TRADE POLICIES BY SECTOR

(1) OVERVIEW
1. Since its last Review, Pakistan has continued to lower its average level oI tariII
protection. Nonetheless, border protection and domestic support still varies by sector, thus
constituting potential impediments to the eIIicient allocation oI resources and Pakistan's
sustainable economic development. ReIorm in key sectors has been under way but
adjustment toward a more diversiIied and eIIicient production pattern has not yet occurred.
2. Agriculture remains the economy`s mainstay, despite the decline oI its GDP share
Irom 24.1 in 2001/02 to 20.9 in 2006/07; it still accounts Ior more than Iour out oI ten
jobs.
3. However, while tariIIs on motor vehicles have been reduced substantially, they
remain high (up to 90) and provide substantial industry protection Ior assembly
activities, where tariIIs on imported CKD kits were reduced
4. Strong state involvement persists in services (especially in transport, communications,
and liIe insurance), which account Ior well over halI oI Pakistan`s GDP and substantial
employment. Financial sector reIorms regarding prudential requirements and other areas
have increased the eIIiciency and soundness oI banking and insurance operators. Bank
privatization is well advanced, and banking has been transIormed into a largely private-
based system (unlike liIe insurance), with substantial Ioreign presence, even though
issuing licences may be subject to reciprocity and equity limitations; reIorms to remove
protection Ior the domestic majority state-owned reinsurance monopolist have been partly
reversed.
(2) AGRICULTURE, LIVESTOCK, FORESTRY, AND FISHERIES
(i) Features
. The share oI agriculture (including Iorestry and Iishing) in GDP Iell Irom 24.1 in
2001/02 to 20.9 in 2006/07. The sector (including hunting and Iishing) remains the
economy`s mainstay, accounting Ior 43.4 oI the labour Iorce in 2006/07 (42.1 in
2001/02). It contributes some two-thirds oI merchandise exports. Agricultural GDP is
split roughly between livestock and crops. Major crops (wheat, cotton, rice, sugar cane,
and maize) account Ior about one third oI agricultural GDP, and wheat, cotton, and rice
account Ior about 60 oI cultivated land; the main irrigated crops are wheat (staple Iood
crop), cotton, rice, and sugar cane). Cotton, the main crop, is susceptible to climatic
conditions and pests. Livestock is dominated by dairy, sheep, and poultry, which has
grown substantially. Punjab, Pakistan's second largest province, accounts Ior two thirds
oI national agricultural output.
(ii) Policy framework and developments
(a) Objective and plans
6. Agriculture is a designated government priority. Policy is Iocused on sustainable
Iood security, increased productivity, greater commercialization, import substitution,
diversiIication, and export orientation. The traditional goal has been to achieve annual
sectoral growth Iaster than population, or oI at least 4.3. Food security policy covers
mainly selI-suIIiciency in Iood grains (wheat, rice, and maize), edible oils, and sugar.
Pakistan does not maintain Iood security targets or desired levels by commodity. It
achieved wheat selI-suIIiciency a Iew years ago, and maintains reserve stocks oI about one
million tonnes. Pakistan imports about 70 oI its edible oil requirements, and is the
world`s third largest cotton producer.
7. ReIorms since 2001/02 have been directed at increasing the role oI the private sector,
including in marketing, supplying Iarm inputs, wheat procurement, construction oI silos,
establishing cold-chain Iacilities to collect, store, and transport perishable animal products,
and operating international standard export abattoirs; improving Iarm extension services;
and enhancing pest and disease eradication. Banks must meet bi-monthly credit targets set
by the State Bank, oI which at least 0 must go to small Iarmers. Farm productivity is
being improved through better access to inputs, such as seeds, Iertilizer, and credit. Seed
prices are market determined and a number oI private suppliers, including multinational
Iirms, compete Ireely with Iour public sector Iirms. There are plans to raise certiIied seed
use to 20 Ior wheat and rice (up Irom 14 and 1.), 100 Ior cotton (up Irom 60)
and 30 Ior maize (up Irom 1). Fertilizer prices are deregulated, and it is imported
privately.
8. Most provinces have legislation to regulate agricultural marketing, which remains
poorly developed. Post-harvest losses oI perishable products are around 30, accentuated
by inadequate inIrastructure and transport Iacilities. To improve export quality, a general
system oI compulsory quality and certiIication, in line with international requirements, is
in place Ior most (41 items) crop and livestock products (Agricultural Produce (Grading
and Marketing) Act, 1937). These requirements have been superseded by enhanced
arrangements on some key products, such as horticultural exports handled by the Pakistan
Horticultural Development and Export Board.
9. Policies (price and non-price measures) reportedly hinder diversiIication as they are
biased towards relatively low-value water-intensive crops oI non-basmati rice and sugar
cane. Pakistan's Water Vision 202 action programme proposes major public investment
to improve water storage and irrigation Iacilities. A ten-year investment plan costing PRs
36 billion is also being implemented to develop the agricultural sector, including
construction oI much needed dams and canals.
Market price support
10. Market price support covers wheat, cotton, rice, and sugar cane; non-traditional
oilseeds (sunIlower, soybean, saIIlower, and canola), gram, onions and potatoes were
excluded in 2001. Minimum support (or "rescue") prices, except Ior sugar cane, which
was transIerred to provincial governments in September 2002, are recommended annually
by the Agricultural Prices Commission the major criterion Ior determining prices is cost oI
production. The main Iederal implementing agencies, the Trading Corporation oI Pakistan
Ior seed cotton, and the Pakistan Agricultural Services and Storage Corporation
(PASSCO) Ior paddy rice and wheat, intervene in the market to stabilize prices and
provide support; in recent years price support has been limited to wheat and cotton.
Tobacco prices, including Ior exports, are also set by the Pakistan Tobacco Board.
11. According to Ministry oI Food, Agriculture and Livestock data, domestic wheat
prices have been on average 20 below import parity in recent years, suggesting that the
market price support arrangements are penalizing wheat Iarmers. This price data also
indicates that the extent oI the penalty Iacing cotton Iarmers has Iallen as domestic prices
approached export parity in 2006/07, Irom some -10 below in previous years.
However, rice growers, especially oI basmati, appear to have been heavily penalized by
these pricing arrangements in recent years; in 200/06 and 2006/07 the domestic price oI
basmati paddy rice was some 2 below export parity (some 10 Ior non-basmati paddy
rice).
12. Provincial governments maintain sugar support prices in conjunction with the Federal
Government. According to data provided by the Ministry oI Food, Agriculture and
Livestock, the domestic price Ior sugar was some 10-1 above import parity in 200/06
and 2007/08, but some below in 2006/07. Nevertheless, it seems that Iarmers have
been substantially more assisted, at least in earlier years, by domestic sugar prices being
set at some 0-60 above world levels. Sugar cane prices are not linked to sucrose
content. Also, due to a good potato crop in 2007, the Federal and Punjab Governments
have pledged support to growers, including a 2 Ireight subsidy, and to ban imported
ware-potatoes. The authorities indicate that extending transport subsidies is rare and
occurs generally when there is a surplus oI perishable commodities, to avoid storage costs.
All inter-provincial trade restrictions, especially oI wheat, have been removed.
$ubsidies
13. Subsidies ranging Irom PRs 98 to PRs 20 per 0 kg bag in 2006/07 are provided to
Iarmers using phosphatic Iertilizers, extended Irom urea in 2006. Subsidies on imported
Iertilizers appear to have been terminated at end 2006 while they are still paid to domestic
Iertilizer producers, thereby potentially reducing the likelihood oI the subsidy being passed
on to Iarmers; subsidies were increased in 2007/08 Sales tax on Iertilizers is based on
"deemed" prices set equally Ior imported and domestic Iertilizers below world levels to
cushion its eIIects on Iarmers. To help keep Iertilizer prices below import parity, Iertilizer
manuIacturers receive subsidized natural gas at a cost oI about PRS 13 billion (US$0.2
billion). These subsidies were not phased out as intended by July 2006 (Fertilizer Policy
2001). Canal irrigation is subsidized; in the Punjab by up to two thirds.
orporate agricultural farming (
14. The Government supports CAF as a means oI increasing Iarm productivity and
improving eIIiciency. It covers crops, Iruits, vegetables, livestock, agricultural processing
and marketing, modernization and development oI irrigation Iacilities and water
management, on-Iarm construction oI silos, construction oI non-commercial cold storage
Iacilities, and Iorest plantations. To encourage CAF activity, the Government has recently
removed the 60 cap on Ioreign equity to allow 100 Ioreign ownership, and intends to
permit land purchases or 0-year leases (extendable Ior 49 years), and eliminate the
minimum Ioreign investment level oI US$0.3 million. There are no size limits on land
holdings. Tax incentives include zero tariIIs on agricultural machinery and equipment Ior
grain storage and cool-chain Iacilities, as well as zero GST on all agricultural machinery
and equipment.
