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Introduction

In 2004, Pakistan's economy has reached a stage where it enjoys self-sufficiency in food, an unprecedented stock of foreign exchange reserves, declining budget deficits, increasing industrial production, and is approaching an overall growth of over 5 percent per annum. The economy has achieved fundamental macroeconomic stability amid general improvement in economic indicators. On the other hand, Pakistan is still faced with challenges like boosting investment, eliminating public sector deficits, creating new infrastructure, and expanding social sector development. The tasks of poverty alleviation and employment generation remain formidable, requiring both direct and indirect initiatives. While macroeconomic stability has been achieved, the economy is still at the take-off stage, with much room for improvement.

In the last decade, Pakistan has faced a number of challenges in order to achieve macroeconomic stability, due to variety of factors. To begin with, Pakistan has been struggling to achieve internal political stability, which has a direct bearing upon economic stability. A country cannot achieve macroeconomic stability unless it has a strong political system. Pakistan's checkered and uneven record on political stability and democracy has deprived the country of a long-term vision, direction, and continuity of economic policy. The rapid turnover of governments, and actual and imminent threat of the dismissal of the governments through extra-constitutional means, has certainly proved to be an inhibitor to investment, innovation, and institutional development. To a considerable extent, politics was responsible for the wide fluctuations in the performance of the main sectors of the economy. [1]

Second, the diverse ethnic composition of the country has not only affected resource distribution, but also affects policy continuity. Pakistan is composed of various ethnic groups, like Punjabis, Sindhis, Pashtuns, Mohajirs, etc.—a fact that creates certain problems. For example, when there was a government from Punjab or from Sindh, the other provinces voiced feelings of resentment at perceived exclusion and deprivation. [2] The friction between Punjabis, Sindhis, and Balochis and the vociferous dismissal of dissenting opinions and viewpoints even by educated Pakistanis are manifestations of intolerance. Economic development requires free mobility of labor and capital throughout the nation-state. But if the Sindhis are scared to move and work outside their own district, or tehsil, for fear of discrimination; or the Mohajirs would like to confine themselves to activities within Karachi, Hyderabad and Sukkur; or certain tribes in North West Frontier Province (NWFP) and Balochistan would like that only their areas should be given the monetary benefits accruing from exploitation of minerals, gas, and hydroelectric power; or if the Punjabis keep on insisting on population as the sole basis for the distribution of fiscal revenues, then the country suffers from huge inefficiencies in the allocation and utilization of resources. [3] Furthermore, every time a new government took office, it changed the policies of the previous government, which not only affected the economic environment, but also increased the cost of most projects.

Externally, the changing geo-strategic environment and Pakistan's evolving relationships with International Financial Institutions (IFIs) have affected the country's macroeconomic stability. The war on terror in Afghanistan and Pakistan's status in that conflict as a "front line-state" has greatly affected the country in many ways. First, the slower pace of economic activity in Pakistan's major trading partner countries (the United States and European Union, in particular) reduced their demands for Pakistani products, and as a result Pakistan's exports remained lower than targeted. Furthermore, increases in freight rates and imposition of war risk insurance increased the cost of imports and made Pakistani exports more expensive. Second, cancellation of air cargo flights by foreign airlines disrupted the trade flows. Third, manufacturing units had to maintain higher inventories because of the risk of instability. Fourth, the departure of expatriates from the country and the suspension of visits by foreign buyers did not allow the country to maintain normal trade relations. Furthermore, revenue collection also suffered due to lower imports, while the continuous influx of Afghan refugees placed further pressure on Pakistan's already limited resources and infrastructure. According to the Finance Ministry, the cost incurred by the economy due to these factors was on the order of $2 billion. [4] Furthermore, the terrorist attack on the Indian parliament in December 2001 and subsequent troop deployments on the international border between India and Pakistan has affected foreign investment and the trade balance of Pakistan.

In recent years, the role of international financial institutions has also been very crucial to the economic stability of Pakistan. The assistance from the International Monetary Fund (IMF) and World Bank (WB) merits special mention in this regard. During 1997-2003, relations were improved with the IMF and Pakistan successfully completed most of its agreements. Furthermore, Pakistan also received support from the IMF for the purpose of improving its Balance of Payments (BOP) deficits. The World Bank assisted Pakistan in introducing major changes in the structure of the economy, as well as helping Pakistan address the areas of poverty alleviation, improving governance, and reforming the social security sector.

There have been many ups and downs in the economy of Pakistan during the 1990s, with numerous fluctuations in the basic macroeconomic indicators. The Gross Domestic Product (GDP) growth rate has been under 4 percent during the second half of the 1990s, which is lower than the growth rate in earlier decades. [5] The incidence of poverty remained high and affected large segments of society. The poor quality of governance aggravated the problems, as most of the reforms were hindered by bureaucratic rigmarole. The worsening law and order situation in the country further compounded the problems. The current account balance remained in deficit most of the time due to decreases in the country's export levels. Successive governments in Pakistan allocated major chunks of the budget for non-development purposes, which resulted in budget deficits. Debt servicing and defense expenditures have consumed a major part of the resources, affecting social sector development. There has been an increase in the debt of the country, with a major part of the GDP being consumed by debt servicing. Governments in Pakistan have frequently acquired foreign aid and debt to meet their current expenditures. The balance of trade throughout the period remained in deficit due to decreases in exports. The main sector of exports (i.e., agriculture, including rice and cotton) decreased because of the long drought in the country. However, in recent years this balance has been improved due to heavy rains that helped increase agricultural production. Developing countries like Pakistan need foreign direct investment to aid in that development. But Pakistan has not been fortunate enough to attract much foreign direct investment due to a variety of factors. These include the worsening law and order situation in the country, the unfriendly attitude of the Nawaz Sharif government towards foreign investors in 1998, complications to foreign relations due to Pakistan's acknowledged nuclear tests, and a lack of incentives provided to foreign investors.

This paper is divided into five sections. Following this introduction, the Part One deals with selected macroeconomic indicators of the economy and their performance in the selected period. Part Two discusses the role of the IMF and World Bank in the economic revival of Pakistan. In Part Three, an attempt is made to draw a future horizon of the country. In the last section, I present my conclusions on the topic.

Part 1 >>