Pakistan: Economy

The World Bank considers Pakistan a low-income country. GDP is around $166 billion at the official exchange rate. The population numbered some 167 million in 2008 with a 1.81% growth rate. No more than 55.0% of adults are literate, and life expectancy is about 64 years. In FY 2008-2009, the GDP growth rate was 3.7%, and unemployment was estimated at 14%. Year-over-year consumer price inflation averaged 13.6% in 2009. Main inflation drivers include food and utility prices, the Pakistani rupee’s depreciation versus the U.S. dollar, and higher international commodity prices. Low levels of spending in the social services and high population growth have contributed to persistent poverty and unequal income distribution. Pakistan's extreme poverty and underdevelopment are key concerns, especially in rural areas. The country’s economy remains vulnerable to internal and external shocks due to internal security concerns and the global financial crises.

Reform, Aid, and Debt
Despite its economic and political difficulties, Pakistan has taken some steps over the years to liberalize its trade and investment regimes, either unilaterally or in the context of commitments made with the World Trade Organization (WTO), International Monetary Fund (IMF), and the World Bank. Pakistan has received significant loan/grant assistance from international financial institutions (e.g., the IMF, the World Bank, and the Asian Development Bank (ADB)) and bilateral donors, particularly after it began using its military/financial resources in counterterrorism efforts.

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 resolve investor disputes. After the September 11, 2001 terrorist attacks in the United States and Pakistan's proclaimed commitment to fighting terror, many international sanctions, particularly those that had been 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, and the trend was expected to continue through 2009. 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 relief was granted. Foreign exchange reserves and exports grew to record levels after a sharp decline. The IMF 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 was successful in issuing sovereign bonds; it issued $600 million in Islamic bonds, putting Pakistan back on the investment map.

On October 8, 2005, a magnitude 7.6 earthquake struck Pakistan, India, and Afghanistan. The epicenter of the earthquake was near Muzaffarabad, the capital of Pakistani-administered Kashmir, and approximately 60 miles north-northeast of Islamabad. An estimated 75,000 people were killed and 2.5 million people were left homeless. The disaster of such a huge magnitude galvanized an international rescue and reconstruction effort in support of the affected region. The earthquake cost Pakistan $1.1 billion in resettling those affected. Despite the 2005 earthquake, GDP growth remained strong at 6.6% in fiscal year 2005-2006. Consumer price inflation eased slightly to an average of 8% in 2005-2006 from 9.3% in 2004-2005.

In 2008, the ratio of total debt and liabilities to GDP, a broad measure of the country's capacity to sustain debt, saw an end to a 7-year declining trend, rising in FY 2008 to 60%. The stock of Pakistan's total debt and liabilities increased by 27% year on year in 2008, to PKR 6,417.4 billion (U.S. $80.7 billion at 79.5 rupees per dollar), with a commensurate deterioration in debt sustainability indicators. The fiscal deficit widened from 5.6% of GDP in 1994-95, to 7.7% in 1997-98, and to 5.4% in 2008-2009. Support for loss-making, state-owned enterprises; fuel subsidies; and a weak domestic tax base have been critical elements in the recurring fiscal deficits.

In October 2008, Pakistan entered into a 23-month Stand-By Arrangement with the IMF in order to keep the country solvent and to support its foreign exchange reserves, which had fallen to precariously low levels. The $11.3 billion IMF loan supports two key objectives of restoring macroeconomic stability and confidence in the economy through a significant tightening of macroeconomic policies and ensuring social stability and adequate support for the poor. Other reforms include improvements in banking and tax legislation, phasing out electricity subsidies, and reducing foreign exchange market intervention by the State Bank of Pakistan. A contingency plan for handling problem banks has been prepared and is being strengthened; an action plan to reform tax policy and administration has been adopted and will be implemented with technical assistance from the IMF and the World Bank.

Pakistan remains dependent on IMF and other international assistance for budgetary support and to keep the country more or less solvent. So far, Pakistan has met some of the IMF benchmarks, most recently implementing a 13.6% increase in electricity prices in January 2010. In 2009, Pakistan also received $2.11 billion in aid from the “Friends of Pakistan” group of allies, who pledged $5.7 billion in total.

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 4.7% in FY 2008-2009.

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.

Industry
Pakistan's manufacturing sector accounts for about 25% of GDP. Cotton textile production and apparel manufacturing are Pakistan's largest industries, accounting for about 51.4% of total exports. Other major industries include food processing, beverages, construction materials, clothing, and paper products. Manufacturing sector growth has slowed in the last 2 years due to energy shortages and capacity constraints. However, the sector is forecast to grow 5.5% for FY 2010. Despite government efforts to privatize large-scale parastatal units, the public sector continues to account for a significant proportion of industry. 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. 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.

Foreign Trade
Weak world demand for its exports and domestic political uncertainty have contributed to Pakistan's high trade deficits. In FY 2008, the trade deficit was over $15 billion. In the 2008-2009 budget, the Government of Pakistan raised the maximum tariffs from the 20%-25% range to the 30%-35% range on 300 luxury items due to the large trade gap and growing current account deficit. In the 2009-2010 fiscal year, Pakistan’s trade deficit decreased to $10.92 billion as a result of a decline in imports and a slight increase in exports.

Major imports, which fell to $28.4 billion in 2009, include petroleum and petroleum products, edible oil, wheat, chemicals, fertilizer, capital goods, industrial raw materials, and consumer products. Energy imports account for nearly 30% of Pakistan's imports, and the total gap between electricity supply and demand in Pakistan is over 4,800 megawatts (MW). The ongoing energy crisis and security concerns, together with a decline in global demand, have hampered Pakistan’s textile-reliant export base. Pakistan's exports continue to be dominated by cotton textiles and apparel, despite government diversification efforts.

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