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Country Commercial Guides for FY 2000: Pakistan Report prepared by U.S. Embassy Islamabad, released July 1999 Note*

CHAPTER II. ECONOMIC TRENDS AND OUTLOOK

A. Major Trends and Outlook

Since the late 1980s Pakistan has pursued a program of market-oriented economic adjustment, reform and development, including strong encouragement of foreign direct investment.

Supported by the international financial institutions and bilateral donors, this program has aimed at enhancing macroeconomic stability, instituting structural reforms to promote private sector-and export-led industrial development, and reversing past neglect of key social sectors such as health, education and population planning.

Pakistan has made considerable progress under this program, but the process has not been entirely even, and key challenges remain for its $60 billion economy. Specifically, governments have sought to reduce fiscal and external imbalances, reduce trade barriers, modernize the financial sector, privatize state-owned industries, reform the tax system, encourage private investment in the critical energy sector, and offer specific incentives to attract foreign investment, which is considered critical to the overall development effort. Moreover, governments from all the main political parties support these reformist, market-oriented policies. These efforts have enjoyed generous support from the IMF, in the form of an Enhanced Structural Adjustment Facility approved in January 1999.

Various problems have kept Pakistan's progress below its potential. Floods, drought and pests hurt agricultural output in the early 1990s, and in the current fiscal year as well. Domestic political instability throughout the Bhutto administration and sporadic ethnic and sectarian violence under the caretakers and the government of Nawaz Sharif, who was elected February 3, 1997, have stunted foreign investment. And finally, policy inconsistency and weak implementation have, along with reports of improper official influence in business and economic decisions, dampened investor interest and economic growth in Pakistan.

Pakistan's mixed economic performance reflects the interplay of these positive and negative trends. Real economic growth has been positive, but below government targets. Real GDP grew 1.3 percent in 1996-97, and 4.3 percent in 1997-98. In FY 1998-99, GDP growth is expected to improve to 3.1 percent against a target of 6.0 percent. Recent annual consumer inflation of 6-8 percent has been moderated to match historically modest single-digit rates. In 1998-99, however, consumer inflation is projected at 6.1 percent. Fiscal slippages have led to difficulties in completing the IMF programs, however, Pakistan has been able to maintain an acceptable record with foreign creditors. New investment inflows, both portfolio and direct, at an all-time high in 1995-96, have nevertheless dropped substantially this year.

Poverty remains a serious problem in Pakistan. Average per capita income was only $448 in 1998-99, and income and wealth are not equitably distributed. Given the low rate of GDP growth, per capita income will be flat or decline slightly this year. The population of 134 million is growing at almost 2.6 percent per year. While Pakistan's economic fortunes remain closely linked to cotton and the textile products, the government has made some progress in diversifying the economy, and is committed to improving the quality of life for poorer citizens through the Social Action Program, a multi-year effort to raise education, health and sanitation standards.

There are significant possibilities for U.S. and other foreign suppliers and investors in Pakistan. However, realizing these opportunities will require sound economic policies by the government as well as actions to improve political stability and better develop human resources.

B. Principal Growth Sectors

Economic Growth

After growing at an average rate of over 6 percent per year from 1980 to 1991, real GDP growth has slowed in the 1990's. Real GDP growth dropped to 1.3 percent in 1996-97 due to a poor cotton crop and related setbacks in the textile industry. In 1997-98 growth hit 4.3 percent against a target of 6.0 percent. Real GDP grew only by 3.1 percent in 1998-99.

The Pakistani economy is almost evenly divided between the commodity sector (51 percent of GDP) and the services sector (49 percent), shares that have held constant for about a decade. Sectoral shares in 1998-99 were estimated by the Ministry of Finance as follows:

Commodity Sector				51.3 % of which:	

Agriculture 				24.5
Manufacturing				18.6
Construction				 3.6
Electricity & Gas Distribution 	 		 4.1
Mining						 0.5

Services sector 				48.7 % of which:

Wholesale and Retail Trade			15.4
Transport, Storage & Communication		10.2
Public Administration & Defense	 		 6.1
Ownership of Dwellings			 	 5.8
Finance and Insurance			 	 2.3
Other Services					 8.9

Agriculture

Pakistan has one of the largest irrigation systems in the world. The growth in agricultural production has been unable to meet the country's rapidly expanding food requirements. Agriculture remains the dominant sector of the Pakistani economy, accounting for about 24.5 percent of GDP, half the employed labor force, and a large share of foreign exchange earnings, as well as providing the base for key industries such as textiles and sugar.

Pakistan has two principal crop seasons: the "kharif," which begins in April-June and ends October-December; and the "rabi", which begins in November-December and ends April-May. Wheat, cotton, sugar cane, and rice continue to be the major crops, accounting for nearly 90 percent of value added in the agricultural crop sector. On a much smaller scale Pakistan also grows barley, millet, sorghum, corn, pulses, sunflower seed, rapeseed, mustard, sesame, and tobacco.

Share of Agriculture sector in GDP has declined from 38.9 percent in 1969-70 to 24.5 percent in 1998-99. During 1998/99 agriculture sector grew by 0.35 percent against 3.82 percent in 1997/98. The decline in agricultural growth was mainly due to a decrease in the production of cotton, wheat and value added forestry.

