Pakistan - IUJ

Country Profile 2004

PakistanThis Country Profile is a reference work, analysing thecountry�s history, politics, infrastructure and economy. It isrevised and updated annually. The Economist IntelligenceUnit�s Country Reports analyse current trends and provide atwo-year forecast.

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Country Profile 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004

Comparative economic indicators, 2003

Gross domestic productUS$ bn

Sources: Economist Intelligence Unit estimates; national sources.

0 20 40 60 80 100

Afghanistan

Sri Lanka

Vietnam

Bangladesh

Pakistan

Singapore

Indonesia

India

0.0 0.5 1.0 1.5 2.0

Afghanistan

Bangladesh

Pakistan

Vietnam

India

Sri Lanka

Indonesia

Singapore

0 5 10 15 20 25

Singapore

Pakistan

Vietnam

India

Bangladesh

Sri Lanka

Indonesia

Afghanistan

0 5 10 15 20

Singapore

Indonesia

Bangladesh

Pakistan

Sri Lanka

Vietnam

India

Afghanistan

Gross domestic product% change, year on year


Consumer prices% change, year on year


Gross domestic product per headUS$ �000


585.2

243.3

21.8

Pakistan 1

© The Economist Intelligence Unit Limited 2004 www.eiu.com Country Profile 2004

Contents

Pakistan

3 Basic data

4 Politics4 Political background6 Recent political developments10 Constitution, institutions and administration11 Political forces13 International relations and defence

18 Resources and infrastructure18 Population18 Education19 Health20 Natural resources and the environment20 Transport, communications and the Internet22 Energy provision

24 The economy24 Economic structure25 Economic policy27 Economic performance28 Regional trends

29 Economic sectors29 Agriculture30 Mining and semi-processing31 Manufacturing32 Construction32 Financial services34 Other services

35 The external sector35 Trade in goods36 Invisibles and the current account37 Capital flows and foreign debt38 Foreign reserves and the exchange rate

40 Regional overview40 Membership of organisations

42 Appendices42 Sources of information43 Reference tables43 Population43 Labour force44 Energy supplies44 Transport infrastructure

2 Pakistan


45 Federal and provincial government budgets45 Money supply45 Interest rates45 Gross domestic product46 Gross domestic product by sector46 Gross domestic product by expenditure, current prices47 Gross domestic product by expenditure, constant prices47 Consumer price inflation47 Agriculture: basic data48 Agricultural production49 Non-fuel minerals production49 Manufacturing production50 Karachi Stock Exchange statistics50 Exports by value50 Exports by volume51 Imports by value51 Imports by volume51 Main trading partners52 Balance of payments, IMF series52 Balance of payments, national series53 External debt, World Bank series53 Foreign reserves53 Exchange rates

Pakistan 3


Pakistan

Basic data

796,095 sq km

159.2m (July 2004 official estimate)

Population in millions, June 2003

Karachi 10.1Lahore 5.6Faisalabad 2.3

Subtropical, cold in highlands

Hottest month, June, 28-34°C (average daily minimum and maximum); coldestmonth, January, 13-25°C; driest month, October, 1 mm average monthly rainfall;wettest month, July, 81 mm average rainfall

English is the official language; Urdu is the national language

Imperial system, changing to metric. Local measures include:

1 seer = 0.933 kg; 1 maund = 40 seers = 37.32 kgNumbers are still commonly expressed in crores and lakhs: 1 crore=10m, written1,00,00,000; 1 lakh=100,000, written 1,00,000, although in 1978 theinternational system of millions, billions etc was introduced

Rupee (Rp)=100 paisa. Average exchange rate in 2003: PRs57.75:US$1. Exchangerate on October 4th 2004: PRs59.25:US$1

Six hours ahead of GMT in the summer; four hours ahead of GMT in thewinter

July 1st-June 30th

August 14th (Independence Day), November 9th (Allama Iqbal Day), November14th (end of Ramadan; Eid al-Fitra), December 25th (birth of Quaid-i-Azam andChristmas Day), January 21st 2004 (Eid al-Azhaa), March 23rd (Pakistan Day),March 1st (Ashuraa), May 1st (May Day), May 2nd (Eid-i-Milad-un-Nabia)

a These holidays are dependent on the Islamic lunar calendar and may varyslightly from the dates listed.

