Economic Issues: Pakistan is a poor country with great extremes in the distribution of wealth, but the national economy has gathered significant positive momentum in recent years. Per capita GDP is $708 (about $2,400 when accounting for purchasing power parity).
Severe human losses and property damage from an October 2005 earthquake in northern Pakistan are likely to have limited economic impact, given a large influx of foreign aid and the stimulus provided by reconstruction efforts.
The long-term economic outlook for Pakistan is much improved since 2001, but remains clouded in a country highly dependent on foreign lending and the importation of basic commodities.
In the short-run, substantial fiscal deficits and the still urgent dependency on external aid donations counterbalance a major overhaul of the tax collection system and what have been notable gains in the Karachi Stock Exchange, the world's best performer in 2002, and up 65% in 2003 and 40% in 2004.
Output from both the industrial and service sectors has grown substantially since 2002, but the agricultural sector has lagged (in part due to droughts), slowing overall growth. Agricultural labour accounts for nearly half of the country's work force.
Pakistan's real GDP for the fiscal year ending June 2005 grew by an impressive 8.4%, driven by a strong manufacturing sector and greater than expected agricultural expansion. This was the best overall growth rate in two decades and up from 6.4% the previous year.
Expanding textile production and the government's pro-growth measures have most analysts foreseeing solid growth ahead, with predictions at or above 6% for the next two years.
Pakistan stabilised its external debt at about $33 billion by mid-2003, but rose to nearly $38 billion in 2005. Still, such debt is only about one-third of GDP today, down from more than one-half in 2000. The country's total liquid reserves reached a record $13 billion by mid-2005, an all-time high and an increase of more than 400% since October 1999.
Foreign remittances in 2003 exceeded $4 billion, nearly quadrupling the amount in 2001. Inflationary pressures have grown, at least partly due to increased oil prices, resulting in a year-on-year wholesale rate of 8.5% in December 2005, but may ease in 2006. Defence spending and interest on public debt together consume two-thirds of total revenues, thus squeezing out development expenditure.
Pakistan's resources and comparatively well-developed entrepreneurial skills may hold promise for more rapid economic growth and development in coming years. This is particularly true for Pakistan's textile industry, which accounts for 60% of Pakistan's exports.
Analysts point to the pressing need to further broaden the country's tax base in order to provide increased revenue for investment in improved infrastructure, health, and education, all prerequisites for economic development.
Attempts at economic reform historically have floundered due to political instability. The Musharraf government has had notable successes in effecting macroeconomic reform, although efforts to reduce poverty have made little headway.
Rewards for participation in the post-September 2001 anti-terror coalition eased somewhat Pakistan's severe national debt situation, with many countries, including the United States, boosting bilateral assistance efforts and large amounts of external aid flowing into the country.
In January 2005, a top International Monetary Fund official congratulated Pakistan for its "successful implementation" of reforms that led to "impressive turnarounds" in macroeconomic trends. One month later, the World Bank president praised Pakistan's "terrific" economic progress, but emphasised that Pakistan "has a long way to go in terms of achieving its human development goals."
In April 2005, an Asian Development Bank report noted recent improvement in the Pakistani economy, but identified rising inflation, a large trade deficit, and a balance of payments deficit as majors areas of concern.
About two-thirds of this value came from the purchase of cotton apparel and textiles. US exports to Pakistan during 2005 were worth an estimated $1.175 billion (down 36% from 2004), led by fertilisers and cotton fiber (the decline is a result of completed delivery of civilian aircraft). According to the 2005 report of the US Trade Representative (USTR), Pakistan has made progress in reducing import tariff schedules, though a number of trade barriers remain.
The International Intellectual Property Alliance estimated trade losses of $143 million due to copyright piracy in Pakistan in 2004, and has criticised Islamabad for "fundamental failure" to address a problem - Pakistan is a world leader in the pirating of music CDs - that has kept Pakistan on the USTR's "Special 301" Watch List for 16 consecutive years (in 2004, continuing violations caused the USTR to move Pakistan to the Priority Watch List).
The State Bank of Pakistan reports a steady increase in foreign investment in the country since 2001, with a total exceeding $1 billion for the year ending June 2005. More than one-quarter of this amount came from the United States.
The Heritage Foundation's 2006 Index of Economic Freedom - which may overemphasise the value of absolute growth and down play broader quality-of-life measurements - noted significant improvements, but again rated Pakistan's economy as being "mostly unfree," identifying restrictive trade policies, a heavy fiscal burden, weak property ownership protections, and a high level of "black market activity."
Corruption is a serious problem: in 2005, Berlin-based Transparency International placed Pakistan l44th out of 158 countries in its annual ranking of world corruption levels.
The Foreign Operations FY2005 Appropriations bill (P.L. 108-447) established a new base programme of $300 million for military assistance for Pakistan. When additional funds for development assistance, law enforcement, and other programmes are included, the aid allocation for FY2005 was about $688 million. Congress also has appropriated billions of dollars to reimburse Pakistan for its support of US-led counterterrorism operations.
From FY2002-FY2005, annual supplemental appropriations have included a total of $4.16 billion in additional defence spending to be used for coalition support payments to Pakistan and other co-operating nations.
The vast majority of this funding has gone to Pakistan: Pentagon documents indicate Pakistan received coalition support funding of $2.3 billion for the period FY2002-FY2004 - an amount roughly equal to one-fifth of Pakistan's total military expenditures during that period - and a report of the House Armed Services Committee (H.Rept. 109-89) said the Secretary of Defence expected to disburse to Pakistan the entire FY2005 allocation of $1.22 billion.
After the September 2001 terrorist attacks on the United States, policymakers searched for new means of providing assistance to Pakistan. President Bush's issuance of a final determination that month removed remaining sanctions on Pakistan (and India) resulting from the 1998 nuclear tests, finding that restrictions were not in US national security interests.
Some Members of the 108th Congress urged reinstatement of proliferation-related sanctions in response to evidence of Pakistani assistance to third-party nuclear weapons programmes.
However, the Nuclear Black-Market Elimination Act (H.R. 4965) did not see floor action. Pending legislation in the 109th Congress includes H.R. 1553, which would prohibit the provision of military equipment to Pakistan unless the President can certify that Pakistan has verifiably halted all proliferation activities and is fully sharing with the United States all information relevant to the A.Q. Khan proliferation network.
P.L. 107-57 (October 2001) waived coup-related sanctions on Pakistan through FY2002 and granted presidential authority to waive them through FY2003. A November 2003 emergency supplemental appropriations act (P.L. 108-106) extended the President's waiver authority through FY2004.
The Foreign Operations FY2006 appropriations bill (P.L. 109-102) extended it through FY2006. President Bush has exercised this waiver authority annually.
Also in the 108th Congress, the House-passed Foreign Relations Authorisation Act, FY2004-2005 would have required the President to report to Congress on Pakistani actions related to terrorism and WMD proliferation. The Senate did not take action on this bill.
The House-passed version of the Intelligence Authorisation Act, FY2005 contained similar reporting requirements; this section was removed in the Senate. In the 109th Congress, the pending Targeting Terrorists More Effectively Act of 2005 (S. 12) includes Pakistan-specific language.
In the Intelligence Reform and Terrorism Prevention Act of 2004 (P.L. 108-458), Congress broadly endorsed this recommendation by calling for US aid to Pakistan to be sustained at a minimum of FY 2005 levels and requiring the President to report to Congress a description of long-term US strategy to engage with and support Pakistan.
A November 2005 follow-on report by Commissioners gave a "C" grade to US efforts to support Pakistan's anti-extremism policies and warned that the country "remains a sanctuary and training ground for terrorists."
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