In an effort to boost rural incomes the Government of Pakistan (GOP) annually reviews and increases the support price of agricultural commodities. The GOP has removed price subsidies on fertilizers, increased the availability of agricultural credit, and provided incentives for the import of agricultural machinery. The GOP's agricultural priorities include: integrated development of agriculture and irrigation facilities, better land and water management practices, improvements in fertilizer use, pest management, research, diversification to higher-value crops and development of agro-industries.

Wheat - Wheat accounts for nearly 38 percent of the cultivated area. During 1998/99 wheat production is estimated down 3.2 percent to 18.1 Million Metric Tons (MMT) compared to last year. This decline is attributed to decrease in yields because of a long spell of dry season at the time of crop growing season in rain-fed areas and decrease in use of phosphatic fertilizer. Cotton - Pakistan's economy primarily depends on cotton and its cotton textiles production as a major source of foreign exchange and employment. About 80 percent of the crop is grown in Punjab and the remaining in Sindh Province. Cotton production in 1998/99 is estimated at 6.3 million (480lb) bales compared to 7.17 million bales in 1997/98. Decline in cotton production was attributed to decrease in area, unfavorable weather at harvest and virus attack in Sindh Province.

Rice - Rice is the second largest staple food crop in Pakistan and is a major export crop. The principal export varieties are long-grained non-glutinous aromatic "Basmati" rice grown in the Punjab and non-aromatic coarse rice (variety Irri-6) planted in Sindh province. Rice production during 1998/99 is estimated at 4.65 MMT compared to 4.33 MMT in 1997/98. Increased production is attributed to improved yields due to timely planting, less pest infestation and below normal monsoon rains in saline areas. Pakistan is a major rice exporter and annually exports about 2 MMT or about 10 percent of world trade.

Sugarcane - Pakistan's sugar production depends almost entirely on sugar cane, although there is some production of sugar beets in the NWFP. Production of sugar cane in 1998/99 increased to 55.2 MMT compared to 53.1 MMT produced in 1997/98. This increase was in response to higher support prices and even higher market prices for cane. Farmers also switched from traditional varieties to newer high-yielding and latter maturing varieties.

Refined sugar production in 1998/99 has been estimated at 3.78 MMT (raw value basis), at last year's level. Pakistan has produced exportable supplies of sugar for the last two years. Excess production is becoming a burden to the industry because it is not efficient and cannot compete on the world market.

Tobacco - Pakistan grows tobacco and produces tobacco products, but the market for domestic products is substantially undercut by smuggled goods. Despite these major leakages, the cigarette industry is a significant contributor to excise and sales tax revenues. MY 1999 production is forecast at 98,500 metric tons (farm weight) due to an expected increase in area and yields.

About half of the total production is used for cigarette manufacturing and the remainder used in traditional ways of smoking (in hand-rolled cigarettes called birris, in water pipes, and as snuff). The major tobacco growing region is in the NWFP. Of the total tobacco imports estimated at 976 MT in 1998/99, 576 MT of flue-cured tobacco has been imported from the United States. The U.S. share of imported tobacco is increasing gradually in response to increased demand for high quality cigarettes.

Minor crops - Minor crops account for only 4.5 percent of total cultivated area; these include oilseeds (sunflower, soybean, safflower) chilies, pulses, potatoes, and onions.

Fisheries - Pakistan's fishing industry is relatively modest, but has shown strong growth in recent years. The domestic market is quite small, with per capita annual consumption of approximately 2.0 kilograms. About 80 percent of production comes from marine fisheries from two main areas, the Sindh coast east from Karachi to the Indian border, and the Makran coast of Baluchistan. Ninety percent of the total marine catch is fish, the shrimp which constitute the remainder are prized because of their greater relative value and demand in foreign markets.

During 1998/99, total fish production is estimated at 616,500 MT of which 431,000 MT is marine and remaining 168,000 MT is inland. About one-third of the edible catch is consumed fresh, nine percent is frozen, eight percent canned, and about 43 percent used as fish meal for animal food.

Livestock - Livestock accounts for 37 percent of the value added by the agricultural sector and 9 percent of the total GDP. Principal products are milk, beef, mutton, poultry, and wool. During 1998/99, livestock population increased to 118.2 million. Beef production in 1998/99 is estimated at 963,000 MT, mutton production 633,000 MT, milk production 24.8 MMT and poultry meat 188,700 MT.

In an effort to enhance milk and meat production, the GOP recently launched a comprehensive livestock development project with Asian Development Bank assistance. In addition, the GOP has broadened extension and artificial breeding services, rationalized animal health services, improved slaughterhouses, and introduced high yielding fodder varieties.

Forestry - Forests in Pakistan constitute an area of 4.2 million hectares i.e., about 5 percent of total geographical area. One-third of the forest area in Pakistan is productive and the remaining two-thirds is maintained for environmental stability. The principal forest products are timber, principally for house construction and furniture, and firewood. The estimated production of fuel wood during 1998 was 26 million cubic meters. A large number of wood products amounting to Rs.7.9 billion are being imported to meet the domestic requirements.

