Pakistan - Economy

Despite steady expansion of the industrial sector during the 1990s, Pakistan's economy remains dominated by agriculture. Agriculture and industry made roughly the same contribution to GDP—26% and 25%, respectively—in 2001, although 44% of the labor force was in agriculture and only 17% industry. About 70% of export revenues are generated by agriculture or agriculture-based manufactures, with cotton alone accounting for 58.9% of the total in 2000/01. Exports of primary agricultural products are concentrated in cotton and rice. One-fourth of the land is farmed or used for grazing, and much of this is planted to food crops for domestic consumption. Pakistan is generally poor in natural resources, although extensive reserves of natural gas and petroleum are being exploited. Iron ore, chromite, and low-quality coal are mined.

This strong performance not withstanding, a growing debt-servicing burden, large government expenditures on public enterprises, low tax revenues, high levels of defense spending, and a rapid rise in imports with burgeoning domestic demand contributed to serious fiscal and current account deficits during the late 1980s. In response, in 1988 the government initiated a major structural reform program with World Bank and IMF support. When the country was created in 1947, there were no industries, and few banks, or mercantile firms. Since that time, industrial production has risen significantly. In 1998, industry accounted for about 26% of the GDP, compared with only 7% in 1950. Thanks in part to significant expansion of power facilities, largely in the Indus basin, the pace of economic development was particularly rapid during the 1980s. For most of the decade, the annual GDP growth rate averaged 6.5%, reflecting an expansion of over 4% annually in the agricultural sector and over 7% in value added in the industrial sector.

The government pursued policies aimed at private sector-led development, macro economic stability, and structural reforms. Overall growth indicators remained promising with the reform measures, as GDP increased by 5.5% in 1990/91 and 7.8% in 1991/92, and export growth averaged a robust 14% between 1989 and 1992. These improvements notwithstanding, reform efforts secured less than expected reductions in the country's balance of payment deficits, due in part to deteriorating terms of trade in the wake of rising oil prices during the 1991 Gulf War. Severe floods in the Sindh and Punjab provinces in late 1992 and a contraction in international commodity markets weakened Pakistan's export sector during 1992/93, further exacerbating the country's trade and current account deficits and helping to reduce GDP growth to only 3% in 1993. In March of 1994 the government received IMF approval of a three-year Enhanced Structural Adjustment Facility (ESAF) to support reforms. The IMF wanted austerity measures aimed at reducing the government deficit to 4% of GDP, a reduction in the maximum tariff rate from 70% to 45%, increased privatization of large state-owned enterprises, and a tax on agricultural income. However, the government's failure to follow the IMF recommendations and liberalize the economy caused the IMF to suspend the $1.5 billion loan in mid-1995. The suspension of the loan worried investors and damaged Pakistan's debt ratings. The trade deficit grew, foreign exchange reserves dwindled, and inflation remained high.

After the government recommitted itself to reform, the IMF approved a new $600 million standby arrangement in September. Still, by 1996 the economy was in its worst recession in 25 years. Tax receipts were falling well below their targets and export earnings had declined, leaving the government with a deepening foreign-exchange crises as reserves fell to only $500 million by the end of the year. By mid-1997, the government owed $1.6 billion in interest on $30 billion owed to foreign creditors, putting the country perilously close to default. Growth in GDP was only 1.2% in 1997, down from 6.1% in 1996. Growth rebounded to 4.2% in 1998/99 as per capita income reached $434, up from $400 in 1990. However, Pakistan came under international economic sanctions following its six nuclear bomb tests in May 1998, and then again after the elected government was over thrown in a military coup in 1999. The growth rate declined to 3.9% in 1999/00 and then to $2.5% in 2000/01, as per capita income fell to $397. Net public debt in 2000/01 rose to 103.8% of GDP. In November 2000, the government entered into a 10-month stand-by agreement with the IMF preliminary to the rescheduling of $1.8 billion of sovereign debt with the Club of Paris countries in January 2001. After the 11 September 2001 terrorist attacks on the United States, more concessional finance was made available. In December 2001, Pakistan entered into a three-year arrangement with the IMF under its Poverty Reduction and Growth Facility (PRGF), and under a new Paris Club agreement, over $12 billion of national debt was rescheduled. Net public debt in 2001/02 decreased marginally to 96.2% of GDP. GDP growth rose slightly o 3.6% and inflation eased to2.7%, down from 4.4% the year before. The most improved economic indicator was foreign reserves, which rose from about $900 million in 1999 to over $10 billion in March 2003.

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