Direction of Imports Pakistan's imports originate from few countries. On average, around 49 percent of imports during the 1990s originated from seven countries namely, USA, Japan, Kuwait, Saudi Arabia, Germany, UK and Malaysia. By and large, the shares of imports originating from these countries have remained almost unchanged during the 1990s. The percentage shares of imports from major countries during 1990-91 to 1998-99 are given in Table 9.15.

Source: Pakistan's Foreign Trade Key Indicators, Ministry of Commerce, Islamabad

Trade Balance
The trade balance (custom basis) remained in deficit during the 1990s. Trade deficit was as high as $ 3574 million or 5.7 percent of GDP in 1996-97 mainly due to substantial decline in exports. The higher POL imports ($ 2174.4 million) during July-April, 1999-2000 has caused trade balance to deteriorate by 16.7 percent to $ 1409.9 million as against the level of $ 1208.0 million recorded in the corresponding period last year. Had there been no change in unit values of exports and imports, Pakistan's trade deficit during July-April, 1999-2000 would have been $ 370.8 million instead of $ 1409.9 million, thereby registering an improvement of 69.3 percent instead of a deterioration of 16.7 percent. The annul trade deficit since 1990-91 is given in Table 9.16.

* Provisional
Source: Federal Bureau of Statistics, Islamabad

Terms of Trade (TOT)
The terms of trade (1990-91=100) has exhibited a mixed trend in the decade of 1990s.

The TOT index increased from a low level of 90.9 in 1991-92 to as high as 123.5 in 1997-98, showing a substantial gain of 35.9 percent. In the next year (1998-99) the TOT although slipped by 6.3 percent and aggregated at 115.7, is still sufficiently above the base level.

The terms of trade during July-March, 1999-2000 stood at 100.3 which is 14.3 percent lower than the comparable period last year (117.0). The decline in export unit value index during this period has been marginal at 0.4 percent while rise in import unit value index was 16.2 percent. It may be noted that as a result of the adverse movement of TOT Pakistan has lost $ 1039.1 million during the first ten months of the current fiscal year. The loss in export earnings amounted to $ 319.9 million while higher payment to the extent of $ 719.2 million was made on import side. The details are given in Table 9.17.

* Provisional.
Source: Federal Bureau of Statistics, IBD

Trade Policy, 1999-2000
The trade policy is primarily oriented towards liberalizing imports in order to enhance the capacity utilization of the indigenous industry and to boost exports. The objective is to gradually convert the economy from a relatively closed, inward looking with high tariff walls to an open and outward looking with low tariff. Trade policy for the fiscal year 1999-2000 has visualized various concessions and tax relief to expand and diversify the country's export base. It focused on removing the barriers which inhibited exports. The policy strives at establishing an environment for export-led growth with a view of narrowing down the persistent trade gap. The policy also endeavours to prepare for the challenges and obligations of various World Trade Organization (WTO) agreements. It seeks to upgrade productive capacity of the country and looks forward for the social & economic uplift of the people. The salient features specified in the trade policy are given below:

- To promote export of engineering, contracting and consulting services, there will be only one percent income tax on foreign exchange income of these services.

The income tax is being curtailed to half a percent to promote export of 5 Kg consumer packs of branded rice.

- Income tax imposed on the exports of fish and other edible items (tin and bottle packs) is being reduced to half a percent from the existing one percent. Likewise cut and uncut precious and semi-precious stones would now be levied half a percent income tax, instead of one percent for boosting their exports.

- Industrial units which are registered exporters could import machinery and spares worth $ 7000 per annum without opening L/C through foreign currency demand draft, provided these imports are made by air or through courier.

- The regulatory duty presently levied on export of steamed and crushed bones at the rate of 20 percent and 15 percent is reduced to 10 percent and 5 percent respectively.

- New and used angle dozers and bulldozers could be imported without payment of custom duty and sales tax.

