In 2000, the government made significant macroeconomic reforms: Privatizing Pakistan's state-subsidized utilities, reforming the banking sector, instituting a world-class anti-money laundering law, cracking down on piracy of intellectual property, and moving to quickly resolving investor disputes.

After September 11, 2001, and Pakistan's proclaimed commitment to fighting terror, many international sanctions, particularly those imposed by the United States, were lifted. Pakistan's economic prospects began to increase significantly due to unprecedented inflows of foreign assistance at the end of 2001.

This trend is expected to continue through 2009. Foreign exchange reserves and exports grew to record levels after a sharp decline. The International Monetary Fund lauded Pakistan for its commitment in meeting lender requirements for a $1.3 billion IMF Poverty Reduction and Growth Facility loan, which it completed in 2004, forgoing the final permitted tranche.

The Government of Pakistan has been successful in issuing sovereign bonds, and has issued $600 million in Islamic bonds, putting Pakistan back on the investment map. Pakistan's search for additional foreign direct investment has been hampered by concerns about the security situation, domestic and regional political uncertainties, and questions about judicial transparency.

On October 8, 2005 a magnitude 7.6 earthquake struck Pakistan, India, and Afghanistan. The epicenter of the earthquake was near Muzaffarabad, the capital of Pakistani-administered Kashmir, and approximately 60 miles north-northeast of Islamabad.

An estimated 75,000 people were killed and 2.5 million people were left homeless. The disaster of such a huge magnitude galvanized an international rescue and reconstruction effort in support of the affected region. The earthquake cost Pakistan $1.1 billion in resettling those affected.

U.S. assistance has played a key role in moving Pakistan's economy from the brink of collapse to setting record high levels of foreign reserves and exports, dramatically lowering levels of solid debt. Also, despite the earthquake in 2005, GDP growth remained strong at 6.6% in fiscal year 2005/2006.

In 2002, the United States led Paris Club efforts to reschedule Pakistan's debt on generous terms, and in April 2003 the United States reduced Pakistan's bilateral official debt by $1 billion. In 2004, approximately $500 million more in bilateral debt was granted. Consumer price inflation eased slightly to an average of 8% in 2005/2006 from 9.3% in 2004/2005.

Low levels of spending in the social services and high population growth have contributed to persistent poverty and unequal income distribution. Pakistan's extreme poverty and underdevelopment are key concerns, especially in rural areas.

Reform
In October 2008 Pakistan entered into a 23-month Stand-By Arrangement with the IMF in order to keep the country solvent and to support its foreign exchange reserves, which fell to precariously low levels.

The IMF loan supports two key objectives of restoring macroeconomic stability and confidence in the economy through a significant tightening of macroeconomic policies and ensuring social stability and adequate support for the poor.

Other reforms include improvements in banking and tax legislation, phasing out electricity subsidies, and reducing foreign exchange market intervention by the State Bank of Pakistan. Pakistan's' program remains on track for the first quarter of the IMF program.

The exchange rate has remained broadly stable and the international reserves position has strengthened significantly. Structural reforms have progressed broadly as envisaged.

A contingency plan for handling problem banks has been prepared and is being strengthened; an action plan to reform tax policy and administration has been adopted and will be implemented with technical assistance from the IMF and the World Bank.

The Government of Pakistan, however, continues to count on foreign inflows, including U.S. assistance, for budgetary support and to keep the country more or less solvent. The Government of Pakistan has been actively soliciting budget and energy import support from China, the Gulf States, and the World Bank.

Pakistan's economy remains vulnerable to external and internal shocks due to internal security concerns and global financial crises. The country also continues to struggle with reforms, having mixed success, especially in reducing its budget and current account deficits.

Agriculture and Natural Resources
Pakistan's principal natural resources are arable land, water, hydroelectric potential, and natural gas reserves. About 28% 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 21% of GDP and employs about 42% of the labor force.

The most important crops are cotton, wheat, rice, sugarcane, fruits, 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. Pakistan exports rice, fish, fruits, and vegetables and imports vegetable oil, wheat, cotton (net importer), 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 declined to less than 2% in 2008.

Pakistan has extensive energy resources, including fairly sizable natural gas reserves, some proven oil reserves, coal, and large hydropower potential. However, exploitation of energy resources has been slow due to a shortage of capital and domestic and international political constraints.

For instance, domestic gas and petroleum production totals only about half the country's energy needs, and dependence on imported oil contributes to Pakistan's persistent trade deficits and shortage of foreign exchange. The government announced that privatization in the oil and gas sector is a priority.