(iii) Main subsectors
(a) Crops
eat
1. Government wheat policy remains directed at balancing the support oI Iarm incomes
and ensuring Iood security/selI-suIIiciency, with consumer interests oI ensuring price
stability and aIIordable prices. While wheat was liberalized somewhat in 2000, it remains
relatively regulated compared with other agricultural items; regulatory arrangements have
varied subject to market conditions. Policies were last changed in 200 to raise
procurement prices and encourage private imports, and the Punjab Government removed
transport restrictions on inter-provincial trade. Government subsidies apply on quota sales
to millers, which are sold at prices that are below market prices and do not cover the
procurement costs oI imported or domestic wheat plus storage and handling. This
discourages private wheat imports. Subsidies accrue to millers who make signiIicant
proIits on milling government wheat. Flour mills are licensed (Flour Mills (Control)
Order, 199), and can be directed to buy wheat Irom particular sources and to regulate
production, sale, and delivery oI products, including to mill at speciIied rates.
16. A new wheat policy, being implemented progressively, is aimed at reducing
government intervention and a more market-based approach to achieve the dual objectives
oI achieving Iood security (ensuring Iood availability at aIIordable prices) and
guaranteeing minimum producer prices. Its essential elements are a clear distinction
between guaranteed minimum prices (Iixed and announced prior to the season) and
procurement prices (variable depending on market conditions); a strategic reserve
(initially oI one million tonnes) to be maintained Ior price stabilization and emergency
purposes, as distinct Irom operational stock used Ior regular releases onto the market
during the transitional period to the new policy; setting oI a price band Ior procurement
and marketing within which the private sector can operate Ireely; imports and exports will
remain generally open to the private sector subject to occasional adjustments Ior Iood
security reasons; producers are Iree to sell to the Government or privately.
17. Provincial governments continue to intervene heavily in the market, especially in the
main wheat producing province oI the Punjab. Wheat stocks held by PASSCO and
provincial governments (Punjab, Sindh, and Balochistan) consist oI operational reserves
sold to millers, as needed, and strategic holdings that are managed to support prices. Since
only one IiIth oI households have surplus wheat production and more Iarmers have to buy
wheat, raising prices is likely to penalize wheat Iarmers on balance as well as consumers
generally, thus increasing rather than reducing poverty. Domestic wheat prices have
generally been well below import parity in recent years . Imports are subject to a 10
MFN tariII; previously they were exempt but subject to a "regulatory" duty oI 10
imposed in 2004.
otton
18. Cotton accounts Ior about 60 oI Pakistan`s export earnings and 8 oI domestic
edible oil production; over three-quarters is produced in the Punjab. It is exported as a
raw material and provides an essential input to the domestic textiles industry. Cotton
Vision 201, approved in 2006, calls Ior 20.70 million bales oI production by 201; a
cotton yield per acre oI 1,060 kg; exports oI 0.6 million bales; and an improved yarn
recovery rate oI 92 (current average is 84). The Government has made Iurther eIIorts
to encourage production oI clean (contamination Iree) cotton during the review period
(Chapter III). Textile mills must provide a premium on clean cotton, which is supported
by government-set minimum procurement prices; the authorities indicate that market-
determined premiums on clean cotton exceed these levels. The Pakistan Cotton Standards
Institute has developed international standards to improve cotton quality (Cotton
Standardization Ordinance, 2002).
%obacco
19. Tobacco is a leading cash crop, generally oI low quality; it is grown mainly in Punjab
and North West Frontier Province (NWFP). The Pakistan Tobacco Board regulates,
controls, and promotes the export oI tobacco (PTB Ordinance, 1968). Pre-sowing
marketing contracts between growers and the Iew manuIacturers are negotiated based on
minimum prices Iixed by the Board. Tobacco companies must notiIy it oI their annual
tobacco requirements in October and execute grower agreements by end-December oI
each year; these must be submitted to the Board. Over-quota production is purchased at
lower prices and growers cannot carry over under-quota production to Iuture years.
Minimum and maximum prices, including Ior export, are set by type and grade, which can
vary across areas. Two committees (one each in Punjab and NWFP) calculate growing
costs Ior consideration by the Price and Grade Revision Committee, which includes
representatives oI all stakeholders and recommends minimum prices to the Board. The
weighted average tobacco price received by growers Irom each tobacco manuIacturer
cannot be lower than the preceding year. The Board is Iunded by a cess levied on tobacco
production, which must not exceed 3. According to the CRB, Board controls are
Irequently evaded.
$ugar cane
20. The sugar industry, mainly producing Irom cane, seems ineIIicient. Sugar exports are
oIten subsidized, usually involving rebates and mandatory export conditions on mills that
must pay a penalty on non-exported quantities. Provincial governments levy a cess that
varies across provinces on sugar cane growers, to Iund research and development.
Molasses is used to make industrial alcohol (ethanol), and legislation is being considered
Ior its mandatory mixture with petrol (10) to make gasohol. Imports oI sugar are subject
to an MFN tariII oI 1 (the additional "regulatory" duty oI levied in 2006 was
withdrawn). Reducing tariIIs on sugar (and sugar conIectionery (oI 2) would raise
eIIiciency.
1
Exports are subject to a "regulatory" duty oI 1.
dible oils
21. The Pakistan Oilseed Development Board promotes the oilseed sector (canola,
sunIlower, and oil palm). It is Iunded by the Ministry oI Food, Agriculture and Livestock
Irom a cess oI Rs. 0.0 per kg levied on imported edible oils and Irom 10 oI the tariII
duty collected on oilseeds imported Ior crushing. The Board no longer sets support prices
and oilseed prices are set in the open market. The All Pakistan Solvent Extractor`s
Association, in coordination with the Board, sets voluntary procurement prices Ior
sunIlower and canola, based on the cost oI imported edible oils and prevailing domestic
market conditions; Ior the 2006/07 crop year these are PRs 830 per 40 kg bag and PRs
70 per 40 kg bag, respectively. The Board operates three mini-oilseed processing plants
Ior processing quality sowing seed on a non-proIit basis. Ghee is required to contain a 6
to 3 ratio oI hard to soIt oil Ior quality and health considerations, which also increases the
demand Ior domestic soIt oil.
(b) Livestock
22. Dairying accounts Ior over halI the value oI livestock output, and has been declared a
priority sector. The Iive-year Prime Minister`s Special Initiatives in Livestock,
implemented in early 2006, aims to improve livestock health and extension services using
a public-private partnership approach; it is expected to cost PRs 1.696 billion. Two "not-
Ior-proIit" private-sector-led companies were established in 200, the Livestock and Dairy
Development Board (with an initial capital cost oI PRs 4.3 million) and the Pakistan
Dairy Development Company (Dairy Pakistan) (with a total grant oI PRs 480 million).
The Board became operational in January 2007, and its primary objectives are to plan,
coordinate, and promote development oI the livestock, poultry, dairy, and meat sectors,
including through Iinancial assistance. It is currently implementing three development
projects worth PRs 3.12 billion to improve milk and meat production. Dairy Pakistan
became operational in 2006, to improve the dairy sector; a government grant oI PRs 200
million has helped improved milk collection and set up model dairy Iarms. A new
Livestock Development Policy, approved in 2006, is being implemented to Ioster private-
sector-led development within an enabling public sector environment, and to build
capacity to Iacilitate market-oriented Iarming.
(c) Fisheries
23. The Iishery sector's share in GDP declined Irom 0.4 in 2001/02 to 0.3 in 2003/04,
where it has remained. Steps are being taken to strengthen the sector, including improved
extension services, introduction oI new techniques, development oI value-added products,
and improved management and conservation practices. For example, there is still a
prohibition on catching marine turtles outside the 12 nautical miles limit, as well as on
their domestic consumption, and export; catching shrimps during June-July is also
prohibited. Under the Fisheries Policy, the sector is targeted to grow at 10 annually,
with exports reaching US$1 billion by 201; the policy is being largely implemented by
establishing a non-proIit Fisheries Development Board.
