Economy of Pakistan

Pakistan is a developing country with the world's sixth-largest population, and an economic growth rate that has been consistently positive since a 1951 recession. At purchasing power parity, Pakistan's GDP in 2005 was estimated at approximately $368 billion, slightly smaller than that of thePhilippines (World Bank, PDF).

Pakistan's economic outlook has brightened in recent years in conjunction with rapid economic growth and a dramatic improvement in its foreign exchange position as a result of its current account surplus and a consequent rapid growth in hard currency reserves.

The administration of President Pervez Musharraf has sought and received debt relief from international lenders, reducing its external debt from $32 billion to a discounted present value less than half of that. The government is using Pakistan's surplus to prepay expensive debt and replace it with commercial debt, which it has been able to obtain at low interest rates as a result of its improved credit rating.

Musharraf's economic agenda includes measures to widen the tax net, privatize public sector assets, and improve its balance of trade. Pakistan has made governance reforms, privatization, and deregulation the cornerstones of its economic revival.

Although it has received a positive endorsement from international financial institutions such as the World Bank, the IMF and the ADB, as well as improved credit ratings from S&P and Moody's, Pakistan is still experiencing a costly dearth of Foreign Direct Investment.

Pakistan's Finance Minister, Shaukat Aziz, who has been credited with Pakistan's economic turnaround, was elected to the office of Prime Minister on August 28, 2004.

Economy in greater depth

Underdevelopment and extreme poverty in parts of Pakistan - as well as fiscal mismanagement in the 1990s that left a large debt - obscure the potential of a country which has the resources and entrepreneurial skill to support rapid economic growth. In fact, the economy averaged an impressive growth rate of 6 percent per year during the 1980s and early 1990s.

The economy had been believed to be extremely vulnerable to adverse events, but proved to be unexpectedly resilient in the face of multiple shocks concentrated into a period of less than four years - the Asian financial crisis, the 1998 nuclear tests, global recession, economic sanctions, prolonged drought, the 9/11 attacks, war in Afghanistan, and military tensions with India. Despite these adverse events, the Pakistani economy managed to maintain a positive annual growth rate.

It should be noted that Pakistan's GDP has consistently grown every year since a 1951 recession. In the current century, Pakistan's major stock market index (the KSE-100) has grown by a larger percentage than any other major stock-market index in the world. The rise in the index was driven in part by high dividend yields and profit growth in its constituent companies.

In recent years, Pakistan's GDP growth has exceeded its targets. In the twelve months to June 30, 2004, the GDP grew at 6.4%. Despite high oil prices, the next year's GDP is expected to maintain its 6.4% growth rate.

Since the early 1980s, the government has pursued market-based economic reform policies. Market-based reforms began to take hold in 1988, and since that time the government has removed barriers to foreign trade and investment, substantially reformed the financial system, eased foreign exchange controls, and privatized dozens of state-owned enterprises. Pakistan continues to struggle with these reforms, having mixed success.

While the country has a current account surplus and both imports and exports have grown rapidly in recent years, it still has a large merchandise-trade deficit. The budget deficit in fiscal year 1996-97 was 6.4% of GDP. The budget deficit in fiscal year 2003-04 is expected to be around 4% of GDP.

Since the turn of the century, Pakistan's current account surplus has put upward pressure on the Pakistani rupee, which rose from 64 rupees per dollar to 57 rupees per dollar. The State Bank of Pakistan (the central bank) stabilized the rise by lowering interest rates and buying dollars.

After short-term Pakistani T-bond rates fell below 2%, with government borrowing having declined, banks greatly expanded their lending to businesses and consumers. Construction activity, sales of durable goods such as trucks and automobiles, and housing purchases have all jumped to record levels. Private sector credit expanded by 28.5% in 2003.

Despite rapid growth in domestic automobile manufacturing, imports have also risen to meet the increased demand. Major automakers, such as BMW, Toyota, and Honda have invested in manufacturing facilities in the country.

