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Pakistan: ECONOMY

ECONOMY

Overview: Throughout the 1990s, Pakistan’s economy suffered for a number of reasons, but from 2002 to 2004 the economy has recovered as a result of changes in government policies and the resumption of international lending. Economic statistics do not reflect the reality of the economy, because official economic data omit the informal economy, which is estimated to equal about 30 percent of the formal economy. Agriculture employs the greatest proportion of the working population but accounts for less than 25 percent of gross domestic product (GDP). This discrepancy is the result of rapid growth in services and industry since the 1980s, although major industries, such as textiles and sugar, are heavily reliant on agriculture.

Since independence, economic growth rates have been impressive but also have fluctuated widely. These fluctuations have occurred largely because successive governments have emphasized different sectors through changes in subsidies, regulations, and state ownership of industry. Furthermore, shifts in international aid and foreign capital flows have influenced economic growth through changes in government spending and budget deficits. Still, from 2002 to 2004 there were surpluses in the current account, inflation was low, and export growth was the highest in almost a decade.

Economic liberalization and deregulation began in the early 1980s, continued through the 1990s, and have accelerated under the government of President Pervez Musharraf (1999– ). The government has shifted from state ownership of many industries and heavy regulation of the private economy to privatization of some state industries, deregulation, facilitation of capital flows, and reforms of the financial system and monetary policy. Still, lax fiscal and monetary policies, infrastructural deficiencies, a poorly developed human resource base, and persistent market distortions that benefit a small elite of landowners, industrialists, and others undercut economic potential.

Gross Domestic Product (GDP)/Power Purchasing Parity (PPP): According to World Bank data, in 2003 Pakistan’s GDP was US$68.6 billion, gross national income (GNI) per capita was US$430, and PPP per capita was US$2,060. GDP grew an average of 5.4 percent annually from 1961 to 2003, but average annual GDP growth from 1993 to 2003 was lower, at 3.4 percent. Similarly, per capita GDP grew at an annual average of 2.6 percent from 1961 to 2003 and 0.9 percent from 1993 to 2003. From 1974 to 2004, agriculture’s proportion of GDP declined from 35 to 23 percent, whereas the proportion created by services increased from 43 percent to 52 percent, and industry and manufacturing increased slightly from 22 percent to 25 percent.

Government Budget: In fiscal year (FY) 2004, Pakistan’s total expenditures were US$16.0 billion, and total revenues were US$13.1 billion, both higher than in previous years. The federal budget has two components: the development budget for capital investment and development programs and the ordinary budget covering current expenditures such as defense and debt servicing. In FY 2004 current expenditures accounted for 82.9 percent of total expenditures. Debt servicing accounted for 21.1 percent of overall expenditures, defense for 18.0 percent, and development programs for 15.9 percent. During the 1990s and early 2000s, current expenditures were approximately 80 percent of planned spending, with debt servicing and defense accounting, respectively, for 35 percent and 25 percent of all expenditures. Provinces have their own budgets and limited tax powers, but about 25 percent of the federal budget is distributed to provincial governments to provide agricultural and social services.

From 1993 to 2003, the budget deficit declined, from 8.1 to 4.5 percent of gross domestic product (GDP), and current revenues increased, from 18.1 to 20.8 percent of GDP. Historically, tax collection has been extremely poor as a result of the corrupt, poorly functioning tax administration and numerous tax exemptions. In the 1990s, an estimated 80 percent of tax revenues came from indirect sources, and only 1.1 million of the country’s approximately 130 million people were on the tax rolls. However, from 1999 to 2004 the government instituted several tax reforms that reduced some tax exemptions, decreased excise taxes, and lowered tax rates for banks and private limited companies.

Inflation: The exact figures for inflation rates vary by source, but it is clear that rates of inflation declined throughout the 1990s and early 2000s. According to World Bank figures, inflation peaked at 25 percent in 1974, ranged from approximately 4 percent to 11 percent in the late 1970s and 1980s, and rose to 13 percent in 1991. After 1991, inflation generally declined to 2.4 percent in 2002 and 4.2 percent in 2003.

Agriculture, Forestry, and Fishing: According to official sources, agriculture, livestock, fishing, and forestry produced an estimated 23.3 percent of gross domestic product (GDP) for FY 2004. Employment in this sector has declined as other economic sectors have grown. Approximately 43.1 percent of the working population was employed in agriculture, forestry, and fishing in 2002, down from 48.3 percent in 1992, but still the largest proportion of the workforce among all economic sectors.

