Economy and Trade
The World Bank classifies Pakistan as a low-income country, with around 33% of the population of 162 million living below the poverty line. It says that around 50% of adults are illiterate. High population growth (of around 1.81% per year), poor governance, weak security within the country, and a turbulent political environment have contributed to the country’s poor economic performance.
Agriculture accounts for more than 21% of GDP and provides employment for over 40% of the labor force. Most of the population, directly or indirectly, is dependent on this sector. The most important crops are cotton, wheat, rice, sugarcane, fruit, 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. It is also heavily dependent on oil imports, which account for around half its energy needs. Textiles account for around 70% of manufacturing output.
Economic Policy over 12 Months
Until the economic crisis broke out in 2008, Pakistan had enjoyed a relatively robust economic performance. However, economic policymakers in Pakistan spent much of 2008 and 2009 grappling with the latest crisis to hit the country. Surging oil prices in the first eight months of 2008 caused the current account deficit to increase alarmingly, triggering a plunge in the value of the rupee, as well as concerns that the country could default on its foreign debt.
In October 2008, Pakistan was forced to seek an emergency bailout from the International Monetary Fund (IMF) after key allies—China, the United States, and Saudi Arabia—refused to provide funds to the country. The government had been reluctant to tap the IMF. Past IMF programs, requiring Pakistan to agree to austerity measures, were deeply unpopular. Islamabad had hoped that, as a frontline state in the War on Terror, allies would come to its aid.
Under the IMF agreement, Pakistan was given immediate access to US$3.1 billion of the loan under a 23-month facility, with the rest phased in, subject to quarterly review. In February 2009, Pakistan asked the IMF to increase its loan from US$7.6 billion to US$12.1 billion.
In August 2009, the IMF extended the program to 25 months and raised its support to US$11.3 billion to help address increased risks and financing needs. The program aims to:
protect the poor by strengthening the social safety net—this is a key element of the government’s policy strategy;
raise budgetary revenues through comprehensive tax reforms, to enable significant increases in public investment and the social spending required to achieve sustainable growth.
The IMF said in an April 2010 report that the program had got off to a good start and Pakistan’s economy has made progress toward stabilization. Macroeconomic imbalances have shrunk and inflation fell below 10% in mid-2009. More recently, however, inflation has been on the rise and reached 13% in March 2010. The exchange rate has become somewhat more flexible, and the current account deficit has narrowed considerably, helped by the decline in oil prices and a robust increase in workers’ remittances.
However, in April 2010, the IMF delayed disbursement of the fifth installment of its US$11.3 billion standby loan to Pakistan, after disagreements with Islamabad over Pakistan’s burgeoning budget deficit and the introduction of new revenue-raising measures.
Economic Performance over 12 Months
Pakistan’s already troubled economy came under severe pressure during the calendar year 2008, due to the sharp hike in oil prices and the impact of the global financial crisis. Economic growth fell from 6.8% in fiscal 2007 (year ending June 2007) to 5.8% in fiscal 2008. The economy grew by just 2% in fiscal 2008, reflecting the impact of the global slowdown. However, the agriculture sector grew by 4.7%, due to better weather conditions and a good wheat support price.
The IMF said in its April 2010 report that modest signs of recovery in manufacturing (mainly in the textile sector) and exports suggested that the Pakistani economy was regaining momentum, and that economic growth in fiscal 2010 would reach or even exceed 3%, and could rise to 4% in fiscal 2011. However, the IMF warned that adverse security developments continue to hurt domestic and foreign investors’ confidence, and electricity shortages continue to prevent the economy from achieving its potential.
According to Pakistan’s central bank, the country’s GDP will grow between 2.5% and 3.5% during fiscal year 2010. When Pakistan’s rapid population growth is taken into account this amounts to virtually no growth, and this in a country marked by extreme poverty and social inequality.
The government’s finances deteriorated along with the economy in 2008. The budget deficit rose to 7.4% of GDP in fiscal 2008, from 4.3% in fiscal 2007. However, in 2009 the budget deficit narrowed to 4.3%. Pakistan’s budget deficit may reach 5.5% of GDP in the 2009/10 fiscal year, overshooting a 5.1% target agreed with the IMF, officials said in April 2010. High security-related spending and a shortfall in aid promised by allies were the main reasons for the growing deficit, the official said. The government’s original budget deficit target for fiscal year 2009/10 was 4.9% of GDP. Analysts and officials have also identified low revenue collection as another reason for the widening deficit.
Inflation remained high in early 2010, and well in excess of government forecasts. According to the Federal Bureau of Statistics, the consumer price index was 13.02% higher in February 2010 than a year earlier, mainly due to hikes in electricity, energy, and food prices. A key condition of the IMF loan is that the Pakistan People’s Party-led coalition government must reduce, and ultimately eliminate, gasoline and electricity price subsidies.
Support for Inward Investment and Imports
The government encourages foreign investment. The Board of Investment assists firms that wish to invest in Pakistan. It offers a number of services, including the provision of information on potential investment opportunities within the country. It can also facilitate introductions to joint-venture partners.
The tariff is Pakistan’s main trade policy instrument. The authorities have reduced tariffs significantly during the current decade, particularly with regional trade partners.
Pakistan has come under pressure from the IMF to repeal tax exemptions in recent years, and few now exist. (For more information on the country’s tax policy, see the website of the Pakistan Federal Board of Revenue.).
GDP growth: 2.7% (2009 est.)
GDP per capita: US$2,600 (2009 est.)
CPI: 14.2% (2009 est.)
Exchange rate versus US dollar: Rs81.41 (2009)*
Unemployment: 15.2% (2009 est.)
FDI: US$27.95 billion (December 31, 2009 est.)
Current account deficit/surplus: −US$2.42 billion (2009 est.)
Population: 177,276,594 (July 2010 est.)
* Pakistani rupee
Source: CIA World Factbook except where stated