The growing population and rising standards of living have accelerated the demand for timber, which is partially supplemented through imports. The GOP has banned forest cutting to protect depleting reserves. In order to encourage imports duty on timber and wood has been lowered to 10% only. Vegetable Ghee/Cooking Oil - Vegetable ghee, hydrogenated vegetable oil, is the principal cooking medium in Pakistan. After the market outstripped the supply of milk-produced ghee, the vegetable ghee industry has grown rapidly (from two units in 1947 to more than 40 in 1998). The principal raw material is edible oil, the majority of which is imported palm oil. Pakistan suffers from a large and chronic gap between demand and domestic production of edible oils.

Importing edible oil is an important task. It consumes a big portion of valuable foreign exchange. Pakistan remains a major importer of palm oil followed by soybean oil and sunflower oil. In MY 1997/98, Pakistan imported 163,000 MT of soybean oil, 385 MT of sunflower oil and 1.124 MMT of palm oil.

Industry

Pakistan, which had almost no large industrial units at the time of Partition in 1947, now has a fairly broad industrial base, and manufacturing accounts for about 18.0 percent of GDP.

Cotton textile production is the single most important industry, accounting for about 18 percent of large-scale industrial employment. Cotton yarn, cotton cloth, made-up textiles, ready-made garments, and knitwear collectively accounted for nearly 60.0 percent of Pakistan's exports in 1998-99. Other important industries are cement, vegetable oil, fertilizer, sugar, steel, machinery, tobacco, paper and paperboard, chemicals, and food processing. The GOP is attempting to diversify the country's industrial base and to increase the emphasis on export industries. Small-scale and cottage industries are numerically significant but account for a relatively small proportion of the GDP, about 6.0 percent. (Small-scale industry includes facilities which employ fewer than 50 workers and cottage industries are industrial units in which the owner works and is aided by family members but employs no hired labor.)

Manufacturing's share of GDP in 1998-99 was 18.3 percent, about the same as last year. The manufacturing sector registered a growth of 5.4 percent in 1998-99 compared to 6.9 percent achieved last year.

Public Industrial Sector - The public industrial sector, under the Production Wing of the Ministry of Industries and Production, comprises eight holding corporations which controlled 74 industrial units. A majority of these units have been privatized under the GOP's privatization program and the rest are to be sold off. The eight holding corporations include: Pakistan Steel; the State Cement Corporation; the National Fertilizer Corporation; Pakistan Automobile Corporation (PACO); Federal Chemical and Ceramics Corporation (FCCC); State Petroleum Refining & Petrochemical Corporation (PERAC); State Engineering Corporation (SEC); and the Pakistan Industrial Development Corporation (PIDC). These public sector units will continue to play a key role in certain sectors, such as heavy engineering, steel, automobile, petroleum and defense production.

Textiles - The textile industry is the single most important manufacturing sector, accounting for an average of 40 percent of manufacturing employment, 62 percent of manufacturing exports, and 30 percent of manufacturing value added. Pakistan's textile industry produces cotton yarn, cotton cloth, made-up textiles and apparel. In order to reduce pressure on the demand for raw cotton, the polyester fiber and yarn industry has also grown significantly in recent years. Pakistan also has 12 jute mills with an installed capacity of 37,876 spindles and 1,946 looms. The industry produced 68,600 tons of jute products in 1998-99.

Various government incentives have raised the total installed capacity to 8.3 million spindles and 145,000 rotors from about 8.2 million spindles and 143,000 rotors a year earlier. Despite recent efforts to induct high-speed spindles, automatic cone winders, electronic splicers and other high-tech equipment the industry still is concentrated in the preliminary stages of processing. In general, large firms concentrate on spinning and weaving leaving garment-making to highly fragmented small to medium-scale producers. The number of textile units totaled about 503 in 1998-99. The textile industry needs to move to higher value-added production and to rationalize its operations in order to face the challenges and opportunities of the phased elimination of quotas as part of the Uruguay Round trade agreement.

Knitwear has been Pakistan's largest single segment of garment exports, but finished goods have generally lagged yarn and cloth production. The GOP has proposed a series of measures to upgrade the garment sector, including modernization of facilities, and market research and sales promotion. Ready-made garment exports in 1997-98 totaled $671 million.

Food Processing and Consumer Products - Major segments include sugar, tea, aerated water, edible fats, dairy products, concentrates, juices, tobacco, detergents, and personal care products. Nearly all of these items are produced for domestic consumption.

Iron and Steel - Pakistan Steel, with an annual capacity of 1.1 million tons, is Pakistan's only integrated steel plant. It is located near Port Bin Qasim, 25 Kilometers East of Karachi. The Steel Mill was constructed with technical assistance from the former Soviet Union, and currently employs about 20,000 workers. Iron ore, manganese, and cocking coal for the plant are all imported. Pakistan Steel produces coke, pig iron, billets, hot and cold rolled coils and sheets, and galvanized sheets. The facility notched record production of over one million tons in 1993-94. That resulted in significant pre-tax profits for Pakistan Steel, which had been a chronic loss-maker for most of its operational history (in 1995-96, however, production of all major items declined by an average of 7.5%). Pakistan Steel had announced an expansion program to increase its production capacity to three million tons by mid-1999 but its privatization has now become the first priority of the government.

