Pakistan - Foreign Economic Relations

Foreign Trade

More about the Economy of Pakistan.

Foreign economic relations

Foreign Aid

Since independence Pakistan has had to depend on foreign assistance in its development efforts and to balance its international debt payments. In 1960 the World Bank organized the Aid-to-Pakistan Consortium to facilitate coordination among the major providers of international assistance. The consortium held 92 percent of Pakistan's outstanding disbursed debt at the end of June 1991. The consortium's members include the United States, Canada, Japan, Britain, Germany, France, and international organizations such as the World Bank and the Asian Development Bank (ADB). The World Bank accounted for 26 percent of the outstanding debt, and the ADB, which was the largest lender in the early 1990s, accounted for 15 percent. Most nonconsortium funding comes from Saudi Arabia and other oil-producing Middle Eastern countries. Most aid is in the form of loans, although the proportion of grants increased from around 12 percent in the late 1970s to around 25 percent in the 1980s, mainly because of food aid and other funds directed toward Afghan refugees. With the decline in this aid after 1988, the proportion of grants decreased to 16 percent in FY 1992.

The United States has been a major provider of aid since independence and was the largest donor in the 1980s. All United States military aid and all new civilian commitments, however, ended in October 1990 after the United States Congress failed to receive certification that Pakistan was not developing a nuclear bomb. As of early 1994, United States aid had not resumed, but Agency for International Development projects already under way in October 1990 continued to receive funds.

Foreign trade is important to the economy because of the country's need to import a variety of products. Imports have exceeded exports in almost every year since 1950, and Pakistan had a deficit on its balance of trade each year from FY 1973 through FY 1992. In FY 1991, exports were US$5.9 billion, compared with imports of US$8.4 billion, which resulted in a deficit of US$2.5 billion. In FY 1992, exports rose to an estimated US$6.9 billion, but imports reached an estimated US$9.3 billion, resulting in a trade deficit of US$2.4 billion. Economists forecast a trade deficit of around US$2.5 billion for FY 1993. Pakistan's terms of trade (see Glossary), expressed in an index set at 100 in FY 1981, were 78.0 in FY 1991 and 82.7 in FY 1992.

Crude oil and refined products are significant imports. Their value varies with internal demand and changes in the world oil price. In FY 1982, oil products accounted for around 30 percent of Pakistan's imports, falling to an annual average of 15 percent in FY 1987 to FY 1990, rising to over 21 percent in FY 1991, but dropping back to 15 percent in FY 1992. Other important categories of imports in FY 1992 included nonelectrical machinery (24 percent), chemicals (10 percent), transportation equipment (9 percent), and edible oils (4 percent).

Although import-substitution industrialization (see Glossary) policies favored domestic manufacturing of substitutes for imports, officials also encouraged manufactured exports in the 1950s and 1960s. In the early 1980s, incentives were again provided to industrialists to increase manufactured exports. Nonetheless, in the early 1990s the export base remained primarily dependent on two agricultural products, cotton and rice, which are subject to great variations in output and demand. In FY 1992, raw cotton, cotton yarn, cotton cloth, and cotton waste accounted for 37 percent of all exports. Other important exports were ready made garments (15 percent), synthetic textiles (6 percent), and rice (6 percent). There was some diversification during the late 1980s as the share of manufactured goods rose. The share of primary goods fell from 35 percent to 16 percent between FY 1986 and FY 1993. During the same period, the share of semimanufactures rose from 16 percent to 20 percent, and that of manufactured goods rose from 49 percent to 64 percent.

In the early 1990s, Pakistan's balance of trade remained particularly vulnerable to changes in the world economy and bad weather. Sharp increases in crude oil prices, such as those of 1979-81 and 1990, raised the nation's import bill significantly. Total exports, on the other hand, are more sensitive to agricultural production. The decline in cotton production in FY 1993, for instance, seriously affected the export level.

Sources for imports and markets for exports are widely scattered, and they fluctuate from year to year. In the early 1990s, the United States and Japan were Pakistan's most important trading partners. In FY 1993, the United States accounted for 13.7 percent of Pakistan's exports and 11.2 percent of its imports. Japan accounted for 6.6 percent of exports and 14.2 percent of imports. Germany, Britain, and Saudi Arabia are also important trading partners. Hong Kong is an important export market and China a significant supplier of imports. Trade with the Republic of Korea (South Korea) and Malaysia is small but not unimportant. Trade with India is negligible.

Because of Pakistani fears of protectionism in developed countries and the increasing importance of regional blocs in international trade, the government in the 1980s and early 1990s placed new importance on developing trade links with nearby nations. In the early 1990s, new trading initiatives were being pursued through membership in two regional organizations, the Economic Co-operation Organization (ECO) and the South Asian Association for Regional Cooperation (SAARC).

The ECO was formed in 1985 with Pakistan, Iran, and Turkey as its only members, but Afghanistan, Azerbaijan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan joined in 1992. Some politicians in the member nations see the ECO as a potential Muslim common market, but political rivalries, especially between Iran and Turkey, limit its effectiveness. In 1994 most of the concrete measures being taken by the ECO concerned the improvement of transportation and communications among the member nations, including the construction of a highway from Turkey to Pakistan through Iran.

SAARC was founded in the mid-1980s primarily as a vehicle to increase trade within South Asia by delinking the region's political conflicts from economic cooperation. Its seven member states--Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka--adopted the principle of unanimity in selecting multilateral questions for debate. Despite frequent consultative committee meetings, progress toward increased trade remained limited in 1994. Pakistan's trade with India, for instance, is extremely limited. At the annual SAARC summit in April 1993, members agreed to negotiate a South Asian Preferential Trade Agreement by 1996 that would lower or abolish tariffs among members.

During the first four decades after independence, controls on imports were used to ensure priority use of foreign exchange and to assist industrialization. In the 1980s, the government maintained lists of permissible imports and also used quantitative restrictions and regulations on foreign exchange to control imports. The most extensive list covers consumer goods as well as raw materials and capital goods that can be imported by commercial and industrial users. A second list, mostly of raw materials, can only be imported by industrial users. A third list covers commodities only the public sector can import.

In 1991 and 1992, the government announced various measures to liberalize trade. Import licensing was ended for most goods, many products were removed from the lists of restricted imports, and import duties were cut. In addition, foreign companies were allowed into the export trade. The government also promised to convert the remaining nontariff barriers into tariffs, incorporate various ad hoc import taxes into customs duties, and reduce the numerous exemptions and concessions on duties.

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