- Only commercial companies and refineries of Lube Oil and registered industries of Lube Oil Blending would be allowed to import lube base oil in future.

- Under the personal baggage, import of two computers including personal computer and Lap Top is being allowed.

- The condition of acquiring Pre-shipment Authorization Certificate from the Export Promotion Bureau is being withdrawn for the textile exports to non-quota countries.

- Refrigerated trucks and delivery vans which are not manufactured in the country for poultry industry, dairy industry, fishing, fruits, vegetables and other perishable goods industry are allowed to be imported.

- Auto Coners for the textile industry are also allowed to be imported without custom duty.

- Import of used photocopier is also being allowed which was earlier banned.

Balance of Payments
Pakistan's balance of payments has remained under pressure during the decade of the 1990s. The current account deficit which was $ 2171 million or 4.8 percent of GDP in 1990-91 rose to $ 4575 million or 7.2 percent of GDP in 1995-96 — unprecedented in the history of Pakistan, mainly because of large deficits prevailing in the services and trade accounts. However, it was reduced to $ 1921 million (3.1% of GDP) in 1997-98 due to substantial improvement in trade deficit but deteriorated by 23.9 percent to $ 2381 million in the next year (1998-99), mainly on account of economic sanctions. The deficit under services (net) narrowed by 21.3 percent in 1998-99 and private transfers fell short of $ 936 million over the previous year's level of $ 3210 million. The trade deficit (based on exchange records) grew annually at an average rate of 2.9 percent while long-term capital (net) on a yearly average basis, amounted to $ 2234 million during 1990-91 to 1998-99.

Government took several measures during the current fiscal year (1999-2000) to strengthen the balance of payments position. The principal measures introduced are highlighted below:

- Export Promotion Bureau extended the shipment period up to 240 days from 180 days for textile quota obtained by exporters on first-come-first served basis.

- State Bank of Pakistan allowed direct exporters either to establish an Inland Letter of Credit in favour of indirect exporter/issue a Standardized Purchase Order or make payment through cheques.

- Duty drawback facility was allowed on exports to Afghanistan and Central Asian Republics through land routes provided these exports are effected against advance payment in US dollar or in irrevocable Letter of Credit issued by a recognized bank in US dollars.

- Islamic Development Bank extended direct access facility to Pakistani exporters to avail its export finance scheme. All exports whether traditional or non-traditional would be eligible for financing under the Export Finance Scheme.

- The restrictions on minimum margin requirements for opening letters of credit for industrial raw material and machinery & their spare parts were withdrawn w.e.f. 28th October and 1st November, 1999 respectively.

- The government imposed 2-5 percent withholding tax (2 percent for industrial importers and 5 percent for commercial importers) on the import of edible oils.

- Imports of edible oils at the invoice value of $ 240 and above per metric ton would be exempted from the 15 percent central excise duty.

- The government reduced the rate of return on special US dollar bonds issued on or after 3 rd September, 1999. Accordingly, the profit on bonds of three years maturity was reduced from 2 percent to 1 percent plus six months LIBOR on the day preceding the date of payment. Similarly, the profit on 5 and 7 years maturity bonds was also reduced from 3 percent to 1.5 percent and from 4 percent to 2 percent respectively plus six months LIBOR on the day preceding the date of payment.

- Rescheduling of external debt.

The aforementioned measures together with the other measures taken in the economic revival package of 15th December, 1999 has favourably impacted the balance of payments position during the current fiscal year (July-March, 1999-2000). The current account deficit narrowed sharply by 34.0 percent to $ 1195 million over the level of $ 1812 million recorded in the comparable period last year. This implies a net reduction of $ 617 million. The improvement was attributed to a combination of factors. The trade deficit (f.o.b) showed a reduction of 3.0 percent or $ 46 million. The improvement in trade deficit stemmed from 3.1 percent increase in exports (f.o.b) and 1.8 percent rise in imports (f.o.b). The deficit in services (net) widened by $ 224 million due to higher aggregate service payments of $ 264 million was partly offset by an increase of $ 40 million in aggregate service receipts. The private transfers in this period rose substantially by 48.6 percent to $ 2430 million from the level of $ 1635 million of the comparable period last year depicting a net increase of $ 795 million. The workers remittances, however, declined around 9 percent, while flow under long term capital (net) was limited to $ 274 million, against $ 1411 million of the comparable period last year. The current fiscal year (July-March, 1999-2000) ended with a draw down of $ 28 million in reserves as per details in Table 9.18.

