ECONOMY

Despite steady expansion of the industrial sector during the 1990s, Pakistan's economy remains dominated by agriculture. Agriculture and industry made roughly similar contributions to GDP21.6% and 25.1%, respectivelyin 2005, although 42% of the labor force was in agriculture and only 20% in industry. About 70% of exports revenues are generated by agriculture or agriculture-based manufactures, with cotton alone accounting for about 60% of the total. 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, chromites, and low-quality coal are mined. This strong performance notwithstanding, 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, macroeconomic 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 1995. 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 foreignexchange crisis as reserves fell to only $500 million by the end of the year. By mid1997, 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 overthrown 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 Paris Club 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 to 3.6% and inflation eased to 2.7%, 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. In October 2005, a devastating earthquake in northern Pakistan and Kashmir killed some 80,000 people and left more than 3 million homeless, mostly in Pakistan, to survive the winter. Foreign donors in November 2005 pledged over $6 billion to support reconstruction in the wake of the earthquake. Despite the earthquake, however, the economy was expected to perform strongly in 2006: real GDP growth was projected to reach 6.6% in 2005/06 and 6% in 2006/07. The annual inflation rate was forecast to average 8.6% in 2006 and 6.7% in 2007. Although substantial progress had been made on macroeconomic reforms, by 2006 progress on more politically-sensitive reforms had slowed. For example, in the 2006 fiscal year budget, the government did not impose taxes on the agriculture or real estate sectors, despite Pakistan's severely-low tax-to-GDP ratio. Despite Pakistan's low level of development, prospects for job creation and poverty reduction were good in the medium term. GDP growth, prodded by double-digit gains in industrial production over 2005, has become less dependent on agriculture, and stood at 8.4% in 2005. Foreign exchange reserves continued to reach new levels in 2005, spurred on by

steady workers' remittances. Real GDP growth averaged 5% over the 200105 periods, and inflation averaged 5.2% over the same period.

FOREIGN TRADE
Pakistan has suffered a weak trade position since the early 1970s, as the cost of oil imports have raised while prices for the country's main exports have declined on the international market. Exports fell 2.5% and imports dropped 20% in 1998, but by 2000 they were back on the upswing, growing at 8.3% and 19%, respectively. Pakistan's commerce ministry estimates that up to $1.5 billion of unregistered trade occurs annually, mostly from smuggled imports. Smuggled goods (tea, soap, domestic appliances, batteries, tires, bicycles, and televisions) enter the country primarily from Afghanistan. The important commodity exports for Pakistan are cotton, textiles, and clothes. Other major exports include rice and leather. In 2003, Pakistan's major exports were: cotton fabrics (10.8% of all exports); cotton yarn and thread (9.6%); and rice (5.3%). Primary imports were: machinery and transportation equipment (26.7% of all imports); mineral fuels and related (23.8%); and chemicals (16%). During the 1980s, the United Kingdom, traditionally Pakistan's most important trading partner, slipped behind the United States, Japan, and Germany. In 2004, Pakistan's leading markets were: the United States (21% of all exports); the UAE (10.9%); the United Kingdom (7%); and Germany (5.1%). Leading suppliers were: China (12.2% of all imports); the United States (11.1%); the UAE (10.7%); and Saudi Arabia (10.4%). http://www.encyclopedia.com/topic/Pakistan.aspx