24. Deep sea Iishing (managed by the Marine Fisheries Department oI the Ministry oI
Food, Agriculture and Livestock) remains governed by the 199 Deep Sea Fishing Policy
(amended in 2001) and associated laws (e.g. Exclusive Fishing Zone (Regulation oI
Fishing) Act, 197 (amended 1993) and Pakistan Fish Inspection and Quality Control Act,
1997 and associated rules, 1998). Deep sea Iishing is categorized into two zones:
medium-sized vessels in Zone II (20-3 nautical miles) and Zone III (beyond 3 nautical
miles) Ior larger Iishing vessels and tuna long liners. The number oI Iishing licenses is


Iixed at 20 Ior Zone II and 10 Ior Zone III: there are 18 vacant licences and no Zone III
licensees; 47 applications were received at end-August 2006. No licensed Ioreign vessels
operate in Pakistan`s Exclusive Economic Zone (EEZ). Such licences may be granted in
exceptional cases where a Ioreign Iirm makes a "sizeable" investment in establishing
value-added shore-based Iacilities, such as canning and processing, and transIers
technology. The provincial governments oI Sindh and Balochistan have separate
legislation aIIecting Iisheries. For example, the Sindh Government requires trawlers with
over six crew to have turtle excluder devices.
(3) MINING AND ENERGY
2. The Ministry oI Petroleum and Natural Resources Iormulates and implements
petroleum, gas, and mining policies. All minerals (except petroleum and nuclear minerals)
are constitutionally owned by the provinces. Each provincial government has its own
Department oI Mines and Mineral Development to negotiate mining agreements, issue
licences and leases, regulate and monitor mining, and collect royalties. The Federal
Government`s role is to provide geological data, assist in provincial coordination, and to
Iacilitate Ioreign investment in the mining sector. It also Iinances mineral projects. Small-
scale mining (capital under PRs 300 million) is reserved Ior Pakistani nationals.
(i) Mining
26. The main Pakistani mining operation, Saindak Metals Limited, is state owned and
produces copper, gold, and silver. Blister copper is exported. The Government provided
Iunding oI PRs 1.3 billion Ior the mine`s development, in the late 1990s; in November
2002, it was leased Ior ten years to a Chinese Iirm under a US$30 million development.
2

Saindak was de-listed Irom privatization in September 2006 due to it being leased. The
Duddar zinc-lead mine, a joint venture between the state-owned Pakistan Mineral
Development Corporation (PMDC), the Balcohistan Government, and Chinese interests, is
due to start in 2009. A major copper mine at Rekodik is planned with Ioreign interests that
could involve investment oI US$1 billion by 2012.
27. The PMDC operates Iour coal mines (10 oI the country`s coal deposits), Iour salt
mines/quarries (4 oI total salt production) and a silica sand quarry. It is being
restructured, and the Government has decided to privatize some oI its coal and salt mines.
The state-owned Lakhra Coal Development Authority, the sole coal provider to the only
coal-Iired power plant, is being privatized
28. The 199 National Mineral Policy has been reviewed and updated recently. The
Government remains keen to attract Ioreign operators, including joint ventures. Foreign
investment must be in the Iorm oI a joint venture, and minimum Ioreign equity levels vary
with location.
3
The provinces operate Mineral Concession Rules consistent with national
policy. Mining and value-added processing is classiIied as a "category A" industry, and
thus pays a concessionary tariII oI on imported machinery Ior minerals exploitation.
Investors are protected against expropriation.
29. Provincial governments levy royalties oI 10 Ior precious stones, 3 Ior precious
metals, 2 Ior base metals, 1 Ior other minerals, and existing rates Ior coal, which vary
between PRs 20 per tonne in Baluchistan and PRs 60 per tonne in Sindh. No other
provincial taxes are imposed. Mining companies pay income tax at 3. Additional
proIits tax is "negotiable".
(ii) Energy
30. Pakistan`s energy needs are met principally Irom natural gas (0 in 2006), oil (28)
and coal (7.0). Hydro-electricity accounts Ior 12.7 and nuclear power 0.8. The
main change in recent years has been the continued increase in gas use at the expense oI

The lessee pays annual rent oI US$0. million, royalties oI 2 oI sales, presumptive taxes oI 1.2 and 0. to
the Export Processing Zone Authority, and shares equally in any cash surplus aIter loan repayments.
Minimum Ioreign equity is 1 in Balochistan, 20 in the Punjab and parts oI NWFP, and 2 elsewhere.
oil. Pakistan imports about three-quarters oI its crude oil requirements, and has large
reserves oI natural gas at Sui in Balochistan. These are plans to import natural gas by
pipeline Irom Turkmenistan, Iran, and Qatar to meet shortages expected to occur by 2010.
Pakistan is also considering constructing several regional gas pipelines, e.g., Iran-Pakistan-
India, Turkmenistan-AIghanistan-Pakistan, and Qatar-Pakistan.
(a) Hydrocarbons
31. Private sector oil and gas development is a government priority. The independent Oil
and Gas Regulatory Authority (OGRA) started regulating the oil and gas sectors in March
2002 (Oil and Gas Regulatory Authority Ordinance, 2002).
4
It issues licences, ensures
eIIicient practices in oil and gas marketing, storage and distribution, and aims to promote
eIIective competition. OGRA is responsible Ior providing open access to networks, where
it is deemed to be in the public interest and where it believes excess capacity exists,
subject to the owner being adequately compensated. The regulatory Iunctions oI the
midstream and downstream petroleum industry, including liqueIied petroleum gas (LPG)
and compressed natural gas (CNG) activities, and petroleum product pricing Iunctions,
were transIerred to OGRA in March 2006. The Ministry oI Petroleum and Natural
Resources Iormulates and implements measures to regulate upstream oil and gas activities.
The state-owned Government Holdings (PvT) Ltd administers the Government`s working
interests in various joint ventures and is independent Irom the Ministry`s regulatory
Iunctions.
!etroleum
32. Onshore and oIIshore oil exploration policies announced in 2001 and 2003
respectively provided incentives to attract Ioreign investment, including encouragement oI
joint ventures (Petroleum Exploration and Production Policy, 2001).

Minimum Pakistani
equity limits apply Ior onshore zones and, iI unmet, the Government Holdings (PvT) Ltd
may acquire the minimum interest.
6
Firms must meet minimum employment
requirements, training, and welIare expenditures; special arrangements apply to oIIshore
areas, including contracting a minimum oI 10 oI computer soItware to local suppliers iI
competitive. Exploration licences are auctioned based on minimum work commitments.
Most oil is produced by the majority state-owned Oil and Gas Development Company Ltd
(OGDCL) (about 7 oI total output) and Pakistan Petroleum Ltd (PPL) (about 23).
These companies have been partially privatized during the review period and Iurther
divestments are planned. Exports oI oil and gas must be approved.
33. Petroleum income (oIIshore and onshore) is taxed at 40. Royalties oI 12. oI the
"Iair market value" are paid to the Federal Government Ior onshore areas along with
production bonuses per concession. OIIshore production-sharing contracts are subject to
royalties oI during the
th
year oI production; 10 during the 6
th
year; and 12.
thereaIter. The sliding scale production-sharing arrangement depends on whether the Iield
is in shallow, deep or ultra deep areas, and rises according to cumulative production levels.
The Government`s proIit share ranges Irom 20 to 80 Ior crude oil/LPG/condensate;
Irom 10 to 80 Ior natural gas in shallow grid areas; to 70 Ior all types oI output
in deep grid areas; and Irom to 60 Ior all products in ultra deep grid areas). Crude
oil prices are based on the c&I price oI comparable Arabian/GulI crude oil adjusted Ior


Regulations Ior onshore areas based on "petroleum concession agreements" were introduced in 2001 (Pakistan
Petroleum (Exploration and Production) Rules, 2001) and Ior oIIshore areas based on production-sharing
contracts in 2003 (Pakistan OIIshore Petroleum (Exploration and production Rules, 2003). OIIshore and
onshore areas have been zoned and separate incentives provided.
Minimum Pakistani working interest is 1 Ior Zone I (high-risk, high-cost areas), 20 Ior Zone II (medium
risk to high/medium cost), and 2 Ior Zone III (low cost, low risk).
quality diIIerences (and Ior gas associated with oilIields, the c&I price oI internationally
comparable condensate).
atural gas
34. Natural gas production has risen by 0 since 2002/03. OGRA licenses natural gas
(and LPG, LNG, and CNG) pipelines, testing or storage Iacilities, and any installation,
transmission, distribution or sale. LPG investment has been about PRs 9 billion. LPG
prices were deregulated in 2000. Policy is to replace Iurnace oil with gas in power
generation. Gas and oil Iields are taxed on the same basis.