Land area

Population

Main towns

Climate

Weather in Karachi

Languages

Measures

Currency

Time

Fiscal year

Public holidays

4 Pakistan


Politics

The army returned to power on October 12th 1999, when the chief of armystaff, General Pervez Musharraf, overthrew the civilian government of NawazSharif, which had been elected in February 1997. In September 2001 GeneralMusharraf sided with the US against the Taliban, which governed most ofAfghanistan, and also against the al-Qaida international terror network, andwas rewarded with significant international debt rescheduling, loans and debtswaps to revive Pakistan�s ailing economy. From that time the US and its alliesalso refrained from strong criticism of General Musharraf�s coup and hissubsequent actions.

Against the backdrop of increasing international goodwill, in April 2002General Musharraf held a highly dubious referendum to secure his �election�as president for five years. In June 2002 General Musharraf proposed sweepingconstitutional amendments which gave the military an overtly political role,with himself as an all-powerful president. In October 2002 Pakistan held aparliamentary election that was marred by allegations of pre-poll riggingagainst the main opposition parties. The election returned pro-Musharrafparties and groups to power. However, the national parliament remaineddeadlocked while debating a potential agreement between General Musharrafand the elected assembly on power-sharing between civilian politicians andthe army.

At the end of 2003 General Musharraf clinched a compromise deal with theMuttahida Majlis-i-Amal (MMA), an alliance of six religious parties inparliament. In exchange for a verbal promise to step down from his armyposition before 2005, the constitution of Pakistan was amended to legitimiseGeneral Musharraf�s presidential role. Uncertainty remains as to how longGeneral Musharraf will remain president as well as army chief, although it islikely that he will retain both posts.

Political background

The idea of a separate homeland for the Indian subcontinent�s Muslims wasfirst enunciated in 1930 by a poet, Muhammad Iqbal, and formally adopted bythe All India Muslim League, led by Muhammad Ali Jinnah, on March 23rd1940. Pakistan gained independence on August 14th 1947 when British Indiawas partitioned. West Pakistan (now Pakistan) and East Pakistan (nowBangladesh) were separated by 1,600 km of Indian territory. Pakistan todaycomprises the four provinces of Punjab, Sindh, North West Frontier Province(NWFP) and Baluchistan, as well as the Federally Administered Tribal Areasand the Federal Capital Area (FCA) of Islamabad.

Following a succession of civilian and military governments, the first generalelection for a National Assembly was held in December 1970. The largestnumber of seats was won by Mujibur Rehman�s Awami League (AL; based inEast Pakistan). However, Zulfikar Ali Bhutto�s Pakistan People�s Party (PPP) tooka lead in the west. Confronted by the reluctance of the PPP and the army

Pakistan splits in 1971

Pakistan 5


(controlled by West Pakistani political leaders) to countenance a Bengali-dominated government in Pakistan as a whole, in March 1971 the AL launcheda campaign of civil disobedience, immobilising the east. A brutal militarycrackdown, in which hundreds of thousands of Bengalis were killed, came toan abrupt end in December that year, when the Indian army intervened andEast Pakistan, now renamed Bangladesh, was declared an independent state.

Mr Bhutto became president and chief martial law administrator of atruncated Pakistan, and, following the passage of a new constitution in April1973, its prime minister. Although the PPP easily won the general election ofMarch 1977, strong-arm tactics employed against the opposition at local levelsparked widespread protests. On July 5th 1977 General Muhammad Zia ul-Haq,the chief of army staff, removed Mr Bhutto and declared martial law. MrBhutto was put on trial for alleged complicity in the murder of a politicalopponent. He was convicted, and was hanged on April 4th 1979. General Zia�sincreasingly harsh rule was characterised by an Islamisation programmeostensibly designed to fulfil the original purpose of Pakistan but aimed inreality at extending his own rule by generating popular support.