Industry
Pakistan's manufacturing sector accounts for about 19% of GDP. Cotton textile production and apparel manufacturing are Pakistan's largest industries, accounting for about 51.4 % of total exports. Other major industries include food processing, beverages, construction materials, clothing, and paper products.

Manufacturing sector growth has slowed in the last two years due to energy shortages and capacity constraints. In 2007-2008, the manufacturing sector grew by 5.4%. Despite government efforts to privatize large-scale parastatal units, the public sector continues to account for a significant proportion of industry.

In the face of an increasing trade deficit, the government seeks to diversify the country's industrial base and bolster export industries. Net foreign investment in Pakistani industries is only 0.5% of GDP.

Foreign Trade and Aid
Weak world demand for its exports and domestic political uncertainty have contributed to Pakistan's high trade deficit. Pakistan's trade deficit rose to over $15 billion in FY 2008, up from $9.7 billion in FY 2007, as lackluster export growth fell far short of increasing imports.

Energy imports account for 29.6% of Pakistan's imports, and growth in exports cannot cover the increases in international commodity prices. 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, rising to $35.41 billion in 2008. External imbalance has left Pakistan with a growing foreign debt burden. In 2008, GDP growth rate slowed down to 5.8% with slight deterioration in public and external debt indicators.

The stock of Pakistan's total debt and liabilities (TDL) increased by 27% year on year, to PKR 6,417.4 billion (U.S. $80.7 billion at 79.5 rupees per dollar), with a commensurate deterioration in the debt sustainability indicators.

In particular, the ratio of total debt and liabilities to GDP, a broad measure of the country's capacity to sustain debt, saw an end to a seven-year declining trend, rising in FY 2008 to 60%. (GDP at the official exchange rate is around $132 billion.) The fiscal deficit widened from 5.6 % of GDP in 1994-95, to 7.7% in 1997-98, and to 8.0 % in 2007-2008.

Support for loss-making, state-owned enterprises, fuel subsidies, and a weak domestic tax base are critical elements in the recurring fiscal deficits. The Pakistan Telecommunications Company Ltd. (PTCL) represented the largest of Pakistan's privatization programs for 2005.

Pakistan's privatization program has, however, stalled after the Supreme Court of Pakistan reversed the Government of Pakistan decision to privatize Pakistan Steel Mill and has not take off since then.

Despite its economic and political difficulties, Pakistan took steps to liberalize its trade and investment regimes, either unilaterally or in the context of commitments made with the World Trade Organization (WTO), IMF, and the World Bank. In the 2008-2009 budget, however, the Government of Pakistan raised the maximum tariffs from the 20%-25% range to the 30%-35% range on 300 luxury items due to a large trade gap and growing current account deficit.

Pakistan has received significant loan/grant assistance from international financial institutions (e.g., the IMF, the World Bank, and the Asian Development Bank (ADB)) and bilateral donors, particularly after it began using its military/financial resources in the war on terror.

In addition, the ADB is negotiating $500 in loans to Pakistan. The World Bank has $2 billion in assistance in the pipeline, but it seems that only $700 million may be disbursed before the end of fiscal year 2008-2009.

GDP (year ending June 30, 2008, PPP): $446 billion.
Real GDP growth rate (year ending June 30, 2008): 5.8%.
Per capita GDP (year ending 2008, PPP): $2,600.
Natural resources: Arable land, natural gas, limited oil, substantial hydropower potential, coal, iron ore, copper, salt, limestone.
Agriculture: Products--wheat, cotton, rice, sugarcane, eggs, fruits, vegetables, milk, beef, mutton.
Industry: Types--textiles & apparel, food processing, pharmaceuticals, construction materials, shrimp, fertilizer, and paper products.

Trade (2007 est.): Exports--$16.31 billion: textiles (garments, bed linen, cotton cloth, and yarn), rice, leather goods, sports goods, carpets, rugs, chemicals and manufactures. Major partners--U.S. 21%, United Arab Emirates 9%, Afghanistan 7.7%, U.K. 5.1%, China 5.3%. Imports--$30.33 billion: petroleum, petroleum products, machinery, plastics, paper and paper board, transportation equipment, edible oils, pulses, iron and steel, tea. Major partners--China 13.8%, Saudi Arabia 10.5%, United Arab Emirates 9.7%, Japan 5.7%, U.S. 6.5%, Kuwait 4.7%, Germany 4.1%.