Pakistan's nuclear tests in May 1998 triggered the imposition of economic sanctions by the G-7. International default was narrowly averted by the partial waiver of sanctions and the subsequent reinstatement of Pakistan's IMF ESAF/EFF in early 1999, followed by Paris Club and London Club reschedulings. The Sharif government had difficulty meeting the conditionality of the IMF program, which was suspended in July 1999, and resumed later during Pervez Musharraf's administration. Having improved its finances, the government has stated that it will no longer require IMF assistance after November 2004, when the current assistance program ends.

With a per capita GDP of about $2080 (PPP, 2003) the World Bank considers Pakistan a low-income country. Pakistan has a large informal economy, which the government is trying to document and assess. Approximately 50 percent of adults are literate, and life expectancy is about 64 years or less. The population, about 155 million in 2004, is growing at about 1.96%.

Relatively few resources have been devoted to socio-economic development or infrastructure projects. Inadequate provision of social services and very high birth rates in the past have contributed to a persistence of poverty. An influential recent study (Feeney and Alam, 2003) concluded that the fertility rate peaked in the 1980s, and has since fallen sharply. Pakistan has a family-income Gini index of 41, close to the world average of 39.

Agriculture and natural resources

Agriculture

Pakistan's principal natural resources are arable land and water. About 25% 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 23% of GDP and employs about 44% of the labor force. The most important crops are wheat, sugarcane, cotton, and rice, which together account for more than 75% of the value of total crop output. Pakistan is a net food exporter, except in occasional years when its harvest is adversely affected by droughts. Pakistan exports rice, cotton, fish, fruits, and vegetables and imports vegetable oil, wheat, cotton, 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 has since declined to about 4%. Agricultural reforms, including increased wheat and oilseed production, play a central role in the government's economic reform package.

Energy and minerals

Pakistan has extensive energy resources, including fairly sizable natural gas reserves, some proven oil reserves, coal, and a large hydropower potential. However, the exploitation of energy resources has been slow due to a shortage of capital and domestic political constraints. Domestic petroleum production totals only about half the country's oil needs, and the need to import oil has contributed to Pakistan's trade deficits and past shortages of foreign exchange. The current government has announced that privatization in the oil and gas sector is a priority, as is the substitution of indigenous gas for imported oil, especially in the production of power. Pakistan is a world leader in the use of compressed natural gas (CNG) for personal automobiles.

Industry

Pakistan's industrial sector accounts for about 24% of GDP. Cotton textile production and apparel manufacturing are Pakistan's largest industries, accounting for about 64% of total exports. Other major industries include cement, fertilizer, edible oil, sugar, steel, tobacco, chemicals, machinery, and food processing.

The government is privatizing large-scale parastatal units, and the public sector accounts for a shrinking proportion of industrial output, while growth in overall industrial output (including the private sector) has accelerated. Government policies aim to diversify the country's industrial base and bolster export industries.

In FY 2002-03, real growth in manufacturing was 7.7%. In the twelve months ending June 30, 2004, large-scale manufacturing grew by more than 18% compared to the previous twelve-month period.

Services

Pakistan's service sector accounts for about 51% of GDP. Transport, storage, communications, finance, and insurance account for 24% of this sector, and wholesale and retail trade about 30%. Pakistan is trying to promote the information industry and other modern service industries through incentives such as long-term tax holidays.

Foreign trade and aid

Fluctuating world demand for its exports, domestic political uncertainty, and the impact of occasional droughts on its agricultural production have all contributed to variability in Pakistan's trade deficit.

In the six months to December 2003, Pakistan recorded a current account surplus of $1.761 billion, roughly 5% of GDP. Pakistan's exports continue to be dominated by cotton textiles and apparel, despite government diversification efforts. Exports grew by 19.1% in FY 2002-03. Major imports include petroleum and petroleum products, edible oil, chemicals, fertilizer, capital goods, industrial raw materials, and consumer products.

Past external imbalances left Pakistan with a large foreign debt burden. Principal and interest payments in FY 1998-99 totaled $2.6 billion, more than double the amount paid in FY 1989-90. Annual debt service peaked at over 34% of export earnings before declining. With a current account surplus in recent years, Pakistan's hard currency reserves have grown rapidly. Improved fiscal management, greater transparency and other governance reforms have led to upgrades in Pakistan's credit rating. Together with lower global interest rates, these factors have enabled Pakistan to prepay, refinance and reschedule its debts to its advantage.

