Pakistan's economy is in a much better position these days than it was prior to 1997. It has achieved macroeconomic stability as revealed by the performance of all relevant indicators. The GDP growth rate has shown substantial improvement and has reached the historic landmark of more than 5 percent. In the past, Pakistan's human development has not matched its growth rate. Now there is a critical need to link growth of the GDP to human development, because growth without development is a recipe for social and political instability. A strong correlation between economic growth and human development is essential for a successful and peaceful Pakistan.

The pace of accelerating debt has been slowed and brought within manageable limits. This is a result of the strict fiscal discipline adopted by the military regime headed by General Musharraf. There has been improvement in Pakistan's balance of trade. Although the government still operates at a deficit, the gap between revenues and expenditures has been reduced in recent years. Governance has improved thanks to reforms undertaken by the military government, although these are still at the initial stage and face stiff resistance from vested interests. Opponents to political devolution, whether bureaucrats or politicians who lost power in the process of reform, are creating problems with the proper implementation of these reforms. Positive economic performance with an equitable distribution of its gains is the surest way to silence those in opposition.

Despite improvement in all sectors of the economy, it is at the take-off stage and faces many challenges that still need to be addressed. Pakistan's poverty rate continues to rise. Unemployment in Pakistan has been aggravated due to constraints on public expenditures in recent years. Rising unemployment not only creates economic problems, but also has social consequences for society as a whole. A major contributing factor to growing impoverishment is Pakistan's population growth rate of 2.6 percent per annum that will lead, according to one estimate, to a doubling of the population by 2020. Controlling the population growth rate is fundamental to improving per capita income.

In the future, the performance of Pakistan's economy will depend upon the interplay of domestic, regional, and international factors. First, on the domestic front, the performance of the economy depends upon the continuity of structural reforms imposed by the military government of General Musharraf. These reforms overhauled the major sectors of the economy and are the beginning point for strengthening the institutions of economic governance in the nation. Success in continuing implementation of governance reforms, police reforms, banking sector reforms, administrative reforms, civil service reforms, and so on, will determine the future course of action. Pakistan's economy has shown a fair degree of improvement since General Musharraf's initiatives in these areas, but the possibility remains that it may again fall victim to vested interests, returning the country to an institutional graveyard of inefficiency and corruption.

Second, political stability is a determining factor for macroeconomic stability. Although democratic civilian governance is restored, there remains a need to improve the institutions of democracy in Pakistan. The political parties, parliament, the independent press, and a fair and impartial judiciary all need to be strengthened in order to achieve and sustain higher growth rates. High growth rates occurred under military governments, but sustained high growth rates can only be achieved in a strong democracy, which has a built-in system of checks and balances necessary for development.

Third, there is need to foster inter-provincial and inter-sectional harmony in Pakistan to sustain a proper climate for overall economic development. Smaller provinces must be given a fair, adequate recompense of their tax contributions as a share of federal resources. Political leadership in these provinces must stop inciting the population against the central government and other provinces, as well as avoiding incitement of the violent religious sectarianism that has undermined public security. An improving law and order situation will help in attracting foreign direct investment in the country.

Finally, the international image of the country needs improvement. In recent years, Pakistan's image in the international community has been damaged due to the rise of violent extremist and fundamentalist elements in the society. These elements have been involved in kidnapping and killing foreign nationals in the country, resulting in a deteriorating image of Pakistan worldwide. This has aggravated the decline of foreign investment in Pakistan.

Regionally, improvement in the political stability of Afghanistan will be an important determining factor for macroeconomic stability in Pakistan. Pakistan received a lot of economic help from the United States as compensation for its cooperation in the war on terrorism. If the dust settles in Afghanistan and the United States turns its attention away from Pakistan as its ally there, as it did following the 1989 Soviet withdrawal, it will again affect Pakistan's economic security. Pakistan needs to attract continued US investment in order to sustain long-term growth. Within the region, relations with India are an important determinant for the economic environment of Pakistan. If conflicts like the 1999 Kargil crisis with India recur in the future and the situation remains tense along the Indo-Pak border, it will undermine the stability needed to encourage trade and investment. It is evident that Pakistan's economy was adversely affected by the war on terrorism in Afghanistan and the crisis with India in 2002. These events and their aftermath resulted in a lessening of foreign investor confidence in Pakistan.

Globally, the relationship with the United States and international financial institutions remains crucial to the performance of Pakistan's economy. As far as the United States is concerned, there is need for Pakistan to cultivate a long-term, cooperative relationship. This will help Pakistan in receiving US investment, but also is a key determinant for Pakistan's relations with the IFIs. It is evident that whenever Pakistan's relations with the United States were positive, it received substantial assistance from the international community. When there was friction in the US-Pakistan relationship, the situation was reversed. To maintain a positive long-term relationship with the United States, Pakistan must control extremist elements in its society and continue its cooperation in the war on terrorism, the central US foreign policy concern at this time. Many extremist organizations were banned by the Musharraf government, which is a step in the right direction, but there still is a need to monitor such elements closely in the future. Finally, the issue of nuclear proliferation must be resolved. The lack of control implied in the diversion of strategic defense resources undermines Pakistan's national security, as well as needlessly raising tensions between Pakistan and the international community.

In recent years, there has been improvement in Pakistan's relations with international financial institutions due to sound economic policies pursued by the military regime. Pakistan successfully completed a stand-by agreement with the IMF in 2001 (i.e., the first ever, fully completed agreement between the IMF and Pakistan since 1988), with the Poverty Reduction and Growth Facility project in process and scheduled for completion at the end of 2004. The IMF and the World Bank have shown satisfaction with Pakistan's economic performance in recent years. Both these institutions have agreed to enhance their assistance to Pakistan in different sectors of the economy provided the stabilization program remains in place. The improved relationship with the IMF will help Pakistan in poverty alleviation and macroeconomic stabilization. Likewise, the World Bank will help Pakistan in continuing and maintaining structural reforms in the major sectors of its economy. Ongoing assistance from both the IMF and World Bank, not only through lending but also economic policy advising, will enable Pakistan to continue to raise the standard of living of its citizens, and help to ensure the country's political and macroeconomic stability as its importance in the global community increases.