IN its third review of Pakistan’s trade performance released last week, a WTO report says the country’s economic growth has been impressive since 2002, mainly because of its relatively open trade and investment regimes.

However, the country is now facing various challenges, including controlling inflation, fiscal consolidation (together with raising tax revenues), containing the external current account deficit, obtaining foreign financing consistent with the external debt sustainability, and increasing official external reserves.

The economy has been opened up in several areas in the last few years in particular customs procedures have been greatly improved, overall tariff protection considerably reduced, tariff bindings increased, and intellectual property rights strengthened. But more has to be done for sustaining the growth.

In some other areas, however, trade liberalisation has slowed, for example, support for production and exports has increased. At the same time, structural weaknesses, including infrastructural bottlenecks, excessive regulatory controls and labour market rigidities as well as problems concerning governance, have inflated the costs of doing business. The so-called regulatory mechanism fully controlled by the government has worsened the situation as prices of utilities and others witnessed surge without any genuine reasons.

Continued trade liberalisation and other productivity-boosting structural reforms to address these weaknesses together with steps to reduce political uncertainty would help improve the country’s international competitiveness, especially for sensitive sectors such as textiles and clothing, and thus the prospects for sustained economic growth.

These include a distorting tax (and tariff) system, narrow production and export base, the state's prominent role in the economy, infrastructure bottlenecks, weak governance, business hindrances, including burdensome regulation and red tape, labour market rigidities, and political and security uncertainties.

By raising the costs of ‘doing business’ these hampers private sector growth and efficiency, thereby impeding, inter alia, improvements in productivity and export competitiveness. The overall international competitiveness appears to be declining, including in traditional products (e.g. textiles). Export performance has been mixed and exports as a share of GDP have fallen during the review period and contributed less than previously to growth.

Exports remain highly concentrated and two- thirds were textiles and clothing in 2005-06. Since 2001, the main change in merchandise trade structure has been a rise in the share of mining exports (from 2.3 per cent to 5.5 per cent in 2006) and agriculture (12.5 per cent to 13.7 per cent) at the expense of manufacturing (85 per cent to 80.8 per cent), especially textiles.

There has been little export market diversification. The US and EC remain by far Pakistan's principal markets, accounting for over half of exports in 2006. Partly reflecting the narrow export base, concentrated in low-value-added products and few markets, the shares of exports to Asian, American, and European markets have remained largely unchanged.

However, even the low growth in textile has been aided by several assistance packages, including research and development grants tied to exports, and freight subsidies, but minimal market diversification away from the traditional EC and the United States’ markets have occurred. But textile production is likely to expand; the clothing segment may contract as it faces greater overseas competition; its real income could decline overall unless productivity improves substantially to capture the potential benefits arising from abolishing quotas.

Pakistan has been unable to benefit from the quota abolition due to its high costs, low labour productivity, and inefficient production processes. Raising productivity by 60 per cent to match the Chinese levels could result in annual welfare gains to Pakistan of over $1 billion.

The report says major reforms have taken place in the engineering products sector, where tariff-based schemes have replaced local-content-based deletion programmes on many products, including motor vehicles. However, while tariffs on motor vehicles have been reduced substantially, they remain high (up to 90 per cent) and provide substantial industry protection for assembly activities, where tariffs on imported CKD kits were reduced.

Some other engineering activities, such as certain equipment (e.g. electrical and electronic goods), are also benefited from recently increased tariffs and/or from tariff-based indigenisation programmes. State involvement in manufacturing remains substantial especially in heavy engineering and steel.

Average manufacturing tariffs have fallen from 20.9 per cent in 200-2 to 15 per cent in 2007-08, and peak ad valorem rates have fallen from 250 per cent to a maximum of 90 per cent. The scope of tariff bindings now 98 per cent has risen considerably since 2001-02, thereby promoting market access transparency and predictability. However, as the bound average tariff is some four times the applied level, substantial leeway exists to raise applied tariffs to protect against imports.

Excluding some areas in the taxation structure which showed improvement, it is difficult to understand which concessions/exemptions still operate and to assess their incidence; the extent to which new exemptions/concessions extend, replace or duplicate previous ones is often unclear. While SROs on exemptions/concessions are published in the official Gazette and simultaneously posted on the CBR website, no integrated schedule or publication of current concessions/exemptions exists.

Their wide use makes the tariff regime complex and less transparent. By altering the structure of tariff incentives unpredictably, with uncertain effects on resource allocation, these concessions/exemptions may potentially counteract economic efficiency, for example, by raising tariff escalation and increasing/widening effective rates of protection. The WTO also came hard on Pakistan duty drawback system, which is termed administratively complex and non-transparent, and as it does not directly relate duty paid on imported inputs to refunds, it is likely to have an uneven impact across export items.

Investment incentives are available to all, including foreign, investors. Boosted by greater openness and privatisation, the FDI rose substantially from 0.7 per cent of GDP in 2001-02 to 3.5 per cent in 2006-07. Inflows originated largely from the United States, EC, and China, and were channeled mainly into telecommunications, information technology, and financial business services.

For achieving greater benefits from liberalisation of trade, Pakistan will have to pay more attention to enhancing the educational and skill levels needed to export value-added and high technology goods and services.