3. Transmission, distribution, and sale oI natural gas is under a duopoly oI two state-
owned Iirms, Sui Southern Gas Pipelines (SSGCL) and Sui Northern gas Pipelines
(SNGPL), which operate in geographically diIIerent areas and earn, under the regulated
regime, a guaranteed annual pre-tax rate oI return oI 17.0 and 17. oI net operating
Iixed assets, respectively.
7
The Government is considering introducing a third party
access (TPA) regime and the phased unbundling oI transportation, distribution, and sales.
36. LPG regulation was transIerred to OGRA in March 2003, and OGRA licenses
production, storage, Iilling, and distribution Iacilities (LPG (Production and Distribution)
Rules, 2001). LPG marketing companies must supply a minimum share oI their sales in
remote areas: all LPG marketing companies receiving LPG Irom the Punjab and NWFP
must sell at least 7 oI their local LPG in Northern Areas, 7 in AJK, and 6 in FATA;
and all marketing Iirms receiving LPG Irom Sindh and Balochistan must sell at least 10
oI their local LPG in Balochistan. The LPG Production and Distribution Policy was
released in 2006. LPG prices must be "reasonable" and notiIied to OGRA, which may
determine "reasonable" prices iI they are considered unreasonable and in the "public
interest"; OGRA determines the reasonableness oI prices taking into account import
parity, producer prices, and the audited accounts oI LPG marketing companies over the
previous two years. It notiIies the maximum base-stock LPG price, based on the weighted
I.o.b. Saudi price oI propane and butane Ior the previous 12 months, based on the current
US$/PRs exchange rate. LPG exports require prior approval.
(b) Electricity
37. Hydro-electricity provides about one third oI power consumed. About 70 oI
Pakistan`s electricity is supplied by two vertically integrated state-owned entities, the
Pakistan Water and Power Development Authority (WAPDA) (60), and the Karachi
Electric Supply Corporation (KESC). Although occurring slowly, WAPDA has been
restructured into a network consisting oI nine distribution companies (DISCOs) serving
diIIerent areas, Iour thermal generation companies (GENCOs), one hydro-generation
company, and the National Transmission and Dispatch Company (NTDC), in preparation
Ior unbundling and privatization. Three supply companies (Jamshoro, Faisalabad, and
Peshawar) are planned to be privatized in early 2008, and 73 oI KESC, also a licensed
transmission company, was sold in late 200. Sixteen independent power producers
(IPPs) also operate under mainly "build-own-operate" (BOO) arrangements; 14 supply
WAPDA and two supply KESC. FDI into the power sector is about US$4 billion.
WAPDA`s operating losses in 2004 were PRs 27.9 billion, when the average cost oI
supplying electricity exceeded the average tariII oI PRs 4.09 per kWh by 13. KESC also
had losses some PRs 1 billion. Total losses, equivalent to about 1 oI GDP (US$00
million annually), also reIlect billing and collection ineIIiciencies; an increasing shortage
oI electricity has re-emerged since 2006; imports and exports require government
approval.

OGRA recommends "prescribed" prices to the Government which sets higher national uniIorm consumer prices;
the diIIerence is paid to the Government by the gas companies as the Gas Development Surcharge (Natural Gas
(Development Surcharges) Ordinance, 1967).
(4) MANUFACTURING
38. The manuIacturing sector`s GDP share rose Irom 1.9 in 2001/02 to 19.1 in
2006/07, while its share oI employment remained at 13.9. The sector`s expansion
reIlects substantial growth in the "large scale" segment; its GDP share rose Irom 10.2 to
13. 6, while that oI the "small scale" segment Iell Irom .3 to 4.. State involvement
in large-scale manuIacturing remains signiIicant, although it is declining as privatization
continues. Textiles, clothing, and Iootwear accounted Ior 24 oI manuIacturing value
added in 2000/01, Iood processing (especially vegetable ghee, sugar, tobacco, beverages,
and cooking oil) Ior 14, and chemicals (especially pharmaceuticals and industrial
chemicals) Ior 1.
39. Average manuIacturing tariIIs have Iallen Irom 20.9 in 2001/02 to 1.0 in
2007/08
8
, and peak ad valorem rates have Iallen Irom 20 to a maximum oI 90.
TariIIs have Iallen substantially, on average, across all aggregated industries; non-metallic
mineral products had the highest average tariII in 2006/07, oI 20.8, Iollowed by textiles
and leather with 18.9.
(i) Policy developments
40. Industrial policy is based on accelerated industrialization aimed at increasing
manuIacturing value added and share oI GDP to US$188 billion and 30, respectively, by
2030. The sector`s diversiIication is a key goal, moving away Irom textiles and clothing
into Iood processing, petrochemicals, motor vehicles, non-metallic mineral products, and
electronics.
41. The traditionally based "old Iashioned" industrial policy approach oI promoting
speciIic industry groups at the expense oI others has been unsuccessIul. Structural
weaknesses include the concentration on textiles, low-technology intensity, slow
productivity growth, and weak positioning in the international market. Domestic Iirms,
generally small, have been unable to reap economies oI scale or become suIIiciently
export-oriented to be exposed to international competition. Future industrial policy is to
be based on getting the right incentives Ior investment by lowering costs and relying more
on the market and the private sector to generate manuIacturing sector growth. This will
require tariII reIorms, including: reducing dispersion by lowering the number oI rates
outside regular bands; converting speciIic tariIIs to ad valorem duties; closing loopholes
created by special exemptions; improving customs procedures; and, a cascading or
escalating tariII structure to protect inIant and pioneering industries. As liberalizing trade
with India would also increase industrial competitiveness through availability oI cheaper
imports, beneIit Pakistan consumers, and raise revenue Irom taxing existing illegal trade,
Pakistan might consider allowing MFN-based trade with India and developing strategic
partnerships and collaborating with Indian Iirms.
(ii) Food processing
42. Food (and beverages) processing, one oI Pakistan`s major industrial sectors consists
mainly oI Iresh (Iruit juice and pulp) and processed (dried) Iruits (mangoes, citrus, apples
and guavas) and vegetables (potatoes, onions, and mushrooms), conIectionery, cereals,
biscuits, and bread. SigniIicant components oI Iood processing are the edible oil
(manuIacturing mainly vegetable ghee and cooking oil) and sugar industries. Processed
Ioods (including beverages) are consumed mainly domestically, many assisted by
relatively high tariIIs. For example, while the edible oil industry is based largely on
imported unreIined oil, the domestic oil extraction industry is protected by high speciIic
tariIIs on oils and seeds, equivalent to ad valorem rates oI 6-70; lowering tariIIs would
raise eIIiciency and beneIit the meat processing and seaIood industries.


(iii) Textiles and apparel
43. Pakistan is a leading exporter oI textiles and clothing, and production remains its
single most important industry, accounting Ior 10. oI GDP. Based on locally grown
and imported cotton, and concentrated in the preliminary processing stages, it is dominated
by cotton textiles (cotton yarn and cloth, made-up textiles), clothing, synthetic/manmade
Iibres (polyester yarn and acrylic Iibres), carpets, and jute products. The sector comprises
a well organized large-scale segment (mainly the integrated textile mills) and a highly
Iragmented cottage/small-scale segment; the three state-owned cotton textile mills have
been privatized and the remaining woollen mill is being divested. Most textile exports are
lower-value coarse and medium yarns. The industry has been substantially modernized
and restructured during the review period, with total investment oI some US$6 billion
(mainly in spinning and weaving) and substantial imported textile machinery. Current
goals Iormulated by the Ministry oI Textile Industry, created in September 2004, are Ior
exports to increase to US$14. billion by 2009, and Ior reduced reliance on cotton, given
rising trends towards using synthetic and blended Iabrics, by raising the share oI man-
made Iibres Irom 18 to 0; tariIIs, oI up to 3 in 2007/08, are the main border
measure assisting the industry, and they may have hindered production oI non-cotton
textiles.