Political opposition centred on the Movement for the Restoration ofDemocracy (MRD), of which the most important component was the PPP, nowled by Benazir Bhutto, the former prime minister�s daughter, who returnedfrom exile in April 1986. General Zia died in a plane crash!probably the resultof sabotage!on August 17th 1988, and, in accordance with the constitution,was succeeded as head of state by the chairman of the Senate (the upperhouse of parliament), Ghulam Ishaq Khan, a former civil servant. Ms Bhutto�sPPP became the largest party in the National Assembly (the lower house) atthe November 1988 election. The PPP formed a government after reaching anunderstanding with the Muttahida Qaumi Movement (MQM), whichrepresents Urdu speakers from India (mohajirs) who settled in urban areas ofSindh province at partition.

Ms Bhutto�s administration seemed doomed from the outset, however. Rivalryfor control of Sindh, the PPP�s traditional heartland, rapidly soured relationswith the MQM; the Islami Jamhoori Ittehad (IJI, a multiparty alliance dominatedby the Pakistan Muslim League, or PML), which had come a close second in thefederal polls and had won control of the Punjab assembly (the key provincialparliament) proved implacable in opposition; and the �establishment�!theall-powerful army high command and senior civil servants!increasinglyresented a government it considered not only weak and corrupt but also unfit tohandle sensitive defence and foreign policy issues. Mr Khan sacked Ms Bhutto20 months into her five-year term and installed a biased caretaker adminis-tration to ensure �positive results� in elections within 90 days.

The October 1990 general election was duly won by the IJI, and Nawaz Sharif,an industrialist and former chief minister of Punjab, became prime minister.Despite enjoying a two-thirds majority in the National Assembly, effectivecontrol of all four provincial parliaments and the backing of the military andthe president, the essentially artificial nature of the IJI!hastily cobbled togetherby the Inter-Services Intelligence agency after General Zia�s death to meet the

Nawaz Sharif first takes powerin 1990

6 Pakistan


challenge posed by Ms Bhutto and a resurgent PPP!soon became apparent.Initially supportive parties, including the fundamentalist Jamaat-i-Islami andthe MQM, were alienated.

Relations between Mr Sharif and Mr Khan degenerated into a battle forpolitical supremacy. In April 1993 the head of state dismissed the primeminister and installed another caretaker regime, which included members ofthe PPP. Although Mr Sharif was reinstated six weeks later by the SupremeCourt, which ruled that Mr Khan had exceeded his powers, the power strugglecontinued. It was brought to an end on July 15th when the army chief, GeneralAbdul Waheed, forced both men to resign.

An election in October 1993, overseen by an interim government headed by aformer World Bank vice-president, Moeen Qureshi, returned the PPP as the largestparty in the National Assembly, followed by Mr Sharif�s faction of the PML, thePML (N). Owing to the support of a breakaway faction of the PML, Ms Bhutto wasable to form a coalition government both at the centre and, crucially, in Punjab.

However, the PPP-led administration failed to address widely held grievances,including declining living standards and mounting lawlessness and terrorism,as well as rampant high-level corruption. Yet it was Ms Bhutto�s increasinglybrazen manipulation of the democratic process to sustain and prolong her rule,not least the extrajudicial killing of hundreds of MQM militants, that tipped thebalance against her. The army high command urged Farooq Leghari (who hadbeen deputy leader of the PPP for years before his elevation to the presidency)to oust her, which he did in November 1996.

Recent political developments

The depth of popular disaffection with the PPP, coupled with the interimgovernment�s hostility towards Ms Bhutto, propelled Mr Sharif�s PML (N) to anoverwhelming victory in federal and provincial parliamentary elections inFebruary 1997. However, Mr Sharif�s attempts again to hog all powersembroiled him in a series of disputes with the chief justice, Sajjad Ali Shah, thepresident, Mr Leghari, and the army chief, General Jehangir Karamat, and led tothe ousting of all three in due course. Mr Sharif also lost important electoralallies (such as the MQM), angered regional parties with his perceived bias infavour of Punjabi interests, and clashed repeatedly with increasingly vocalopposition parties!not least over Islamisation policies that alienated bothreligious extremists and liberals. Unable to address the country�s chroniceconomic and law-and-order problems, the government was perceived as evermore corrupt, autocratic and reckless.