In June 1999, the first tin plate making plant of Pakistan, Siddqsons Tin Plate, has started commercial production. This plant is a joint venture between a local company with French and Japanese firms. The plant cost US$32 million and has a production capacity of 120,000 tons of tin plate per annum.

Fertilizer - Pakistan has 10 fertilizer units, of which four are in the private sector. At the end of 1998, they had a total annual capacity of 4,551 thousand tons. In 1998-99 overall production of fertilizer declined 2.3 percent to 3,019,478 million tons compared to 3,089,191 million tons during 1997-98 There is no domestic production of potassic fertilizers.

Cement - Pakistan has 23 operating cement units, of which 19 are in the private sector. The total annual capacity of the industry is 13,029 thousand tons. Cement production in 1998-99 was about 3.8 percent lower than the previous year. Pakistan has large quantities of both limestone and gypsum and a large domestic market. Cement was one of the few industries with an established base in Pakistan at the time of independence in 1947, when there were five cement factories. Pakistan currently produces five types of cement: Portland grey, Portland slag, Sulphate resistant, Super Sulphate resistant, and White. In 1972, the Government of Pakistan nationalized cement factories and consolidated them under the State Cement Corporation of Pakistan. The current privatization process has reversed that initiative. In order to promote growth in the cement sector, the GOP has allowed duty-free import of plant and machinery not manufactured locally.

Chemicals - Pakistan produces some basic chemicals, such as soda ash, caustic soda, and sulfuric acid. Production of soda ash in 1998-99 was 177,593 tons, and caustic soda 83,998 tons. Caustic soda is used in the textile, hydrocarbon refining, and soap industries; sulfuric acid is used in the textile, paper, fertilizer, and steel industries.

Leather - Leather is a major and rapidly expanding export sector; exports grew at an annual compound rate of 21 percent over a recent five-year period, boosted by a range of government incentives. The leather and leather products industry is labor-intensive (directly employing more than 200,000 workers) and there are over 400 tanneries in Pakistan. The recent growth of the industry is due in large part to its successful progression from the export of raw hides and skins and semi-processed leather towards high value-added finished leathers and leather products (including leather jackets, gloves, footwear, and sporting goods). The tanning sector is concentrated in the Punjab, where units process primarily buffalo and cow hides; tanneries in the Sindh process primarily goat and sheep skins. The local market for leather is limited, and about 80 percent of production is exported. More sophisticated machinery and productivity increases can be expected to further boost exports. Pollution is a serious problem for this industry.

Electronics and Electrical Goods Industry - The electronics and electrical goods industry is basically a consumer products industry, making light bulbs and tubes, air conditioners, fans, refrigerators, freezers, televisions, radios, and other electrical appliances. The industry depends heavily on imported parts and components, although there have been somewhat successful efforts to increase the percentage of domestic components.

Vegetable Ghee/Cooking Oil - Vegetable ghee, hydrogenated vegetable oil, is the principal cooking medium in Pakistan. After the market outstripped the supply of milk-produced ghee, the vegetable ghee industry has grown rapidly (from two units in 1947 to more than 40 in 1998). The principal raw material is edible oil, the majority of which is imported palm oil. Pakistan suffers from a large and chronic gap between demand and domestic production of edible oils.

Importing edible oil is an important task. It consumes a big portion of valuable foreign exchange. Pakistan remains a major importer of palm oil followed by soybean oil and sunflower oil. In MY 1996/97, Pakistan imported 205,672 MT of soybean oil, 3,836 MT of sunflower oil and 1070,000 MT of palm oil.

Pharmaceutical - There are more than 30 multinational manufacturers of pharmaceutical products in Pakistan (of which twelve are U.S. firms) and they command over three quarters of the domestic market. Engineering Industry - Major engineering goods facilities include a heavy foundry and forge at Taxila in the Punjab (which produces castings and forging for the railway, heavy machinery, and automobile industries); the Heavy Mechanical Complex at Taxila (which produces industrial machinery); the Karachi Shipyard and Engineering Works (which builds and repairs ships as well as produces boilers); and the Pakistan Machine Tool Factory, established at Karachi in 1968 in collaboration with a Swiss firm (which produces precision machines, tools and automotive parts).

Energy

Pakistan's primary energy supply mix during the period July 1997 to June 1998 consisted of oil (43.9 percent), natural gas (37.3 percent), hydel 13.0 percent), coal (5.1 percent), liquid petroleum gas (0.4 percent) and nuclear (0.2 percent). The average crude oil production during this period was 56,284 bpd. The production of natural gas during the same period was 1,916 mmcfd. Development of the energy sector remains a high priority. Pakistan has faced chronic energy shortages and domestic energy demand has outstripped supply. From July 1997 to June 1998, the largest electricity consumption was domestic (42.1 percent), followed by industry (27.7 percent), agriculture (15.6 percent), bulk supply and public lighting (9.3 percent) and commercial (5.3 percent).