44. Recent growth has been aided by several assistance packages. The Textile Vision
200 adopted in 2001, Iocussed on developing a globally competitive market-oriented
industry by 200, capable oI realizing the opportunities arising Irom the removal oI global
textile quotas. It proposed minimum investment oI US$ billion over Iour years to
increase exports by at least 12, including to new markets, so that Pakistan would become
a top-Iive Asian textile exporter. However, despite on-going policy priority, minimal
export diversiIication away Irom the traditional quota-protected EC and U.S. markets has
occurred (Chapter II). Other measures include incentives to upgrade technology, such as
income tax concessions, and gradual lowering oI tariIIs on imported textile machinery and
parts to encourage investment Ior balancing, modernization, and rehabilitation, along with
various tariII and sales tax concessions/exceptions on raw materials. Research and
development grants based on exports to most markets also apply, and coverage has been
expanded since July 2006. The State Bank provides long-term Iinancing Ior export-
oriented projects at concessionary rates. Labour law amendments in 2006 beneIited the
industry, especially by Iixing minimum labour wages on an hourly basis. The Textile
Garment Skill Development Board, created in 2006 under the Ministry oI Textile Industry,
promotes worker training. The Federal Textile Board has been reactivated to develop
programme support Ior the sector. A major government initiative is the establishment oI
textile and garment cities, based on private-public partnership in Karachi, Lahore, and
Faisalabad, to promote value-added production by providing modern inIrastructure and
clustered development based on Ioreign investment. The Government is also considering
another major incentives package totalling over PRs 29 billion Iollowing
recommendations by the National Textile Strategy Committee.
4. Because oI its competitiveness, Pakistan is one oI the countries expected to beneIit
most Irom the new quota-Iree regime. However, while textile production is likely to
expand, the clothing segment may contract as it Iaces greater overseas competition: its
real income could decline overall unless productivity improves substantially to capture the
potential beneIits arising Irom abolishing quotas. The authorities indicate that so Iar
Pakistan has been unable to beneIit Irom the quota abolition due to its high costs, low
labour productivity, and ineIIicient production processes. Raising productivity by 60 to
match Chinese levels could result in annual welIare gains to Pakistan oI over US$1 billion.
(iv) Engineering sector
46. The engineering sector, a government priority, consists oI the heavy segment (e.g.,
cement, sugar plants, industrial boilers and construction equipment) and the light segment
(motor vehicles, bicycles, and surgical instruments); much oI the sector has been
privatized. The Engineering Vision 2010 Plan aims to raise its share oI manuIacturing to
30 by 2010 and to increase total exports IourIold to 10-12, as well as increasing
investment to US$10-12 billion. The re-structured Engineering Development Board
(EDB), which is being replaced by the Engineering Development Authority, oversees the
sector`s development and has identiIied several "thrust" sectors e.g. motor vehicles,
domestic appliances, electrical products, and capital goods. The EDB`s policies are to
ensure at least 30 local sourcing oI plant, machinery, and equipment, especially Ior
energy projects, and progressive indigenization oI the engineering industry in the power
sector; out-sourcing oI procurement oI engineering goods and services to domestic Iirms,
where expertise is available, or iI not Ioreign collaboration, conditional on technology
transIer; and local government procurement. A government operated Technology
Development Fund allocates grants matching private investment in the engineering sector.
Several tariIIs were increased in 2006/07 to protect engineering industries, such as in the
motor vehicle and textile sectors
(a) Motor vehicles and bicycles
47. The motor vehicle industry grew at an impressive annual average oI 38 growth Irom
2003/04 to 200/06, but lacks economies oI scale. Some 6 oI production is passenger
cars, and ownership has risen above traditionally low and stagnant levels oI around 9.
The industry consists oI many assemblers, most having substantial Ioreign aIIiliations with
major Japanese, Korean, Chinese, and other manuIacturers; Pak Suzuki has about halI oI
the vehicle market. The industry and its indigenization remains a government priority, as
reIlected in the Iive-year Auto Industry Development Plan (AIDP) adopted in 2007. It
aims at doubling the industry`s GDP share to -6 in 2011/12 by raising car production
Irom 200,000 units in 200/06 to 00,000 units, and motor cycles to 1 million units, and
increasing annual exports to US$30 million, based on total investment in the sector oI
PRs 20 billion. In addition to tariIIs, the Plan provides Ior incentives Ior acquiring
technology, productive asset investment, research and development, as well as targets and
incentives to encourage production and export oI value-added components; these details
are being Iinalized. The state-owned Sindh Engineering Company assembles Chinese
buses and trucks and is stated Ior privatization in 2007. Commercial importation oI used
vehicles, including CNG dedicated buses, is prohibited, in order to promote the domestic
industry.
48. Vehicle tariIIs were substantially reduced beIore the deletion programmes were
terminated on 1 July 2006. TariIIs on passenger cars Iell Irom 100-20 in 2001/02 to
0-7 in 200/06; Irom 120 to 20 on light commercial vehicles; 30 to 0-10 on
tractors; 10 to 90 on motorcycles; and remained at 20 on buses and 60 on trucks.
While the deletion programmes had raised local-content levels Ior passenger cars (62-71
by June 200), buses (48-2), trucks (43-68), tractors (3-8), and motorcycles (84-
90), protection created ineIIiciency, including rent seeking by vested interests, global
non-competitiveness, low capacity utilization, and higher prices.
49. Further customs tariII changes Ior vehicles were introduced when the TariII Based
System (TBS) replaced the deletion programmes; this was designed to raise employment
by protecting existing and planned investment, including Iurther localization oI
components production, and to re-structure the industry to improve eIIiciency and develop
"Iair" competition. Only registered assemblers may import completely-knocked-down
(CKD) kits. The TBS maintained existing tariII rates on non-indigenized components
imported by assemblers/manuIacturers in any kit Iorm (SRO No. 6(I)/2006, 22 June
2006); set 0 tariIIs on all localized components oI cars, motor cycles, and trucks and
oI 3 on common parts Ior tractors, buses, and larger trucks; applied a specialized tariII
oI 1 on localized parts oI 412 tariII lines; placed a 3 tariII on all other non-
indigenized replacement parts, irrespective oI vehicle type and category; reduced tariIIs
Irom and 10 to zero and , respectively, on raw materials and sub-components Ior
manuIacturing components and car, bus, truck, and motorcycle assemblies; lowered tariIIs
on CKD and completely-built-up (CBU) imported prime movers Irom 10 and 30 to
zero and 1, respectively; reduced tariIIs on larger trucks (over tonnes) Irom 20 to
10 and Irom 60 to 30, on trailers Irom 60 to 30, and on CKD kits to ; and
lowered tariIIs Irom 20 to 1 on CNG dedicated buses. However, as the high tariIIs
on imported vehicles were unchanged, substantial protection was maintained.
Subsequently, some component tariIIs were raised in 2006/07. TariIIs were raised on
vehicles in 2007/08 with the merger oI the capital value tax. Further rationalization,
including lower and more uniIorm tariIIs on motor vehicles and components could
promote a more competitive industry. The 2007/08 Budget announced the Five Year Pre-
announced TariII Programme Ior CBU and CKD imported vehicles, and a New Entrant
Policy Ior cars and light commercial vehicles based on a three-year exemption Irom the
TariII Based System. The Engineering Development Board has also been mandated to
develop a road Ireight strategy Iocusing on modernization oI the trucking sector.
0. The bicycle industry, dominated by one domestic manuIacturer, is struggling to
compete with smuggled Chinese bicycles. MFN tariIIs were not removed as planned by
200, and were raised Irom 30 to 3 in 2006/07 as part oI a Iive-year plan to improve
the industry`s viability. Allowing imports Irom India would reportedly threaten domestic
producers.
(b) Cement
1. Annual cement capacity has increased to 3 million tonnes, and demand has grown
rapidly, Iuelled by the expanding construction sector. There are 21 listed cement
manuIacturers. The state-owned State Cement Corporation, which accounted Ior about
40 oI cement and 7 oI clinker production, has been privatized. The Government
introduced several measures to curtail escalating cement prices during early 2006,
including a Ireight subsidy oI PRs 60 per bag on imports in April 2006, and allowing
concessionary duty-Iree imports. An MFN tariII oI 20 on certain cement is based on a
world price oI US$40 per tonne. A moratorium on cement exports was also applied
during most oI April 2006; exports are now unrestricted and expected to rise. Domestic
production is claimed to be cartelized.
(c) Other
2. Deletion programmes on the assembly and manuIacture oI engineering and electrical
goods were removed by end 2003. They have been replaced with the TBS, which
generally provides Ior lower tariIIs on imported CKD kits so as to encourage local
assembly. Indigenization oI manuIacture oI domestic appliances is some 7-100 and 80-
100 Ior electrical capital goods. The EDB encourages the local assembly oI machine
tools. The electronics industry mainly repairs and assembles CKD kits. An Emerging
Electronic Products Assembly Scheme (EEPAS) introduced in 2003 suspended
indigenization oI certain products Ior Iive years and allowed imported CKD kits at a
tariII.