Important recent events

May 1998

Pakistan detonates six nuclear devices after India conducts five nuclear tests. A stateof emergency is declared and several countries, including the US and Japan, imposeeconomic sanctions.

The Sharif government

Pakistan 7


October 1998

Remarks made by the chief of army staff, General Jehangir Karamat, to the effect thatthere is a need to balance executive power and improve efficiency of government byinstituting a National Security Council in which the armed forces are represented,provoke the prime minister, Nawaz Sharif, to remove him and appoint GeneralPervez Musharraf as the new army chief.

February 1999

The Indian prime minister, Atal Behari Vajpayee, arrives in Pakistan by bus to sign theLahore Declaration, which commits both countries to trying to resolve their differencesthrough peaceful bilateral means.

April 1999

The former prime minister, Benazir Bhutto, is convicted of corruption in absentia bythe Lahore High Court and sentenced to seven years� imprisonment. She decides toremain outside Pakistan.

May 1999

Pakistani-backed rebels and Pakistani regular soldiers capture strategic hills in theKargil sector along the border in Indian-administered Kashmir.

July 1999

With Pakistan facing international isolation and the threat of all-out war with Indiaover the Kashmir incursions, Mr Sharif bows to American pressure and ordersPakistani forces to withdraw from the positions they have recently seized, trans-forming an initial military victory into a diplomatic defeat in the eyes of many of hiscompatriots.

October 1999

Following differences between Mr Sharif and General Musharraf over responsibilityfor the Kargil misadventure, the government is overthrown in a bloodless militarycoup after Mr Sharif tries unsuccessfully to dismiss General Musharraf. The armychief installs himself as Pakistan�s �chief executive� and suspends the constitution.

April 2000

Mr Sharif is convicted of terrorism and hijacking by a special court, and is sentencedto life imprisonment. In December, he and his family are exiled to Saudi Arabia for aperiod of at least ten years.

July 2001

Talks between India and Pakistan in Agra, India, collapse over disagreement on theissue of Kashmir and crossborder terrorism.

September 2001

General Musharraf supports the US in the aftermath of the September 11th terroristattacks, earning resentment from Islamist hardliners but improving his internationalstanding.

June 2002

General Musharraf proposes sweeping constitutional amendments to enshrine therole of the military in politics and make himself an all-powerful president. The mainparties reject the proposals.

8 Pakistan


July 2002

General Musharraf bans Mr Sharif and Ms Bhutto from contesting the forthcominggeneral election. The law is challenged in the Supreme Court. The court upholds thenewly imposed condition that all those who wish to contest the general electionmust have university degrees.

October 2002

General Musharraf issues a Legal Framework Order and holds a general election,which Mr Sharif and Ms Bhutto are not allowed to contest. International observersallege that the poll is marred by pre-election rigging. The Muttahida Majlis-i-Amal(MMA) alliance of Islamic parties wins an unprecedented 63 seats.

November 2002

The pro-government PML (Quaid-i-Azam), or PML (Q), together with smaller partiesand defectors from the main parties, forms a government with a slim majority.Zafarullah Jamali becomes prime minister.

June 2003

General Musharraf is invited to the US by President George W Bush. Pakistan ispromised US$3bn in economic and military assistance over the next five years.

September 2003

The MMA threatens to hold street demonstrations in protest at General Musharraf�sfailure to give up his military role.

December 2003

General Musharraf clinches a compromise deal with the MMA. In exchange for averbal promise to step down from his army position before 2005, the constitution isamended to legitimise General Musharraf�s presidential role. The amendmentdeclares the validity of all laws implemented since 1999, and explicitly states that nolaws enacted during and since 1999 may be called into question in a court of lawunder any circumstances.

September 2004

On September 15th Pakistan�s information minister, Sheikh Rashid Ahmed, statesthat General Musharraf would continue in both his posts of president and armychief. However, Mr Ahmed later retracted his statement, saying that it was not agovernment statement but merely reflected his personal desires.

