

• The signing of the South Asia Free Trade Agreement (SAFTA) in January 2004 is an important step towards higher intra-regional trade in South Asia. The first phase of SAFTA tariff reductions is expected to come into effect from July 2006.

Pakistan's peers around the world have reduced their trade barriers to even lower levels, however, and more work remains to be done to remove the bias against exports that is implicit in the tariff structure.

While   India granted Pakistan the Most Favored Nation status in 1995/96, Pakistan has not yet reciprocated this move.

Perhaps more importantly, Pakistan faces the challenge of increasing the productivity—and thereby the export competitiveness—of its firms and producers. Value chain analyses conducted by the World Bank identify a number of "behind the border" constraints to trade, including problems trade logistics, availability and cost of electricity, labor market rigidities, the food safety standards regime, and slow duty-drawback payments. To ensure that trade can contribute to Pakistan’s economic growth and poverty reduction, a concerted effort must be made to address these impediments to competitiveness.

World Bank Operations on International Trade

In recent years the World Bank has supported the Ministry of Commerce and other agencies in the Government of Pakistan with analysis on trade issues, including most recently the Pakistan Growth and Export Competitiveness Report, as well as studies on agricultural trade, a series of studies on Pakistan-India trade, plus policy notes on SAFTA, textile quotas, and tariff rationalization.

The Pakistan Tax Administration Reform Project supports improvements in customs administration.