The major crops are wheat, rice, sugarcane, and cotton. Because of the generally arid climate and low soil moisture, agricultural production relies heavily on irrigation, nearly all of which is found in the east, around the Indus River and its tributaries. Agricultural growth has averaged around 4 percent annually since independence, and from 1947 to 2003 total food crop production increased from 4.7 million tons to 25.9 million tons. Substantial agricultural growth began in the 1960s with the use of high-yielding crops, increased government prices for crops, and subsidies for irrigation water, fertilizer, and other inputs. By the 1980s, Pakistan had become a net exporter of food grains. However, by the 1990s cotton output had declined, and the country became a net importer of food grains as the rate of population growth continued to exceed the rate of agricultural growth. The country’s unfulfilled agricultural potential is often seen as the result of the domination of large landowners, deterioration in the irrigation network, soil degradation from fertilizers, and poor government investment in agricultural research.

Mining and Minerals: Mining and minerals historically have been a weak economic sector. Since 2000 mining and quarrying have accounted annually for around 1.4 percent of gross domestic product (GDP) and employed an estimated 0.1 percent of the working population. Chromite is the only metallic ore that has been exploited on a commercial scale, but the country has substantial deposits of copper and iron ores as well. Pakistan also has significant deposits of non-metallic ores such as anhydrite, dolomite, gypsum, limestone, marble, and rock salt.

Industry and Manufacturing: Since the mid-1960s, the industrial sector has produced 19 to 25 percent of gross domestic product (GDP), accounting for 24.5 percent of GDP in 2004. Manufacturing and construction dominate the industrial sector, accounting for around 19 percent of GDP. Since the 1980s, approximately 17 to 20 percent of the working population has been employed in the industrial sector (25 percent in 2004), mostly in manufacturing and construction. Although the industrial base has diversified since independence, the production base depends heavily on textiles and sugar. Manufacturing output is therefore vulnerable to adverse weather conditions and fluctuations in international prices for cotton and sugar. Various liberalization reforms have been pursued since the early 1980s but have been hindered by substantial corruption, frequent raw material shortages, the government’s tendency to provide generous concessions to particular sectors (such as sugar refining and yarn spinning), and a burdensome tax structure that has helped promote the development of the informal economy.

Energy: Economic growth, population growth, and rising urbanization have increased energy demand, much of which is met by imported energy sources because of the country’s limited domestic energy resources. Traditional resources, such as firewood and dung, are commonly used, particularly in rural areas, and the government plans to reduce firewood consumption by introducing solar power to rural areas. Coal has provided around 5 percent of total domestic energy supply for decades, but most is of poor quality and generally is used in brick kilns.

With regard to nontraditional sources, oil and natural gas have provided around 37 to 43 percent of total energy supplies each since the late 1970s, and the country is attempting to expand hydropower production. For decades, Pakistan has depended heavily on oil imports, and in FY 2003 imported oil provided 31.6 percent of total energy supplies—at a cost of US$3.1 billion. Domestic oil provided 6.7 percent of total energy supplies, and domestic recoverable petroleum reserves have fallen to less than 50 percent of their estimated original amount. However, natural gas production nearly doubled to 2.7 million cubic feet per day in FY 2003, providing 43.8 percent of the total energy supply. The government has considered pipelines that could import around 1.5 billion cubic feet of gas per day, but as of early 2005 these plans were still under review. Hydropower has declined from 17.7 percent of total energy supply in FY 1979 to 11.3 percent in FY 2003. The government is interested in reversing this trend, but the area with the greatest potential for hydropower expansion (the mountainous north) is difficult to access and would have high transmission costs. Finally, nuclear power production was meager until the 2001 inauguration of the country’s second nuclear power facility, and nuclear energy production increased to 1.2 percent of total energy supply in FY 2003.

Services: The services sector accounts for about 50 percent of Pakistan’s annual gross domestic product (GDP). From 2000 to 2004, transportation, wholesale and retail trade, finance, public administration, defense, and services collectively provided about 52 percent of GDP. Services alone were about 9 to 10 percent of GDP. The services sector has suffered from many of the same problems as the industrial sector, such as political corruption and crippling tax rates, and sectoral growth has been limited by a dearth of educational resources and skilled labor.