Differences with General Karamat�s successor, General Musharraf, erupted into allbut open hostility after Mr Sharif bowed to international pressure in July 1999 andprevailed on militants backed by the Pakistani army to withdraw from strategicpositions that they had seized in Indian Kashmir in April, provoking the mostserious military conflict between the two countries since their 1971 war. GeneralMusharraf was infuriated by Mr Sharif�s claims that the government had not beensufficiently consulted in advance about the campaign, and by the prime minister�ssubsequent efforts to encourage senior officers to challenge General Musharraf�sauthority.

Pakistan 9


On October 12th 1999, shortly after state-run television announced that GeneralMusharraf!who was returning from a visit to Sri Lanka!had been sacked,Mr Sharif was himself deposed and arrested by generals loyal to GeneralMusharraf. Mr Sharif was subsequently convicted of terrorism and hijacking!arising from ultimately unsuccessful attempts made to prevent the army chief�sflight from Sri Lanka landing in Pakistan!and was sentenced to lifeimprisonment. General Musharraf, who said that he had been compelled to actto �prevent any further destabilisation� of the military, suspended parliamentand the constitution, named himself Pakistan�s �chief executive�, andestablished a National Security Council dominated by serving generals as thecountry�s supreme decision-making body.

The new administration�s objectives, which General Musharraf said wouldhave to be attained before �true democracy� could be restored, included therevival of the economy; the restoration of law and order; a purge of corruptpoliticians and officials; preventing the exploitation of religion for sectarian orpolitical ends; the depoliticisation of state institutions; the rebuilding ofnational confidence; the strengthening of Pakistan�s federal structure; and thedevolution of powers to grass-roots bodies. General Musharraf subsequentlyappointed himself as all-powerful president, and banned Ms Bhutto andMr Sharif from contesting the general election in October 2002. Senior judgestook a fresh oath of office under a provisional constitutional order�legitimising� the military takeover. On June 20th 2001 General Musharrafamended the provisional constitution order, dissolved the national andprovincial assemblies and was sworn in as president by the chief justice ofPakistan for a five-year term.

In September 2001 General Musharraf took the critical decision to side with theUS against the Taliban and al-Qaida, and was rewarded with significantinternational debt rescheduling, loans and debt swaps to revive the ailingeconomy. Capitalising on the backdrop of international goodwill, in April heheld a highly dubious referendum to secure his �election� as president forfive years.

In June 2002 General Musharraf proposed sweeping constitutional amend-ments to enshrine the army in politics with himself as an all-powerfulpresident. In July 2002 he passed laws banning two former prime ministers,Ms Bhutto and Mr Sharif, from contesting elections. In October 2002 Pakistanheld a parliamentary election that was marred by allegations of pre-poll riggingagainst the main opposition parties. The elections returned pro-Musharrafparties and groups to power. However, the national parliament remaineddeadlocked while debating a potential agreement between General Musharrafand the elected assembly on power-sharing between civilian politicians andthe army.

At the end of 2003 General Musharraf clinched a compromise deal with theMuttahida Majlis-i-Amal (MMA), an alliance of six religious parties inparliament. In exchange for a verbal promise to step down from his armyposition before 2005, the constitution of Pakistan was amended to legitimiseGeneral Musharraf�s role. The amendment declares the validity of all laws

General Musharrafoverthrows Mr Sharif in 1999

General Musharraf becomes aUS ally in the �war on terror�

10 Pakistan


implemented since 1999, and explicitly states that no laws enacted during andsince 1999 may be called into question in a court of law under anycircumstances.

On September 15th 2004 Pakistan�s minister of information, Sheikh RashidAhmed, stated that President Musharraf would not step down as chief of armystaff before the end of 2004. However, he later retracted his statement.Parliament has begun debating the question of whether General Musharrafshould be allowed to remain in both positions.

Constitution, institutions and administration

The 1973 constitution, framed by Mr Bhutto�s PPP government, provided for afederal democratic structure. Still in force prior to General Musharraf�s October1999 coup, it had undergone major amendments, often to legitimise theauthoritarian actions of successive administrations. The most sweepingchanges, announced in March 1985 by General Zia�s martial law regime,formalised the concentration of power in the hands of the president, whoassumed the right to dissolve the National Assembly and to appoint the primeminister, the three chiefs of the armed forces, provincial governors and keyjudicial figures.

