Economy of Pakistan

Economy - overview: Pakistan is a poor, heavily populated country, suffering from internal political disputes, lack of foreign investment, and a costly confrontation with neighboring India. Pakistan's economic outlook continues to be marred by its weak foreign exchange position, notably its continued reliance on international creditors for hard currency inflows. The Pervez Musharraf government faces $32 billion in external debt and has nearly completed rescheduling with Paris Club members and other bilateral creditors. Foreign loans and grants provide approximately 25% of government revenue, but debt service obligations total nearly 50% of government expenditure. The International Monetary Fund has remained silent on future disbursements from its $1.56 billion bailout package initiated in 1999, and other international financial institutions are gauging the current administration's resolve to implement necessary fiscal reforms. MUSHARRAF's ambitious economic agenda includes measures to widen the tax net, privatize public sector assets, and improve its balance of trade position. Pakistan has made privatization a cornerstone of economic revival, but may have difficulty attracting new investors until it receives positive endorsement from the World Bank. The Bank has withheld its approval pending resolution of the pricing dispute between the government and independent power producers.

Economy - in greater depth:
Extreme poverty and underdevelopment in Pakistan, as well as fiscal mismanagement that has produced a large foreign 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. However, the economy is extremely vulnerable to Pakistan's external and internal shocks, such as in 1992-93, when devastating floods and political uncertainty combined to depress economic growth sharply and the financial crisis in Asia which hit major markets for Pakistani textile exports. Average real GDP growth from 1992 to 1998 dipped to 4.1 percent annually.

Since the early 1980s, the government has pursued market-based economic reform policies. Market-based 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. Since that time the government has removed barriers to foreign trade and investment, begun to reform the financial system, eased foreign exchange controls, and privatized dozens of state-owned enterprises. Pakistan continues to struggle with these reforms, having mixed success, especially in reducing its budget and current account deficits. The budget deficit in fiscal year 1996-97 was 6.4% of GDP. Initial data implied a reduction in 1997-98 to 5.4% and in 1998-99 to 4.3%, but revised data indicates that the deficit is probably still over 5.0%. In that same 2-year period, the rupee was devalued against the dollar 12% and 10.5% respectively.

Economic reform was further 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 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. The current government has announced a program of reforms and is in discussion with the IMF regarding a Poverty Reduction and Growth Facility to begin in July 2000.

With a per capita gross domestic product of about USD 441, the World Bank considers Pakistan a low-income country. No more than 39 percent of adults are literate, and life expectancy is about 62 years or less. The population, currently about 130 million, is growing at about 2.6%, very close to the GDP growth rate. Relatively few resources have been devoted to socio-economic development on infrastructure projects. Inadequate provision of social services and high population growth have contributed to a persistence of poverty and unequal income distribution.

Agriculture and Natural Resources
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 24% of GDP and employs about 50% 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. Despite intensive farming practices, Pakistan remains a net food importer. 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 less than 4%. Agricultural reforms, including increased wheat and oilseed production, play a central role in the new government's economic reform package.

Pakistan has extensive energy resources, including fairly sizable natural gas reserves, some proven oil reserves, coal, and large hydropower potential. However, the exploitation of energy resources has been slow due to a shortage of capital and domestic political constraints. For instance, domestic petroleum production totals only about half the country's oil needs. The need to import oil also contributes to Pakistan's persistent trade deficits and the shortage 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.

Industry Pakistan's manufacturing sector accounts for about 26% 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. Despite ongoing government efforts to privatize large-scale parastatal units, the public sector continues to account for a significant proportion of industry. In FY 1998-99, gross fixed capital formation in the public sector accounted for about 38% of the total. In the face of an increasing trade deficit, the government hopes to diversify the country's industrial base and bolster export industries.

Foreign Trade and Aid
Weak world demand for its exports and domestic political uncertainty have contributed to Pakistan's high trade deficit. In FY 1998-99, Pakistan recorded a current account deficit of $1.7 billion, only a slight improvement over the FY 1997-98 current account deficit of $1.9 billion. Pakistan's exports 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. External imbalance has left Pakistan with a growing 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 now exceeds 34% of export earnings.

Pakistan receives 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, when then-President George H. W. Bush could no longer certify under the Pressler Amendment to the Foreign Assistance Act (Section 620e[e]) "that Pakistan does not possess a nuclear explosive device and that the proposed assistance package reduces significantly the risk that Pakistan will acquire a nuclear explosive device."

GDP: purchasing power parity - $282 billion (1999 est.)

GDP - real growth rate: 3.1% (1999 est.)

GDP - per capita: purchasing power parity - $2,000 (1999 est.)

GDP - composition by sector:
agriculture: 25.2%
industry: 26.6%
services: 48.2% (1998 est.)

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

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

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

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: agriculture 44%, industry 17%, services 39% (1999 est.)

Unemployment rate: 7% (FY98/99 est.)

Budget:
revenues: $10 billion
expenditures: $11.7 billion, including capital expenditures of $NA (FY98/99)

Industries: textiles, food processing, beverages, construction materials, clothing, paper products, shrimp

Industrial production growth rate: 3.8% (1999 est.)

Electricity - production: 59.262 billion kWh (1998)

Electricity - production by source:
fossil fuel: 63.05%
hydro: 36.31%
nuclear: 0.64%
other: 0% (1998)

Electricity - consumption: 55.114 billion kWh (1998)

Electricity - exports: 0 kWh (1998)

Electricity - imports: 0 kWh (1998)

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

Exports: $8.4 billion (f.o.b., 1999)

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: $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)

Debt - external: $32 billion (1999 est.)

Economic aid - recipient: $2 billion (FY97/98)

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)

Fiscal year: 1 July - 30 June

See also : Pakistan