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Pakistan - Economy (Notes)

With a per capita GDP of about $690 (current U.S. $), the World Bank considers Pakistan a low-income country. No more than 48.7% of adults are literate, and life expectancy is about 63 years. The population, currently about 165 million, is growing at 2.09% annually.

In 2000, the government made significant macroeconomic reforms: Privatizing Pakistan's state-subsidized utilities, reforming the banking sector, instituting a world-class anti-money laundering law, cracking down on piracy of intellectual property, and moving to quickly resolving investor disputes. After September 11, 2001, and Pakistan's proclaimed commitment to fighting terror, many international sanctions, particularly those imposed by the United States, were lifted. Pakistan's economic prospects began to increase significantly due to unprecedented inflows of foreign assistance at the end of 2001. This trend is expected to continue through 2009. Foreign exchange reserves and exports grew to record levels after a sharp decline. The International Monetary Fund lauded Pakistan for its commitment in meeting lender requirements for a $1.3 billion IMF Poverty Reduction and Growth Facility loan, which it completed in 2004, forgoing the final permitted tranche. The Government of Pakistan has been successful in issuing sovereign bonds, and has issued $600 million in Islamic bonds, putting Pakistan back on the investment map. Pakistan's search for additional foreign direct investment has been hampered by concerns about the security situation, domestic and regional political uncertainties, and questions about judicial transparency.

U.S. assistance has played a key role in moving Pakistan's economy from the brink of collapse to setting record high levels of foreign reserves and exports, dramatically lowering levels of solid debt. Also, despite the earthquake in 2005, GDP growth remained strong at 6.6% in fiscal year 2005/2006. In 2002, the United States led Paris Club efforts to reschedule Pakistan's debt on generous terms, and in April 2003 the United States reduced Pakistan's bilateral official debt by $1 billion. In 2004, approximately $500 million more in bilateral debt was granted. Consumer price inflation eased slightly to an average of 8% in 2005/2006 from 9.3% in 2004/2005.

Low levels of spending in the social services and high population growth have contributed to persistent poverty and unequal income distribution. The trends of resources being devoted to socioeconomic development and infrastructure projects have been improving since 2002, although expenditures remain below global averages. Pakistan's extreme poverty and underdevelopment are key concerns, especially in rural areas. The government has reined in the fiscal mismanagement that produced massive foreign debt, and officials have committed to using international assistance--including a major part of the $3 billion five-year U.S. assistance package--to address Pakistan's long-term needs in the health and education sectors.

The government started pursuing market-based economic reform policies in the early 1980s. These reforms began to take hold in 1988, when the government launched an ambitious IMF-assisted structural adjustment program in response to chronic and unsustainable fiscal and external account deficits. The government began to remove barriers to foreign trade and investment, reform the financial system, ease foreign exchange controls, and privatize dozens of state-owned enterprises.

Although the economy became more structurally sound, it remained vulnerable to external and internal shocks, such as in 1992-93, when devastating floods and political uncertainty combined to depress economic growth sharply. The Asian financial crisis seriously affected Pakistan's major markets for its textile exports. For example, average real GDP growth from 1992 to 1998 dipped to 4.1% annually. Economic reform also was set back by Pakistan's nuclear tests in May 1998, and the subsequent economic sanctions imposed by the G-7. International default was narrowly averted by the partial waiver of sanctions and the subsequent reinstatement of Pakistan's IMF enhanced structural adjustment facility/extended fund facility in early 1999, followed by Paris Club and London Club re-scheduling. After taking power in late 1999, President Musharraf instituted policies to stabilize Pakistan's macroeconomic situation. Pakistan continues to struggle with these reforms, having mixed success, especially in reducing its budget and current account deficits.

Agriculture and Natural Resources
Pakistan's principal natural resources are arable land, water, hydroelectric potential, and natural gas reserves. About 28% of Pakistan's total land area is under cultivation and is watered by one of the largest irrigation systems in the world. Agriculture accounts for about 21% of GDP and employs about 42% of the labor force. The most important crops are cotton, wheat, rice, sugarcane, fruits, and vegetables, which together account for more than 75% of the value of total crop output. Despite intensive farming practices, Pakistan remains a net food importer. Pakistan exports rice, fish, fruits, and vegetables and imports vegetable oil, wheat, cotton (net importer), pulses, and consumer foods.