These provisions remained in place for many years, not least because theyallowed the army to impose its will indirectly through the president, thusavoiding the need for a full-blooded military intervention in politics. However,soon after becoming prime minister in February 1997 Mr Sharif used his two-thirds majority in parliament to eliminate many of the executive powers of thepresident, including the power to sack governments.

Tensions between the executive and the judiciary have been commonplace inrecent years, largely owing to attempts by civilian governments to assert theirsupremacy. A protracted power struggle in 1997 between Mr Sharif and thechief justice whom he inherited, Sajjad Ali Shah, which began as a dispute overwho had the right to appoint senior judges, led to Mr Shah�s dismissal inDecember of that year (and the resignation of Mr Leghari as president), and tothe passage of constitutional measures curtailing the powers of the chief justice.

General Musharraf�s administration carried out 29 amendments to theconstitution unilaterally through a Legal Framework Order (LFO) issued onOctober 10th 2002, the day of the general election. The Supreme Court hastaken the view that the LFO cannot be challenged through the courts, and thatonly parliament has the power to amend it or get rid of it altogether. However,following the election neither the government nor the opposition had the two-thirds voting strength in parliament required to amend the constitution, eitherto validate or to reject the amendments. The two sides spent nearly a year innegotiation. The three main disagreements were: whether the president had theright to dismiss parliament; the timeframe within which General Musharrafwould quit as army chief; and whether General Musharraf should be elected aspresident through the LFO or by a vote in the parliamentary electoral college. BySeptember 2003 the talks had broken down and the opposition was preparing

Tension between executiveand judiciary is high

Pakistan 11


to launch street demonstrations. However, in December 2003 GeneralMusharraf clinched a compromise deal with the MMA: General Musharrafpublicly (but only verbally) agreed to step down from his position as armychief in exchange for the MMA�s support in amending the constitution tolegitimise his role since 1999. The crucial article 270 AA in the constitutionalamendment declares the validity of all laws and orders enacted since October14th 1999. In particular, it explicitly states that no laws enacted or actions takensince 1999 can under any circumstances be questioned in a court of law.

Political forces

The army remains Pakistan�s ultimate political arbiter. It has run the country foras many years as civilian governments, and was the driving force behind thepremature removal of the last four elected administrations!Ms Bhutto�s in 1990and 1996, and Mr Sharif�s in 1993 and 1999!all of which paid the price forseeking to increase their power at the military�s expense. In August 2001General Musharraf�s regime held non-party local polls to elect officials (nazims)who would represent a new breed of civilian politicians untainted by theexcesses of their predecessors and inclined to support the army�s politicalagenda. General Musharraf has, by and large, succeeded in achieving this goal.Under the new system, a nazim answers to a district co-ordination officer(DCO), who is appointed by the provincial governor, who is in turn appointedby General Musharraf. However, tensions have emerged over the distributionof power and funds between the nazim and the provincial members ofparliament. The latter claim that their powers of patronage have been curtailed,thereby undermining their clout in their constituencies.

The Pakistan Muslim League (PML) was long regarded as the party closest to thepowerful establishment of generals and senior bureaucrats. Mr Sharif, forexample, was groomed as a politician by General Zia, and his first governingcoalition was originally contrived by military intelligence as a counterweight tothe PPP. After two disappointing and curtailed stints in government in a decade,the PML is now widely perceived as incompetent and corrupt. With Mr Sharifin exile, it has split into two factions, one of which, the pro-military PML(Quaid-i-Azam), or PML (Q), dominates the current government. In September2003 four smaller anti-Sharif factions of the PML were persuaded to join thePML (Q). The PML (N) remains loyal to Mr Sharif.