(5) SERVICES
3. The share oI services in GDP (including electricity, gas, and water) has changed little
during the review period, and was 7.4 in 2006/07. Its share in total employment Iell
slightly Irom around 44.0 to 42.6 in 200/06. Wholesale and retail trade, and
transport, storage, and communications have remained by Iar the leading service activities.
Pakistan generally incurs a substantial deIicit on services trade, mainly due to negative
receipts on transportation (Ireight), travel (personal), business services, construction, and
insurance.
4. Pakistan's GATS Schedule oI SpeciIic Commitments covers 47 activities within the
Iinancial (banking and insurance), business, communications, construction/engineering,
health, and tourism/travel services. Certain general (i.e. horizontal) market-access and
national-treatment limitations relate to commercial presence or the presence oI natural
persons (e.g. presence oI Ioreign executives/specialists, expenses oI representative oIIice,
authorization Ior acquisition oI real estate by Ioreign Iirms). Cross-border supply oI
services is unbound Ior all sectors. Commercial presence in certain sectors (e.g. insurance,
banking) is subject to equity limits and/or other speciIic conditions. Pakistan withdrew
exclusive rights oI the Pakistan Telecommunication Company Limited (PTCL) in advance
oI its commitment to do so by end 2003. It listed MFN exemptions in Iinancial services to
preserve reciprocity requirements, Islamic Iinancing transactions, and joint ventures
among Economic Cooperation Organization countries, as well as in telecommunications,
Iavouring countries/operators with bilateral agreements with PTCL on accounting rates.
Pakistan did not participate in the WTO negotiations on maritime transport services. Its
initial services oIIer under the current Doha Round oI multilateral negotiations was
submitted in May 200 and covered 6 activities, improving substantially according to the
authorities, on Uruguay Round commitments. Pakistan has not submitted a revised oIIer.
(i) Financial services
. ReIorms since the last Review have improved eIIiciency and contributed to economic
perIormance. They seem essential Ior Pakistan's successIul economic restructuring and
long-term development, since an eIIicient Iinancial sector allocates savings into more
productive investments. The banking sector has been restructured and transIormed Irom a
predominantly weak, state-owned system to a sound, market-based one reliant on private
ownership. Pakistan is a moderately intermediated economy, and requires Iurther Iinancial
deepening.
(a) Banking
6. Pakistan has continued to deregulate banking; privatize state-owned banks;
strengthen the prudential supervisory and regulatory Iunctions oI the State Bank oI
Pakistan (SBP), including its independence; promote bank re-structuring and
consolidation; improve transparency; and enhance corporate governance. Currently,
there are 37 commercial banks and 4 specialized banks. Major divestments oI state banks
have occurred since the last Review, and Iurther sales are planned oI shares in Habib
Bank, oI 10 equity in United Bank, and oI the National Bank`s remaining state equity in
2007. At end 2006, majority state-owned banks had 21 oI total deposits (22 oI total
banking assets), and domestic, majority private-owned banks 74 ( held by Ioreign
banks).
7. Bank Iinancial soundness and proIitability have increased. The market share (assets)
oI the largest Iive banks had Iallen Irom over 60 to around 2 in December 2006,
albeit still highly concentrated. Net (aIter allowances) bank non-perIorming loans (NPLs),
concentrated in state-owned banks, remained on average above 10 oI total loans until
2006, but have Iallen to under 1.6 (end-December 2006). Bank interest rate spreads, a
measure oI competitiveness and eIIiciency, declined Irom just over percentage points in
2001 to 3. percentage points in 2004, but jumped to .2 percentage points in 2006.
!rudential supervision
8. The SBP retains prudential supervision and licensing oI commercial banks,
development Iinancial institutions, and microIinance banks. Its supervisory capacity has
been enhanced broadly in line with the Basel Core Principles Ior EIIective Banking
Supervision. Compliance was seemingly increased by the adoption oI country risk
guidelines and capital charges Ior market risk in late 2004, and correcting Ior risk-
weighting misclassiIications in 2003. This is, reportedly, less than Iull compliance in the
legal provisions regarding the regulator`s independence, and arrangements Ior
consolidated supervision. However, according to the authorities the inspection oI overseas
branches oI Pakistani banks has strengthened consolidation supervision. The SBP issued a
road map Ior implementing Basel II (the new capital adequacy Iramework) in March 200,
and detailed instructions on implementation in June 2006; Iull implementation is planned
Irom 2008. To Iurther strengthen risk-Iocused supervision, an Institutional Risk
Assessment Framework (IRAF) has been developed.
9. The SBP has issued prudential regulations, adopted methods Ior on and oII-site
supervision and can enIorce a range oI remedial measures, including controlling bank
risks. The average capital adequacy ratio Ior banks was 12.7 as at December 2006,
when three banks were below the minimum 8 limit. Bank minimum paid-up capital
levels were raised Irom PRs 1 billion to PRs 1. billion Irom end 2004, to PRs 2 billion by
end 200, to PRs 3 billion at end 2006, and are progressively to rise to PRs 6 billion by
end 2009; nine had not achieved the minimum PRs 3.0 billion level at mid 2007. The
SBP issued a Handbook oI Corporate Governance prescribing detailed corporate
governance standards Ior bank management, and has prepared a Problem Bank Manual
that sets out progressive remedial actions to be taken by problem banks, ranging Irom
signing an MOU with the SBP to liquidation. The SBP regulates Islamic banks and has
issued prudential regulations based on Sharia principles. The Banking Laws Review
Commission, Iormed to modernize Iinancial sector legislation, issued a draIt new Banking
Act in 2006.
oreign banks
60. Foreign branches and wholly Ioreign-owned locally incorporated subsidiaries are
permitted, provided that the Ioreign bank's home country belongs to a regional grouping in
which Pakistan is a member and/or it has global tier 1 minimum paid-up capital oI US$
billion. Otherwise, Ioreign banks may operate only as a locally incorporated subsidiary,
with Ioreign equity capped at 49. Pakistan permits MFN exemptions in Iinancial
services. Existing Ioreign banks as well as those Iormed under the above criteria are
allowed to open up to 100 branches as per Branch Expansion Plans submitted and
approved by the SBP. Commercial banks with over 100 branches must open 20 oI their
branches in regional centres where no bank branch exists.
(b) Capital market
61. The capital market, consisting mainly oI the stock exchanges (Karachi, Lahore, and
Islamabad) and an increasing number oI non-bank Iinancial intermediaries (NBFIs), is
supervised by the Securities and Exchange Commission oI Pakistan (SECP); NBFIs were
supervised by the SBP beIore 2003. The SECP administers the core supervisory Iunctions
relating to the capital market, corporate and Iinancial (non-banking) sectors, and can
amend or implement new rules or regulations, with the approval oI the Ministry oI
Finance. Prudential supervision has been strengthened since 2001/02 with the introduction
oI various rules and regulations to enhance the regulatory Iramework. A new Securities
Act has been draIted to address several shortcomings in the Securities and Exchange
Ordinance, 1969, and to ensure adoption oI international best practices and standards. The
SECP also updated and uniIied prudential regulations Ior all NBFIs (NBFI (Establishment
and Regulation) Rules, 2003). It also issued a Code oI Corporate Governance in March
2002 to improve disclosure and Iinancial reporting broadly in line with OECD principles.
Independence oI company auditors has been enhanced, and they are to be changed or
rotated every Iive years. Pakistan has adopted all but one International Accounting
Standards and, according to the authorities, is very close to compliance with the
International Financial Reporting Standards (IFRS). Its accounting and auditing standards
are generally high.
62. Minimum capital levels are speciIied Ior diIIerent types oI NBFI. The minimum
capital requirement oI brokers has been raised Irom PRs 20,000 to PRs 2. million, and
capital adequacy ratios liIted to 2 times the Iirm`s equity. Mutual Iunds are limited to
investing US$1 million overseas. Demutualization oI the stock exchanges is progressing
and a draIt Demutualization Act is awaiting government approval. The National
Commodity Exchange Limited has been launched. The SECP has proposed draIt
legislation Ior private pension schemes and issued the Voluntary Pension System Rules in
200. It has also prepared a draIt regulatory Iramework governing private equity and
venture capital Iunds.