P: Provisional
Source: State Bank of Pakistan, Karachi.

Workers Remittances
Notwithstanding its declining trend in the 1990s, workers remittances continue to hold the ground of being an important component of balance of payments. The inflow dipped from $ 1848 million in 1990-91 to $ 1060 million in 1998-99, denoting a shortfall of $ 788 million in the decade of 1990s. The decline in the fiscal year 1998-99 was much sharp at 28.8 percent or $ 429 million — highest during the last ten years. The main reason for steep fall during 1998-99 has been the exceptionally large spread that prevailed between the composite rate and the open market rate which discouraged expatriate Pakistanis to send their remittances through normal banking channels.

The remittances during July-April, 1999-2000 exhibited a decline of 9.5 percent to $ 795.6 million but cash flow of remittances depicted a rise of 3.2 percent to $ 735.2 million. The decline in aggregate remittances was due to decline in encashments (FEBCs, FCBCs, etc) of $ 106.5 million during July-April, 1999-2000. Country-wise analysis suggests that cash remittances from Kuwait increased sharply by 35.2 percent primarily due to release of funds for Iraq-Kuwait war affectees while Saudi Arabia contributed largest share (35.0%) in the total cash remittances.

Foreign Exchange Reserves
Marked fluctuations were witnessed in the foreign exchange reserves of Pakistan during the decade of 1990s. The reserves were as low as $ 529 million at the end June, 1990 but with a built up of $ 2208 million peaked at $ 2737 million by the end June, 1995. Thereafter, the reserves declined to $ 1219 million (end June, 1997). The imposition of economic sanctions of last year led to the suspension of bilateral and multilateral disbursements. Hence, the reserves further came down to $ 930 million on 30th June, 1998. As a result of effective management, the reserves picked up gradually and attained the level of $ 1730 million by end June, 1999. Reserves as on 29th April, 2000 aggregated at $ 1439 million, indicating a decline of 16.8 percent over the level of end June, 1999.

The month-wise trend of foreign exchange reserves during 1998-99 and 1999-2000. It can be seen from the figure that the government has succeeded in maintaining a stable foreign exchange reserves since June, 1999 despite the country's balance of payments situation remained under pressure.

Exchange Rate
The unified floating exchange rate system which was introduced in May, 1999 remained in operation during the current fiscal year 1999-2000. The value of Rupee under this system is determined by the supply and demand forces in the inter-bank market. The floating inter-bank rate (FIBR) is the effective exchange rate at which all foreign exchange receipts and payments take place.

Pak-rupee against US dollar remained stable both in inter-bank foreign exchange market and open market during July-April, 1999-2000. The inter-bank foreign exchange rate in terms of US dollar averaged around Rs 51.8 during April, 2000 as against Rs 51.6 averaged during July 1999, indicating a marginal depreciation of 0.4 percent. The Rupee-Dollar average exchange rate in the open market during July, 1999 was Rs 53.8 compared to Rs 54.3 during April, 2000. This portrayed that premium remained at a normal level of Rs 2.5 in April, 2000. The month-wise movements of composite/inter-bank and open market exchange rates during 1998-99 and 1999-2000 are reflected in Fig-12. It can be seen from the figure that premium remained stable since February, 1999. The stable and predictable exchange rate has played an important role in the sharp recovery of exports in the current fiscal year.