The only other national party, the Pakistan People�s Party (PPP), was likewisediscredited after having failed to deliver during its two recent periods in office,and won just 18 of the 217 seats in the federal parliament in the February 1997election. The party is in effect leaderless because of Ms Bhutto�s reluctance toreturn to Pakistan!her husband has been imprisoned in Pakistan for sevenyears, and she would be arrested if she returned. Despite this, her partyperformed well in the October 2002 elections, winning 87 seats. However, thePPP now has only 71 seats, as the government has lured several PPP parlia-mentarians to join the government.

The military

The PML

The PPP

12 Pakistan


In an unprecedented move, Pakistan�s six main religious parties formed aunited front to contest the 2002 elections. This grouping, the Muttahida Majlis-i-Amal (MMA) largely comprises the Jamaat-i-Islami and the Jamiat-i-Ulema-i-Islami, both of which have historically drawn support from the tribal andconservative areas of the North West Frontier Province (NWFP). The MMA wonover 60 seats in the National Assembly in the general election to become thesecond-largest opposition party in the country, and it also took control of theNWFP and Baluchistan, the latter in alliance with the PML (Q). Thegovernment�s moves to undermine the PPP and the PML (N) had created avacuum which the MMA filled, and it successfully exploited widespread anti-US sentiment, particularly in NWFP. Until the 2002 elections, the religiousparties had never obtained more than 5% of the total vote in the country. In2002 this rose to nearly 11%.

The Muttahida Qaumi Movement (MQM) was originally formed to supportMuslim refugees that emigrated to Pakistan from India during the partition. It isthe third-largest political party, although its support base is largely confined toUrdu speakers in the main cities of Sindh, particularly Karachi and Hyderabad.The MQM�s militancy and reputation as an unreliable ally have frequentlyprevented it from capitalising on its potential as a power-broker, although it iscurrently a partner in the pro-Musharraf state government in Sindh.

Main political figures

Pervez Musharraf

As the driving force behind the campaign by Pakistan-based Muslim militants inIndian Kashmir in mid-1999, the chief of army staff was perceived as an Islamic hard-liner prior to his overthrow of the government. However, in power the self-designated�chief executive�-turned-president has sought to cultivate a populist and pragmaticimage as a pro-Western reformer keen to rid the country of self-serving politicians,crush terrorism and revive the economy. To a large extent he has cultivated thisimage successfully, especially abroad. However, moves to make himself an all-powerful president, to give the army a formal role in politics, to stop former primeministers Benazir Bhutto and Nawaz Sharif from returning to the country and toclamp down on religious extremism have pitted him against powerful political forcesin Pakistan.

Nawaz Sharif and Benazir Bhutto

Now in exile, both former prime ministers are still popular even though elements oftheir parties have deserted them and joined General Musharraf. If GeneralMusharraf were to step down and Pakistan were to revert to genuine civilian rule,both leaders would probably return to Pakistan and resume their domination ofpolitics.

Altaf Hussain

The exiled leader of the Muttahida Qaumi Movement (MQM) first welcomed themilitary takeover but then boycotted the local elections after accusing the army ofbeing biased against him. He subsequently decided to participate in the 2002 generaland provincial elections, and his party is now part of the pro-government coalitionwhich governs Sindh province. Court cases against him filed by the governments of

The MMA

The MQM

Pakistan 13


Ms Bhutto and Mr Sharif still stand, and there is no chance that he will return toPakistan soon.

Shaukat Aziz

Hand-picked by General Musharraf, the prime minister has spent a large part of hiscareer as a banker with Citibank of the US outside Pakistan. He has a reputation as asound economist and reformer. He has no political base of his own, and relies onthe goodwill of the president.

Maulana Fazlur Rehman and Qazi Hussain Ahmad

The two main leaders of the six-party religious alliance, the Muttahida Majlis-i-Amal,have acquired national status since their group formed Islamic provincialgovernments in the North West Frontier Province and Baluchistan. Mr Rehman is apragmatic politician, whereas Mr Hussain is an ideologue. The two men struck adeal with General Musharraf at the end of 2003 on the issue of his tenure of boththe presidency and the army leadership.