A series of new petroleum policies, announced in late 1991, September 1993, February 1994 and again in May 1997, have promised to boost investment in the oil and gas sector. The energy shortfall has been particularly acute in electricity generation. This has resulted in regular rotating power outages (load shedding) and forced many industries to develop their own alternative power sources. In early 1994, the electricity shortage was estimated at 2,000-MW during peak load hours. The Government of Pakistan (GOP) at that time announced a policy inviting the private sector to develop power generation projects. In 1997-98 government pressure increased for financial concessions from the independent power projects. Investors received from the GOP letters of intent to terminate. The termination would lead to massive financial losses for the firms and further damage to Pakistan's weak investment climate. Notices to five were withdrawn when they later agreed to reduce their power tariffs for 10 years.

Current Situation and Future Planning - Pakistan's electricity is supplied by two large state-owned utilities, the Water and Power Development Authority (WAPDA), which supplies about 86.63 percent of total electricity generated, and the Karachi Electric Supply Corporation (KESC), 13.37 percent. WAPDA, headquartered in Lahore, has an installed generation capacity of 9,945-MW consisting of 51.48 percent thermal, and 48.52 percent hydel. KESC, which generates and distributes electricity to Karachi and its suburbs as well as the adjacent parts of Baluchistan, has an installed generating capacity of 1,735-MW, all of it thermal. In addition, seven private sector plants of a total installed generation capacity of 4,024-MW supply power to the national grid. The country's single 137-MW nuclear power plant has been non-operational since January 1999; and two of the four units of KESC's 382-MW Korangi Thermal Power Station have recently been retired, reducing its present generation capacity to between 155 and 180-MW. Government management of the power sector has been considered very poor, line losses huge, and corruption and over-employment rampant.

Hydroelectric Power - WAPDA, the sole operator of hydro projects, has three large hydroelectric projects: Tarbela, with a total generating capacity of 3,478-MWs; Mangla, with a total capacity of 1,000-MW, and Warsak with 240-MW. Together with 107-MW from scattered small hydro projects, the three major projects give WAPDA 4,825-MW of hydropower. Hydropower's drawback is its seasonal fluctuation. There is little rain from October to May when the demand for irrigation water is high, reducing the effective capability of hydroelectric units. Reservoirs can register up to a 45 percent difference between wet and dry season water levels. Nevertheless, Pakistan has vast untapped hydro potential suitable for development.

Thermal Power - WAPDA has 5,120-MW of installed thermal generating capacity. Most of this capacity comes from two large complexes: Guddu (1,657-MW of steam and combined cycle units), and Jamshoro (880-MW of oil-fired units). WAPDA's third large thermal unit, Kot Addu (1,621-MW) has been partly privatized and its management handed over to the investor. KESC's generating capacity is concentrated in the six-unit Bin Qasim Power Station (1,260-MW).

In late 1998 the Pakistan Army was called in to improve WAPDA's financial status, control power theft and recover outstanding dues. Thirteen Pakistan Army officers headed by a Lt. General are on deputation to WAPDA. They are expected to continue to be involved for a period of two years in the restructuring process. Approximately 35,000 Pakistan Army personnel assist the WAPDA team. Their numbers are to be reduced to 3,500 by the end of July 1999. As a result of their efforts, the total percentage of systems losses during the period January to April 1999 fell to 33 percent from 44.8 percent over the corresponding period the previous year. In late May 1999 the Pakistan Army was also handed control of KESC, ostensibly for a period of six months, to reduce power losses, ensure uninterrupted power supply and improve the recovery of dues. Approximately 3,000 Army personnel are to assist the KESC team. WAPDA is currently negotiating separately with the Hub Power Company and the Kot Addu Power Company, the two major independent power producers, as well as with several smaller independent power producers (IPPs). These negotiations are to be followed by negotiations with the remaining IPPs. They aim at reducing WAPDA's financial burden without violating the sovereign agreements. The GOP plans to restructure and privatize the thermal power generation, transmission and distribution functions of both WAPDA and KESC.

As a preliminary step, each of WAPDA's eight electricity boards has been corporatized; its thermal power units converted into three separate power generation companies; its transmission and grid station network corporatized into a single entity; and Pakistan Electric Power Company, a holding concern created to coordinate their activities. KESC is to be privatized by September 30, 1999 through the sale of up to 51 percent of its equity interest to a strategic buyer, who is to be given management control. Once the two utilities have been privatized, further investments in power generation facilities will become market driven and of no concern to the GOP. For the transition period, the GOP has announced a new (1998) Policy for Private Independent Power Projects, which encourages the use of indigenous resources for power generation. The policy will bring on line private sector generation to meet the power deficit beyond PFY-2003. Until then, the existing power generation facilities as well as those in the pipeline are expected to meet demand. By July 2008 the total power demand in Pakistan is expected to range between 19,000 to 25,000-MW, leaving a shortfall of 5,000 to 8,500-MW in generation capacity.

Nuclear Power - Pakistan produces approximately 0.86 percent of its electric supply from the Karachi Nuclear Power Plant (KANUPP), which is presently non-operational. KANUPP, which was constructed in the 1970s, uses Canadian technology and has a gross generating capacity of 137-MW. A second nuclear plant of a gross generating capacity of 325-MW is under construction with Chinese technical assistance at Chashma, Punjab province and is scheduled to be commissioned by the end of 1999.