Banking and Finance: Multilateral creditors have been a major source of finance and a major influence on economic and social development policies. However, bilateral and multilateral creditors periodically have ceased lending for economic reasons, such as government unwillingness or inability to comply with loan conditions, or political reasons, such as the 1998 nuclear tests and the 1999 military coup. Loans generally have resumed after the government agrees to loan conditions or internationally influential countries reduce their opposition to continued loans. In spite of inexpensive labor, a large domestic market, and access to regional markets, investors often are repelled by corruption, infrastructural difficulties, and various law and order problems in Pakistan. The government has pursued various reforms and liberalization measures, but domestic opposition has weakened implementation.

Domestic banking suffered in the 1990s but has shown signs of improvement from 2002 to 2004. In the 1990s, the government borrowed heavily from the domestic banking system, which prevented interest rates from declining and contributed to growth in the money supply and subsequent inflation. In addition, major domestic manufacturers failed to honor debts to domestic banks. However, from 2002 to 2004 privatization and deregulation of oil, gas, communications, and finance led to increases in investment. Overall investment in the early 1990s was around 19 percent of gross domestic product (GDP) annually but fell to 14.7 percent of GDP by FY 2001 and then increased to 15.5 percent of GDP by FY 2003.

Tourism: According to government statistics, the number of foreign tourists declined throughout the 1990s, as did earnings from foreign tourism. The number of foreign tourists ranged from 80,000 to 180,000 from the mid-1980s to the mid-1990s but dropped to around 70,000 annually thereafter. Pakistan receives about 6 percent of the foreign tourists who visit South Asia. Foreign exchange receipts from tourists peaked at US$156.5 million in 1990 but dropped to US$117 million by the end of the 1990s. The decline in foreign tourists is believed to be due to security concerns and lack of government effort to attract tourists.

Labor: Labor figures are difficult to assess, partly because of the large number of workers in the informal economy. According to government statistics for FY 2004, 30.4 percent of the total population is in the official, civilian labor force, with 28.1 percent classified as employed and 2.3 percent categorized as unemployed. Other figures put the unemployment rate at around 19.7 percent. A much greater percentage of men (83.1 percent) than women (16.9 percent) are active in the official civilian labor force. Agriculture, forestry, and fishing employ the greatest proportion of the civilian labor force (43.1 percent), followed by “community, social, and personal services” (15 percent), wholesale and retail trade (14.8 percent), and manufacturing (13.7 percent). These percentages have changed little since the 1960s. However, the informal economy employs the majority of workers—about 70 percent according to government data from 1974 to 2004—with most employed in wholesale and retail trade, manufacturing, or “community, social, and personal services.” Child labor is regarded as a prevalent problem. Although the exact number of child laborers is not known, official data indicate that 12.8 percent of those 10 to 14 years of age are active in the official labor force.

Foreign Economic Relations: Pakistan is a member of the Asian Development Bank (ADB), the Colombo Plan, the South Asian Association for Regional Cooperation (SAARC), and the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP). It has free-trade arrangements (FTAs) with China, Sri Lanka, and the European Union, and by the end of 2004 had sought FTAs with Mexico and the United States. Historically, political issues have affected Pakistan’s foreign trade and aid. In 1998 the United States and international donors imposed sanctions because of Pakistan’s successful nuclear tests. Those sanctions were dropped after the September 11, 2001, terrorist attacks because the United States regarded Pakistan as an important ally against transnational terrorists operating out of Afghanistan.

Imports: In 2003 imports totaled US$11.3 billion, up from around US$1.2 billion in the late 1960s. Imports of goods and services have constituted about 20 percent of gross domestic product (GDP) since the late 1960s, and since the early 1990s machinery, petroleum products, and chemicals have composed around 55 percent of imported goods. Most imports come from the United States, Japan, Kuwait, Saudi Arabia, Germany, the United Kingdom, and Malaysia. Imports increased throughout the 1990s, at least partly because the government reduced maximum tariff rates from 92 percent in 1994 to 35 percent in 1999.

Exports: In 2003 exports of goods and services totaled US$10.9 billion, up from around US$750 million in the late 1960s. Exports of goods and services have increased from around 10 percent of gross domestic product (GDP) in the late 1960s to 15 percent throughout the 1990s. Since the early 1990s, primary commodity exports have fallen from about 20 percent to 10 percent of exports, while manufactured goods have increased from 55 percent to 75 percent. Manufactured cotton textiles have accounted for about 60 percent of total exports since the early 1990s, and other manufactured goods (such as leather goods, pharmaceuticals, and sporting goods) and primary commodities (particularly rice) for 25 percent of exports. The primary importers of Pakistani goods are the United States, Germany, Japan, the United Kingdom, Hong Kong, the United Arab Emirates, and Saudi Arabia. Since 2000, Pakistan has promoted exports by rebating import duties, sales taxes, and income taxes, and by concessional export financing.