Despite the country's current account surplus and increased exports in recent years, Pakistan still has a large merchandise-trade deficit. The budget deficit in fiscal year 1996-97 was 6.4% of GDP. The budget deficit in fiscal year 2003-04 is expected to be around 4% of GDP.

Pakistan has recently received about $2.5 billion per year in loan/grant assistance from international financial institutions (e.g., the IMF, the World Bank, and the Asian Development Bank) and bilateral donors.

Increasingly, the composition of assistance to Pakistan has shifted away from grants toward loans repayable in foreign exchange. All new U.S. economic assistance to Pakistan was suspended after October 1990, and additional sanctions were imposed after Pakistan's May 1998 nuclear weapons tests. The sanctions were lifted by president George W. Bush after Pakistani president Musharraf allied Pakistan with the U.S in its war on terror.

Having improved its finances, the government announced in 2004 that IMF assistance was no longer needed. The IMF program is consequently being ended. (Pakistan ends 15-year ties with IMF; Daily Times, September 7, 2004)

Economic statistics

Gross domestic product

• GDP at purchasing power parity: $293 billion (2003 est.)
• Real growth rate: 6.4% (2003 est.)
• Per capita GDP at purchasing power parity - $2,080 (2003 est.)
• Composition by sector: (2002-03 est.)
  • agriculture: 23.2%
  • industry: 25%
  • services: 50.7%

Poverty and income distribution

Poverty

• Population below poverty line: 34% (1991 est.)

Income distribution

• Gini Index: 41
• Household income or consumption by percentage share:
  • lowest 10%: 4.1%
  • highest 10%: 27.7% (1996)

Money

Inflation and monetary statistics

Inflation rate (consumer prices): 6% (1999 est.)

Currency and foreign exchange

• Currency: 1 Pakistani rupee (PRe) = 100 paisa
• Exchange rates: Pakistani rupees (PRs) per US$1 - 51.90 (December 1999), 44.550 (1998), 40.185 (1997), 35.266 (1996), 30.930 (1995)

Labor and unemployment

• Labor force: 38.6 million (1999) note: extensive export of labor, mostly to the Middle East, and use of child labor
• Labor force - by occupation: (1999 est.)
  • agriculture 44%
  • industry 17%
  • services 39%
• Unemployment rate: 7% (FY98/99 est.)

Fiscal

• Budget:
• Revenues: $12.3 billion
• Expenditures: $11.7 billion, including capital expenditures of $NA (FY98/99)
• Debt - external: $32 billion (1999 est.)
• Economic aid - recipient: $2 billion (FY97/98)
• Fiscal year: 1 July - 30 June

Industrial sector

• Industries: textiles, food processing, beverages, construction materials, clothing, paper products, shrimp
• Industrial production growth rate: 7.7% (2003)
• Large-scale manufacturing growth rate: 18% (2003)

Electricity

Electricity production

• Electricity - production: 59,262 GWh (1998)
• Electricity - production by source (1998)
  • fossil fuel: 63.05%
  • hydro: 36.31%
  • nuclear: 0.64%

Electricity consumption

• Electricity - consumption: 55,114 GWh (1998)
• Electricity - exports: None
• Electricity - imports: None

Agriculture

• Agriculture - products: cotton, wheat, rice, sugarcane, fruits, vegetables; milk, beef, mutton, eggs

Trade

Exports

• Exports: $11.3billion (f.o.b., 2003)
• Exports - commodities: cotton, fabrics, and yarn, rice, other agricultural products
• Exports - partners: US 22%, Hong Kong 7%, UK 7%, Germany 7%, UAE 5% (FY98/99)

Imports

• Imports: $9.8 billion (f.o.b., 1999)
• Imports - commodities: machinery, petroleum, petroleum products, chemicals, transportation equipment, edible oils, grains, pulses, flour
• Imports - partners: US 8%, Japan 8%, Malaysia 7%, Saudi Arabia 7%, UAE 7% (FY98/99)

See also

• Pakistan
• Demographics of Pakistan

External links

• Statistics Division, Government of Pakistan
• Ministry of Finance, Government of Pakistan