The economic importance of agriculture has declined since independence, when its share of GDP was around 53%. Following the poor harvest of 1993, the government introduced agriculture assistance policies, including increased support prices for many agricultural commodities and expanded availability of agricultural credit. From 1993 to 1997, real growth in the agricultural sector averaged 5.7% but declined to less than 3% in 2005. Agricultural reforms, including increased wheat and oilseed production, play a central role in the government's economic reform package. Heavy rains in 2005 provided the benefit of larger than average cotton, wheat, and rice crops, but also caused damage due to flooding and avalanches.

Pakistan has extensive energy resources, including fairly sizable natural gas reserves, some proven oil reserves, coal, and large hydropower potential. However, exploitation of energy resources has been slow due to a shortage of capital and domestic and international political constraints. For instance, domestic gas and petroleum production totals only about half the country's energy needs, and dependence on imported oil contributes to Pakistan's persistent trade deficits and shortage of foreign exchange. The government announced that privatization in the oil and gas sector is a priority.

Pakistan's manufacturing sector accounts for about 25% of GDP. Cotton textile production and apparel manufacturing are Pakistan's largest industries, accounting for about 70% of total exports. Other major industries include food processing, beverages, construction materials, clothing, and paper products. As technology improves in the industrial sector, it continues to grow. In 2005/2006, the manufacturing sector grew by 8.6%. Despite government efforts to privatize large-scale parastatal units, the public sector continues to account for a significant proportion of industry. In the face of an increasing trade deficit, the government seeks to diversify the country's industrial base and bolster export industries. Net foreign investment in Pakistani industries is only 0.5% of GDP.

Foreign Trade and Aid
Weak world demand for its exports and domestic political uncertainty have contributed to Pakistan's high trade deficit. In 2004, growth rebounded to approximately 6% with substantial improvement in public and external debt indicators and remained robust with 7.8% growth in 2005. Foreign reserves are at an all-time high of $11.5 billion. Pakistan's exports, which grew by 14.4% in 2005/2006, continue to be dominated by cotton textiles and apparel, despite government diversification efforts. Major imports include petroleum and petroleum products, edible oil, wheat, chemicals, fertilizer, capital goods, industrial raw materials, and consumer products, rising to 38.8% to $25.6 billion. External imbalance has left Pakistan with a growing foreign debt burden. The fiscal imbalance is reflected in a high level of total net public debt, which reached an estimated 92.6% of GDP in 2000-01, more than half involving external liabilities, but decreased to 72.7% in 2003. The fiscal deficit widened from 5.6% of GDP in 1994-95 to 7.7% in 1997-98 before declining to 4.5% in 2006. Despite a rise in tax collection, defense and development expenditure along with transfers to the provinces all rose in the 2006 budget, widening the deficit. Support for loss-making, state-owned enterprises and a weak domestic tax base are critical elements in the recurring fiscal deficits. The Pakistan Telecommunications Company Ltd. (PTCL) represented the largest of Pakistan?s privatization programs for 2005. Despite its economic and political difficulties, Pakistan has taken steps to liberalize its trade and investment regimes, either unilaterally or in the context of commitments made with the World Trade Organization (WTO), IMF, and the World Bank. In 2004-2005, efforts in several crucial areas seemingly intensified, resulting in Pakistan becoming a more open and secure market for its trading partners.

Pakistan has received significant loan/grant assistance from international financial institutions (e.g., the IMF, the World Bank, and the Asian Development Bank) and bilateral donors, particularly after it began using its military/financial resources in the war on terror. The United Statespledged $3 billion for FY 2005 to FY 2009 in economic and military aid to Pakistan. In addition, the IMF and World Bank have pledged $1 billion in loans to Pakistan. In 2004 to 2007 alone, the World Bank has pledged over $500 million in investment projects.

Facts at a Glance: Geography - People - Government - Economy - Communications - Transportation - Military - Climate - Current Time - Ranking Positions - Pakistan Rupee Exchange Rates
Notes and Commentary: People - Economy - Government and Political Conditions - Historical Highlights - Foreign Relations - Relations with U.S.

Facts at a Glance
Current Time
Ranking Positions
Pakistan Rupee Exchange Rates

Notes and Commentary
Government and Political Conditions
Historical Highlights
Foreign Relations
Relations with U.S.

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