63. The SBP created an Anti-Money-Laundering Unit in January 2003, revised "know
your customer" guidelines in March 2003, and issued prudential anti-money-laundering
regulations in June 2004; these regulations were strengthened in July 2006.
(c) Insurance
64. The underdeveloped insurance market has grown substantially in recent years,
averaging 2 annually. Total premiums in 2006 were PRs 7.2 billion (60 Irom liIe
assurance). There are 8 private insurance companies (including one registered TakaIul
insurer), two oI which are Ioreign (June 2007); 2, including 2 Ioreign Iirms, provide non-
liIe insurance and 4 provide liIe assurance. Two are Iully state-owned companies: State
LiIe Insurance Corporation (SLIC), and National Insurance Company Limited (NICL),
which has a monopoly on insurance oI all public-sector-owned properties and interests,
including by statutory corporations, and does not engage in insuring private assets. The
1 state-owned Pakistan Reinsurance Company Limited (PRCL) provides reinsurance.
NICL and PRCL are to be privatized. LiIe assurance is dominated by SLIC, which has
about 70 oI the market (down Irom 87 in 2001). Over 86 oI the non-liIe insurance
market is held by private domestic companies (Ioreign Iirms have about 4); the top
eleven Iirms (including NICL) had over 8 market share in 2006 (top Iive 73).
Insurance premiums are market determined. "Bancassurance" (banks collaborating with
insurers to distribute insurance to customers) is permitted. Operating eIIiciency oI
insurance companies has improved since 2001/02.
!rudential regulation
6. The SECP as apex regulator prudentially supervises and monitors the insurance
industry (Insurance Ordinance, 2000, Insurance Rules, 2002, and SEC (Insurance) Rules,
2002). However, there remains some conIusion between its respective regulatory
responsibilities and those oI the Ministry oI Commerce; they both issue rules and SECP
cannot revoke licences without consulting the Ministry. Composite insurance (Iirms
oIIering both liIe and non-liIe insurance) is prohibited. Licensing/registration
requirements are the same Ior Ioreign and domestic insurers. Minimum capital
requirements have recently been raised Irom PRs 10 million to PRs 00 million Ior liIe
assurance and Irom PRs 80 million to PRs 300 million Ior non-liIe insurance; existing
insurance companies must phase in these higher levels by 2010 and 2011, respectively.
All insurers must maintain a statutory deposit oI 10 oI paid-up capital (or iI higher PRs
10 million), or such other amount set by the SECP, with the SBP either in cash or
approved securities. Certain types oI insurance are restricted and require separate
approval. Minimum solvency requirement Ior non-liIe insurers is PRs 0 million.
Chairman, chieI executives, directors, and key staII must meet "Iit and proper" criteria
(Insurance Ordinance, 2000). An Insurance Ombudsman`s OIIice investigates alleged
mismanagement oI insurance Iirms and redresses grievances, and an Insurance Tribunal
with civil and criminal jurisdiction, and a Small Dispute Resolution Committee have been
established. Despite these regulatory gains, including developing oII-site inspection oI
insurers, more in-depth surveillance is needed, such as on-site inspection and enhancing
consumer protection.
66. The Ministry oI Commerce reviewed the sector in early 2007 and a number oI
proposals designed to encourage insurance penetration were adopted, including on a
number oI Iiscal incentives, especially Ior liIe insurance (e.g. income tax deductibility oI
premiums and requiring payments oI pensions Irom approved pension schemes to be made
through liIe assurance companies), to remove certain taxation anomalies, and to develop a
Iramework requiring all insurers to write a certain proportion oI their business in rural
areas as well as amongst the socially deprived. Legislation in 2007 (Finance Act)
increased the SECP`s supervisory powers, including by allowing on-site inspections,
including rights oI entry to company premises to search and seize relevant records and
documents. Revised TakaIul rules were promulgated in September 200; it is proposed to
include Postal LiIe under the SECP`s regulatory net. SLIC is to be converted to a
company as a pre-requisite Ior eventual partial privatization; its Alpha Insurance
Company is to be privatized. Public property insurance is to be opened by removing
NICL`s monopoly, subject to a minimum oI PRs 00 million (NICL`s current retention) oI
the risk remaining within Pakistan, to prevent excessive outIlow oI reinsurance.
oreign operations
67. Foreign liIe and non-liIe insurance Iirms must be locally incorporated (aIter
promulgation oI the Ordinance any new branches are prohibited); Iully Ioreign-owned
Iirms are permitted Iollowing removal oI the 1 Ioreign equity cap in September 2006.
Foreign companies must bring in minimum Ioreign exchange oI US$4 million in equity
towards minimum capital requirements; the balance may be raised locally. Residents are
generally prohibited Irom insuring with overseas companies (Insurance Rules, August
2002).
68. Reinsurance overseas is generally prohibited (Insurance Rules, 2002), and SEPC`s
permission is mandatory Ior "Iacultative" reinsurance placed abroad. Only PRCL oIIers
these services; granting such licences to private domestic and Ioreign re-insurers would
reportedly help develop re-insurance. Under an Asian Development Bank programme,
protection Ior PRCL on reinsurance is gradually being phased out. A compulsory quota
share regime (originally 30) Irom local non-liIe insurance companies has been Iully
phased out (as oI 200). In addition, PRCL`s right to be granted Iirst reIusal oI 3 oI
reinsurance treaties oI private insurers, representing 32 oI total premiums in 2006 (23
in 2004), was to be phased out by 2010. However, removing the compulsory cession in
200 reduced PRCLs gross premiums by 20 and its market share Irom 2 in 2004 to
16 in 200; it was decided to reinstate this right oI Iirst reIusal oI 3 oI reinsurance
treaties so as limit outIlow oI reinsurance premiums, and to raise its capital base.
69. Minimum paid-up capital is set at PRs 10 million (US$0.2 million) Ior local registered
insurance brokers or US$0.3 million Ior Ioreign brokers; in addition, cash or approved
securities oI at least PRs 0. million must be deposited with a bank (Insurance Rules,
August 2002).
(ii) Communications
(a) Telecommunications
70. Ongoing sectoral reIorms in telecommunications, which was declared a priority sector
in 2004, have increased competition and contributed to its growth; they also raised private
participation, and improved access to better quality services at reduced prices. The
authorities indicate that since 2001, telephone connection charges have Iallen by 86 in
rural areas and by 80 in cities; domestic and international call charges have Iallen by
some 90. Total teledensity rose Irom 3.7 in 2001/02 to 43. in May 2007, due
mainly to mobile services, which rose over the same period Irom 1.2 to 39.2.
However, rural teledensity remains very low (including mobile services).
Telecommunications accounted Ior 2.0 oI GDP in 200/06 (up Irom 1 in 2001/02) and
has been a major destination Ior Ioreign direct investment (US$1.8 billion Irom 2003/04 to
March 2006). The Ministry oI InIormation Technology Iormulates and implements policy,
while the statutory independent Pakistan Telecommunication Authority (PTA) regulates
the sector. Its powers and Iunctions were revised in 2006 (Pakistan Telecommunication
Authority (Functions and Powers) Regulations, July 2006).
71. The Iixed-line monopoly held by the state-owned Pakistan Telecommunication
Company Limited (PTCL) on local, long-distance and international services was
terminated Irom 2003 (Deregulation Policy Ior the Telecommunications Sector, 13 July
2003, Pakistan Telecommunication Rules, 2000). The policy aims to liberalize the sector
by encouraging "Iair" competition and maintaining an eIIective international best practice
regulatory regime. PTCL, originally 88 state owned, had a Iurther 26 equity divested
overseas in July 200 (current state equity 62); there are no Iurther divestment plans.
Many companies now compete with PTCL in providing Iixed-line long-distance and
international services (LDI licences) and local calls (local loop or LL licences) using
PTCL`s network. There are six mobile carriers Iollowing auctioning oI two new licenses
(Telenor and Warid) in July 2004; the market leader Mobilink had 44 oI the market in
March 2007 (down Irom 64 in 2003/04), and UIone (PTCL) 21.
72. Liberal rules govern Ioreign investment in telecommunications; 100 Ioreign equity
is allowed in all telecommunication services, including the liberalized basic telephony
services. There are no joint-venture requirements or Ioreign-equity caps. The minimum
Ioreign equity investment in services, which was reduced Irom US$0. million to US$0.3
million in 2000 and Iurther lowered to US$0.1 million in 2004, was removed Irom
telecommunications in 2004.