Demand for Electricity - WAPDA's customer base has expanded from 311,596 in 1959-60 to 10.5 million in May 1999, an average annual compound growth rate of approximately 8 percent. KESC presently has 1.4 million customers. Electricity is still, however, available to less than half of the population. By January 1999 WAPDA had electrified a total of 66,795 villages under its Village Electrification Program. During the 9th 5-year plan (1998-2003), WAPDA proposes to electrify 2,000 to 2,500 villages annually.

Coal - Pakistan's coal reserves received a substantial boost from the discovery, with assistance from the U.S. Agency for International Development (USAID), of deposits estimated at 175 billion tons in the Thar desert. The country's total coal reserves are now estimated at 185 billion metric tons. Initial data suggests that the coal can be mined and is suitable for power generation. As an underground mineral resource, coal (and its extraction) falls within the jurisdiction of the provincial governments. The policy for development of Thar coal provides that its primary use will be to fuel large electric power plants built in tandem with the coal mines, and that development, ownership and operation of both mines and power plants will be in the private sector. The Thar coal field has enormous economic potential for Pakistan.

Minerals - Pakistan offers many opportunities for investors in the mining sector. GOP departments involved in mining development are trying to attract foreign investment through joint ventures for specific projects. Pakistan Mineral Development Corporation (PMDC) is seeking joint venture to develop deposits of Lead and Zinc, and rock salt purification. The Sindh Coal Authority is seeking joint venture for the development of its coal deposits in Lakhra. Several other mineral deposits have been discovered but mines are yet to be developed due to shortage of required funds.

The mining sector registered a negative growth rate of approximately 20% for the year 1998/99. Saindak Metal Corporation that was responsible for commercial production of copper, gold and silver from the Saindak mines has ceased operation due to lack of funds. Various government departments such as Pakistan Mineral Development Corporation (PMDC), Saindak Metal Corporation, Sindh Coal Authority, Punjab Mineral Development Corporation, Sarhad Development Authority and Baluchistan Development Authority are responsible for mining development. Geological Survey of Pakistan (GSP) is responsible for the pre-investigation of soil and geological surveys while the Oil and Gas Development Corporation (OGDC) is involved in exploration of oil and natural gas.

Production of crude oil registered a 5.5% growth, natural gas 19% and coal 21% growth, while production of copper, iron ore, gypsum, rock salt and granite showed a decline.

Total value of estimated reserves of various minerals, other than oil and gas, is approximately US$1.7 billion. Industry specialists feel that initially US$ 300 million is required to develop the reserves that have already been identified. Major mineral deposits in Pakistan are: coal (200 billion tons), limestone (500 million tons) barite (200 million tons), chromite (50 million tons), iron ore (50 million tons), marble & onyx (50 million tons), gypsum (20 million tons), china clay (20 million tons), pink granite (20 million tons), feldspar (10 million tons), and fluorite and quartz (5 million tons each).

During 1997-98, mineral imports of Pakistan included iron ore, copper ore, zinc, lead and aluminum. Pakistan also exported chromite to Japan and China, rock salt to USA, Canada, Indonesia, India and Bangladesh, silica sand to United Arab Emirates.

C. Government Role in the Economy

Since the late 1980s, the GOP has been pursuing a gradual strategy of deregulation, reduction of the public sector role in the economy, and opening the economy to international competition. The government has sought to reduce its direct productive or controlling role, and instead focus on creating the conditions to foster private sector investment and activity. While it has made much progress in this effort, the state remains an important player in the Pakistani economy, especially in the financial sector. Government-owned industrial enterprises employ almost 46,000 workers and remain important in such key sectors as steel, engineering and agro-processing.

Monetary policy

Recent monetary policy has been inconsistent but has been aimed at encouraging growth in the context of price stability. The GOP and State Bank of Pakistan (SBP, the central bank) are attempting structural reforms in an effort to move toward more indirect, market-based methods of monetary control along with greater autonomy for the SBP.

Other GOP monetary reforms have included efforts to reduce concessional and government-directed credit schemes, enhance competition in the banking sector, and improve prudential regulation and supervision. State-owned development finance institutions, however, continue to make politically influenced lending decisions and, partly as a result, have weak balance sheets. Prudential regulations have occasionally been relaxed in adhoc fashion to prop up loss-making public or private industries. The State Bank of Pakistan's autonomy was considerably strengthened with the passage of new banking laws in and the amendment of the State Bank Act in May 1997.

Fiscal Policy

A central element of Pakistan's economic reforms has been the effort to reduce persistent government budget deficits. However, little overall progress has actually been made so far and the current financial position of the country remains fragile.

Deficit reduction is constrained by rigidities in spending patterns and a weak tax base. Defense spending and debt repayments absorb 67 percent of total federal spending, leaving little for other basic government functions and improving the long-neglected social sectors. Meanwhile, the country has a very narrow tax base; perhaps one in one hundred Pakistanis pays income tax. The country has had to rely on import and excise taxes for a very high share of revenues, thus protecting inefficient industries and encouraging smuggling, and on official transfers from external creditors, primarily the World Bank, the Asian Development Bank and the Government of Japan.