Trade Balance: Pakistan has had an annual trade deficit since the early 1970s. According to government data, the trade deficit in goods was US$1.5 billion in FY 1991, increased to US$3.7 billion in FY 1997, and thereafter declined to US$1.1 billion in FY 2003. A similar trend is evident in World Bank figures for Pakistan’s external balance on goods and services, with a deficit of US$691 million in 1970, US$3.1 billion in 1990, and US$444 million in 2003.

Balance of Payments: Data vary by source, and from 1993 to 2004 government institutions did not report relevant statistics according to International Monetary Fund guidelines for member states. However, it is clear that Pakistan has had balance of payments difficulties for decades, largely as a result of current account deficits ranging from US$750 million to US$2.7 billion from 1970 to 2001. Historically, current account deficits have been due to trade deficits. However, from 2002 to 2004 current account surpluses ranged from US$1.9 billion to US$4.2 billion as trade deficits declined and private transfers increased—particularly remittances from Pakistanis working outside the country. As a result of balance of payments problems, the official currency, the rupee, often has declined in value, and the government frequently has had to reschedule debt payments and resort to high-interest emergency borrowing.

External Debt: Estimates of the size of Pakistan’s external debt vary by source. However, observers generally believe that the combination of poor tax administration, high government expenditures, and heavy dependence on external funds has resulted in massive fiscal deficits that, at times, have nearly crippled the economy and rendered Pakistan one of the world’s most indebted countries. When the United States and international lending agencies imposed sanctions after Pakistan’s 1998 nuclear tests, the country was close to defaulting on external obligations. According to the World Bank and the State Bank of Pakistan, Pakistan’s total external debt was approximately US$3.4 billion in 1970, US$9.9 billion in 1980, US$20.6 billion in 1990, and US$36.1 billion in 2003 (about 52.6 percent of the gross domestic product).

Foreign Investment: Since the 1980s, the government has introduced reforms to attract foreign investment. Foreign investment has increased over time, but corruption, civil disorder, and occasional international economic sanctions have acted as major disincentives to investment. According to World Bank figures, foreign direct investment (FDI) in Pakistan increased from US$23 million in 1970 to US$612 million in 2003 (approximately 1 percent of the 2003 FDI in China). From 2000 to 2003, FDI increased in finance, transport, communications, mining, quarrying, oil, and gas, with the principal sources being Switzerland, the United States, the United Arab Emirates, and the United Kingdom.

Foreign Aid: The economy is heavily dependent on bilateral and multilateral aid, which substantially influence economic growth. Aid flows have been reduced as a result of international sanctions for Pakistan’s suspected support of insurgents in Kashmir and for the country’s 1998 nuclear tests. However, after September 11, 2001, the United States and other countries dropped economic sanctions against Pakistan because of its potential role in the war on terrorism. Prior to 2000, Pakistan had never completed an International Monetary Fund (IMF) lending program because of government unwillingness to comply with loan package conditions and political issues such as nuclear weapons tests or difficulties in Kashmir. However, from 2000 to 2004 Pakistan’s relations with the IMF showed marked improvement.

Currency and Exchange Rate: For decades Pakistan’s official currency, the rupee (Rs), has declined in value against the U.S. dollar. The official exchange rate was Rs4.76 to US$1 in 1970, Rs9.85 to US$1 in 1980, Rs21.61 to US$1 in 1990, Rs53.65 to US$1 in 2000, and approximately Rs59.34 to US$1 in late February 2005.

Fiscal Year: July 1 to June 30.







PUBLISHER / AUTHOR: This series of profiles of foreign nations is part of the Country Studies Program, formerly the Army Area Handbook Program. The profiles offer brief, summarized information on a country's historical background, geography, society, economy, transportation and telecommunications, government and politics, and national security. In addition to being featured in the front matter of published Country Studies, they are now being prepared as stand-alone reference aides for all countries in the series, as well as for a number of additional countries of interest. The profiles offer reasonably current country information independent of the existence of a recently published Country Study and will be updated annually or more frequently as events warrant.




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