73. A number oI developments have occurred in key regulatory areas, during the review
period.
icensing
74. Pakistan has a simpliIied class licensing system. Initially the number oI Iixed line
licences (LL and LDI) was open and unlimited, subject to meeting the PTAs licensing
requirements, but currently there is a seven year "watch" period on issuing new licences,
including Ior cellular services. While the PTA will not normally consider licence
applications unless Iirst releasing a public invitation, expressions oI interest can be lodged
at any time. Criteria Ior issuing a licence include economic viability, Pakistani ownership,
and contribution to universal service goals and other social or economic development
objectives. Companies must register with SEPC. Carriers can hold both LL and LDI
licences, and PTCL guarantees licensees co-location rights (PTCL Framework Ior Co-
Location Agreements). LDI licensees must build at least one point oI interconnection in
Iive oI PTCL`s regions within one year and in all Iourteen regions within three years, and
own initially at least 10 oI its network (rising to 30 and 0 in the Iollowing two
years, respectively), or have negotiated a Iive-year inIrastructure lease with PTCL. A
perIormance bond oI US$10 million is required. LL licensees must operate one point oI
interconnection in each PTCL region they operate within a prescribed time. Carriers
(including mobile operators) pay an annual Iee to the PTA not exceeding 0. oI the
previous year`s gross revenue, less inter-operator and related PTA payments, contribute
1. to the Universal Service Fund, and pay 1 (0. Ior mobile operators) to the
Research and Development Fund.
(iii) Transport
7. EIIorts have continued during the review period to reIorm transport policies to
improve the sector`s eIIiciency. An integrated transport policy has been draIted. Long
distances Irom the sea to markets and production centres as well as inadequate
inIrastructure compound the industry`s cost disadvantages. OI key signiIicance in road
and rail transport is the Indus Trade Corridor, running northwards Irom the Arabian Sea,
which provides the gateway to central Asian economies and AIghanistan. It covers 80
oI Pakistan`s urban population and the area contributes to some 8 oI GDP; some 4
million tonnes oI external cargo and 00 million tonnes oI internal Ireight passes through
the corridor annually. Poor transport perIormance is estimated to cost the economy 4-6
oI GDP a year, and annual investment oI almost 1 oI GDP over the next -7 years is
needed to modernize the transport and logistic sector. Road transportation accounts Ior
89 oI passengers and 94 oI Ireight; the remainder is carried by the highly ineIIicient
and loss-making state-owned Pakistan Railways, which carries mainly public sector Ireight
and has certain monopolies over transit trade. The Government has launched a national
trade corridor initiative, aimed at revamping the whole transport sector, including ports,
roads, railways and aviation.
(a) Shipping
76. A third international port, at Gwadar, was inaugurated in March 2007. Congestion at
Karachi Port, which handles 7 oI national sea Ireight, and Qasim Port increases waiting
times and inIlates shipping and trade costs. At Karachi port, Ior example, long dwell
times, internationally high port entry charges (especially the high "wet" relative to "dry"
charges), and the ineIIicient and costly work practices oI the Dock Labour Board are major
drags on competitiveness. EIIorts have been made to signiIicantly reduce "wet" charges
and are under way to "retrench" the Board. Ports remain state-owned and mostly state-run.
However, the Karachi Port Trust and Qasim Port Authority were converted to landlord
status, whereby private Iirms are oIIered concessions on a BOT (build-own-transIer) or
public/private joint venture basis to construct and operate terminals. All port terminals at
Karachi and Qasim Ports are run by international contractors and Iace competition Irom
the terminal at Port Qasim operated by P&O Ports. Gwadar Port signed a 40-year
concession with the international PSAI-AKD Group as port operator in February 2007.
All services can be outsourced without restrictions on Ioreign investment, and Iurther
privatization is planned. Certain port services, including pilot and tug services, are
reserved Ior the public sector.
77. Maritime transport remains dominated by Ioreign ships, and, according to the
authorities, no Ioreign investment restrictions apply to shipping companies operating in
Pakistan. Cabotage is prohibited. The national Ileet oI 1 vessels, run by the state-owned
Pakistan National Shipping Corporation (PNSC), is inadequate, despite the 2001 policy
target to increase the share oI cargo carried by Pakistan Ilagged vessels Irom to 40
(currently 23). PNSC (and its subsidiary National Tanker Company) still has a
monopoly (Iirst right oI reIusal) in transporting government or public-sector cargo and
crude oil/petroleum products imported by three oil reIineries. Ships (including Iloating
craIt, tugs, dredgers, survey vessels) bought or chartered by a Pakistani entity and Ilying
the country`s Ilag are exempt Irom import duties and surcharges until 2020 provided they
are not demolished within Iive years. No restrictions apply to Ioreign carriers operating
Irom or into Pakistani ports. Pakistani Ilagged vessels have been able to transport cargo
Irom Indian ports or third-country cargoes destined Ior India since December 2006 when
maritime transport between the two countries was liberalized on a non-discriminatory
basis (Protocol on Shipping Services Between Pakistan and India, 14 December 2006).
The state-owned Karachi Shipyard and Engineering Works Ltd. constructs and repairs
ships.
(b) Air transportation
78. The Civil Aviation Authority (CAA) is the economic regulator responsible Ior
licensing air service suppliers and maintaining saIety; it also supervises airIares, to
contain predatory pricing and "unIair" competition. The Market Clean-up Board (with
representatives Irom the state-owned Pakistan International Airways (PIA) and private
airlines) "reviews" international and domestic air Iares Iiled by national and international
airlines. Domestic Iares are deregulated (subject to Iiling requirements). A Iurther .8
equity in PIA was divested locally in July 2004, reducing state ownership to 84.2. It
remains the dominant domestic operator, accounting Ior 72 each oI passenger and cargo
traIIic in 2004/0. Shaheen Air International is Pakistan`s second public national carrier.
They compete domestically with three private operators (Aero Asia, Royal Airlines, and
Airblue). Aero Asia and Shaheen Air International, along with 26 other international
carriers, compete on overseas routes with PIA, which carried 2 each oI international
passenger and cargo traIIic in 2004/0. Domestic carriers (passenger and Ireight) must be
controlled by Pakistani investors; Ioreign equity is capped at 49. Domestic carriers
must also operate a minimum oI two trunk routes (one oI which must be Peshawar, Quetta,
Multan or Faislabad), and serve a minimum oI two weekly services on a deIined socio-
economic or tertiary route, or pay a monthly royalty oI PRs 00,000 to PIA. Cabotage
(cargo and passengers) is prohibited. Government subsidies apply to certain oI PIA`s loss-
making socio-economic routes.
#oads
79. Transit trade with AIghanistan and Iran is restricted. The AIghan Transit Trade
Agreement restricts entry oI AIghan trucks into Pakistan; they may not move cargo
directly Irom Karachi Port, and Pakistani trucks must be used to tranship at the border
unless the state-owned National Logistics Cell (NLC) is used. Under a recently concluded
bilateral agreement, the NLC has a monopoly on AIghan transit trade Irom Karachi to
Kabul and Kandahar. Pakistan allows AIghan trucks to transport certain AIghan exports
to India via the Wagah border. The Bilateral Transit Trade Agreement with Iran allows
Pakistani trucks to carry goods to Zahidan while Iranian trucks can operate to Quetta. A
road transportation agreement between Pakistan, Iran, and Turkey is not being
implemented; this is restricting Pakistan-Turkey trade as Iran does not allow Pakistani
trucks to enter and prevents Turkish haulers Irom transiting to Pakistan. Pakistan is
negotiating revised agreements with AIghanistan and Iran aimed at allowing Iree
movement oI transit trade; the agreement with Iran is awaiting ratiIication.
80. Pakistan has signed a number oI regional road transport agreements since its last
Review. The 199 Quadrilateral Agreement with China, Kyrgyzstan, and Kazakhstan was
Iinally implemented in November 2004, and Implementation Rules were issued in April
200. The Pak-AIghan Bus Service Agreement, signed in March 200, allows bus
services between Peshawar and Jalabad, and Quetta and Kandahar. In December 200,
Pakistan signed an agreement with India to allow limited bus services between Nankana
and Amritsar; cabotage is excluded. Pakistan`s operations to India are provided
exclusively by the state-owned Pakistan Tourism Development Authority, which also has
monopolies on other overland transit routes. In October 200, Pakistan ratiIied ESCAP`s
Inter-Governmental Agreement on Asian Highway Network designed to promote regional
international road transport.