The GOP's medium-term adjustment program has aimed to broaden the tax base through extension to under-taxed sectors and reduction of exemptions; to shift from taxation of international trade to taxation of consumption; to move to market determination of administered prices; and to improve the productivity of public spending. Progress has been mixed. Agriculture remains very lightly taxed. A sales tax has been instituted but exemptions, often secured through political influence, remain common. Maximum import tariffs were reduced from 70 percent in 1994-95 to 65 percent in 1995-96,to 45 percent in March 1997, and to 35 percent in March 1999. Increases in utility charges have attempted to keep pace with actual costs, but fee collection remains a serious problem.

Privatization

Privatization of many state-owned enterprises is another key element of Pakistan's reform program, and both major political parties support reducing the state's role in the economy via this process. In 1991 the GOP identified a group of 118 state-owned industrial units for privatization. Of these, 97 units have been sold off. Industrial units, including factories producing cement, chemicals, automobiles, food products, etc., have mainly attracted domestic private investors.

The GOP is continuing preparations at a much slower pace for at least partial privatization of a few state-owned banks, several energy utilities, and - the largest item of all - Pakistan Telecommunication Company Limited (PTCL), the state monopoly phone company. In most cases, the GOP aims to find "strategic investors" to buy up to 26 percent of these firms and gain management control. These privatization are very complex undertakings, since new regimes for regulation of private sector entities in these sectors are still being established. The GOP's implementing agency, the Privatization Commission, says it is proceeding carefully to ensure a transparent process. The government is benefiting from World bank technical assistance in this effort and has hired several foreign financial advisors to help with the preparation.

Foreign investors have shown interest in acquiring stakes in these firms but note that reliable independent audits would speed the bidding process.

The GOP and public-sector unions have agreed on a generous relief package for employees of divested state-owned enterprises. Labor opposition to the privatization program has held up some privatization initiatives through legal action.

D. Balance of Payments Situation

Foreign Exchange Policies and Reserves

The GOP has continued policies to liberalize and deregulate the exchange and payments regime. The Pakistani rupee has been on a managed floating exchange rate until July 21, 1998. Pakistan moved to a dual exchange rate system from July 22, 1998. Under this regime there existed two exchange rates, inter bank floating rate and composite rate, besides official exchange rate determined by the State Bank of Pakistan. While the inter bank floating rate was determined by the market mechanisms, the composite rate was weighted average of official exchange rate and the inter bank floating rate. However in a major development the dual exchange rate was replaced with a market-based unitary exchange rate system from May 19, 1999.

Remittances from Overseas Workers

Remittances from overseas workers have been a major source of foreign exchange earnings for Pakistan. They peaked at $2.89 billion in 1982-83, then dropped to $1.5 billion in 1995-96. In FY 1997-98 workers' remittances further dropped to $1.4 billion. The relative importance of workers' remittances, however, continues to decline. In the past ten years they have fallen from 10 percent of GDP to about 5 percent.

Foreign Trade

The country's trade performance remained disappointing through FY 1998-99. The trade deficit at the end of first ten months (July-April) of 1998-99 stood at $1.3 billion, up 3.5 percent over the same period of the previous year. Exports were down 11.0 percent while imports dropped 8.9 percent.

In 1997-98, Pakistan's foreign trade decreased 3.1 percent over the previous year. However, a sharper fall in imports, lowered the trade deficit to $3.4 billion. Exports for 1997-98 totaled $8.4 billion compared to $8.1 billion in 1996-97. Imports in 1997-98 were $10.3 billion versus $11.2 billion in the previous year.

An export growth of only 4 percent in 1997-98 was mainly due to higher exports of synthetic textiles, rice, raw cotton and sporting goods. In 1997-98, the following countries were the largest recipients of Pakistani exports: the U.S. (21.1 percent); the UK (7.0 percent); Germany (6.4 percent); Japan (4.3 percent); Hong Kong (7.3 percent); United Arab Emirates (5.2 percent); France (2.9 percent); The Netherlands (3.2 percent).

Imports, at 10.3 billion in 1997-98, decreased 8.2 percent over the previous year mainly due to reduced import of edible oils, tea, synthetic fiber and chemicals. In 1997-98, the following countries were the major sources of Pakistan's imports: the U.S. (11.0 percent); Japan (7.7 percent); Malaysia (6.8 percent); Germany (5.1 percent); Kuwait (5.4 percent); UK (3.9 percent); Saudi Arabia (6.6 percent); China (5.0 percent)

Infrastructure Situation

Ports - Pakistan has two significant seaports - Karachi and Port Mohammad bin Qasim - and two proposed sites for future facilities - Gwadar and Pasni, both on Baluchistan's Makran Coast. Karachi is the main port, handling the majority of all dry and liquid cargo. Karachi Port handled 17.586 million tons of cargo during July-March 1998-99 (13.302 million tons of imports and 4.284 million tons of export). The number of vessels handled during July-March 1998-99 were 1,262. Port Qasim, located 50 kilometers southeast of Karachi, is Pakistan's second deep sea port and was built for overflow from Karachi Port and to handle raw material imports for Pakistan Steel Mills. During the period July-March 1998-99, Port Qasim handled a cargo volume of 8.013 million tons, comprising 7.529 million tons of imports and 0.484 million tons of exports.

To facilitate this expansion, the GOP has allowed two shipping companies to construct and operate specialized integrated container terminals at Port Qasim and on Karachi's West and East Wharfs. The GOP also plans acquisition of a bucket dredging plant, development of a modern warehousing complex in Karachi, and construction of a liquid products marine terminal at Karachi. In addition, the GOP proposes private sector participation in contract dredging to deepen navigational channels.

Railroads - Pakistan Railways, an autonomous agency under the Ministry of Railways, operates the railroad system. The system is primarily broad-gauge, but there are also segments of meter-gauge and narrow-gauge track. Over the past fifteen years, there has been a marked shift in freight traffic from rail to highways, a trend which the GOP hopes to stabilize and reverse. Railways carries about 15 percent of freight traffic and road vehicles 85 percent. The rail system comprises 781 stations and 45 halts. Rolling stock includes about 550 locomotives, 4,250 passenger coaches, and 32,000 freight cars. Pakistan Railways plans to improve railroad's share of long-haul freight traffic, to upgrade track to permit trains to operate at higher speeds, and to rehabilitate infrastructure in order to improve capacity utilization. Specific priorities include double-tracking; rehabilitating about 380 traction motors; procurement of diesel-electric locomotive engines; and manufacturing air-conditioned cars and diesel-electric locomotives at a recently opened factory at Risalpur in the NWFP, as well as upgrading telecommunications and signaling systems.

Highways - The World Bank reports that Pakistan's road network is notable for its poor condition. About fifty percent of the road network is unpaved and over two-thirds of paved arterial roads do not have enough carriageway width for two lanes. The majority of paved and unpaved roads are in poor condition. According to the World Bank, on average, poorly maintained roads can cause 30-40 percent higher transportation costs. At both federal and provincial levels, Pakistan provides insufficient funding for road maintenance.

Over 80 percent of Pakistan's freight and passenger traffic travels by road. In June 1998, Pakistan had 236,041 kilometers of roads. The major north-south and east-west link is Lahore and Rawalpindi to Peshawar and carries over half of Pakistan's goods and passenger traffic.

The National Highway Authority (NHA), established in 1991, has the major responsibility to plan, promote, organize and implement programs for construction, development, operation, repairs and maintenance of national highways and strategic roads. Plans, policies and budget of the NHA are approved by the National Highway Council headed by the Prime Minister. The Council controls, directs and regulates the affairs of the NHA.

The GOP's key development priority in the highway sector is to upgrade and fill in gaps in the existing road network so the system can be more efficiently utilized. Proper maintenance of the network is a newly emphasized priority. Additional construction projects include completion of the Indus Highway, converting of the principal route (the N-5 National Highway) to double track, and construction of several inter-city expressways and by-passes. The Lahore-Islamabad motorway was opened for traffic in November 1997.

Air Transport - The GOP has opened the domestic aviation market to private sector competition. As of June 1999, three private carriers operate commercial flights. The national carrier, PIA, has a fleet of 47 planes (eight Boeing 747s, ten Airbus 300s, six Airbus 310s, six Boeing 737s, thirteen Fokker-27s, two DeHavilland Twin Otters, and two Boeing 707 freighters). PIA has also acquired five Boeing 747-300 from Cathay Pacific on a two-year lease. This is an interim arrangement until PIA replaces its aging fleet of Boeing 747-200s. PIA serves 37 domestic and 55 international destinations.

The current private sector competition consists of Shaheen Airlines, a unit of the Shaheen Foundation (a foundation for retired air force officers), Aero Asia, part of the Karachi- based Tabani group of companies, and Bhoja Air.

The GOP plans to continue modernizing and upgrading its civil aviation facilities. This includes construction of a new international airport at Lahore. New airports and improvements in runways are also planned for Islamabad, Peshawar, Karachi, Sialkot and other cities.

Utilities - Two public utilities, the Water and Power Development Administration (WAPDA) and the Karachi Electric Supply Corporation (KESC) are responsible for electric power generation and distribution. However, the GOP's policy to bring private firms into the generation of power has been inconsistent.

Telecommunications - In December 1990, Pakistan converted Pakistan Telephone and Telegraph (PTT) Department, which was directly controlled by the Ministry of Communications, into Pakistan Telecommunications Corporation, (PTC), and more recently into Pakistan Telecommunication Company Limited (PTCL), still the only provider of basic telephone services. The GOP plans to privatize PTC, by first selling 26 percent ownership to a "strategic investor", and then selling the rest after the firm is on a solid footing. The GOP has deregulated and privatized selected telecommunication services. At present there are three cellular mobile phone operators and a fourth one (owned by the PTCL) will commence operation by December 1999. In addition, there is one radio paging company; seven card-phone licensees; seventy telex, facsimile and PABX service providers; two manufacturers of large digital exchanges; and more than twenty data network operators in the private sector.