Parliamentary elections(no. of seats)

1990 1993 1997 2002Pakistan People�s Party (PPP) 44a 86 18 81Pakistan Muslim League (Nawaz) 106b 72 134 19

Muttahida Qaumi Movement 15 � 12 17Muttahida Majlis-i-Amal � � � 63

Pakistan Muslim League (Quaid-i-Azam) � � � 126Others 42 48 40 36

Total 207 206 204 342

a People�s Democratic Alliance coalition, led by the PPP. b Islami Jamhoori Ittehad (IslamicDemocratic Alliance) coalition, led by the Pakistan Muslim League and the Jamaat-i-Islami Pakistan.

Source: Economist Intelligence Unit.

International relations and defence

Tense relations with India since the traumatic and bloody partition of 1947 haveled to three full-scale wars, several lesser skirmishes, a vigorous arms race and,most recently, a continuing stand-off along the international border and Line ofControl (which separates the Indian- and Pakistani-controlled areas) in Kashmir,sparking fears of a possible nuclear war. Following India�s detonation of anatomic device in 1974, Pakistan launched its own nuclear programme.

In May 1998, after the newly elected government in India!led by the BharatiyaJanata Party (BJP)!had tested nuclear devices, Pakistan did the same, promptingseveral countries, including the US and Japan, to impose economic sanctionson both nations. The signing of the Lahore Declaration (which affirms the needfor increased efforts by both countries to restore peace) by Mr Sharif and theIndian prime minister, Atal Behari Vajpayee, in February 1999 seemed to be apositive step towards the normalising of relations, but any perceived gains werequickly erased by the undeclared war in Kargil (in which Pakistani-backedmilitants entered Indian controlled Kashmir, and were eventually repulsed inthe summer of 1999). Talks between Mr Vajpayee and General Musharraf in

Relations with India

14 Pakistan


Agra in July 2001 highlighted disagreements over Kashmir and broke down. InNovember 2001 India accused Pakistan of infiltrating Islamic militants intoKashmir. In December 2001 an audacious attack on the Indian parliament inNew Delhi by terrorists (allegedly backed by Pakistan) led India to mobilise itsentire army and threaten to go to war if the infiltration continued. The USpersuaded General Musharraf to reduce �crossborder� infiltration, but relationsbetween the two neighbours remained tense. India held elections, whichmilitants tried but failed to disrupt, in Kashmir in October 2002. Clashesbetween militants and India�s security forces have continued unabated.

Following a conciliatory speech by Mr Vajpayee in April 2003, relations beganto improve. Pakistan reciprocated with a show of goodwill, and the countriesexchanged ambassadors and restored a bus service between Lahore and Delhi.Unofficial parliamentary delegations from both sides also tried to improve therelationship. In November 2003 India and Pakistan declared a ceasefire on theLine of Control in Kashmir. On January 1st 2004 direct air links between thecountries were established, and a summit between Mr Vajpayee and GeneralMusharraf followed. In March 2004, 30,000 Indian fans were permitted totravel to Pakistan to watch the India-Pakistan cricket series, and the event wasextremely amiable.

In May 2004, following a general election in India, the new Indian primeminister, Manmohan Singh, pledged to continue to seek friendly relations withPakistan. Talks led to a hotline being set up between the two countries� armies.Mr Singh met General Musharraf for the first time on the sidelines of the UNGeneral Assembly meetings in New York in September. The meeting, althoughinconclusive, was amicable.

Friendship with China, born out of a shared antipathy towards India and theformer Soviet Union, has been one of the most consistent features of Pakistan�sforeign policy. Officials of the US Central Intelligence Agency believe that Chinahas supplied Pakistan with nuclear technology and parts, as well as M-11ballistic missiles capable of delivering nuclear weapons. During the Kargildispute, China voiced little support for Pakistan, a reticence that may havereflected the challenge to its authority posed by Chinese Islamic insurgents.However, as a result of tensions between China and the new USadministration, the US attempt to embrace India as a strategic ally againstChina, and the proposed US National Missile Defense programme, China hassuddenly renewed its strategic interest in Pakistan. A plan to develop adeepwater port near the mouth of the Persian Gulf at Gwadar has beenunveiled; the Chinese have committed US$1bn to its development over the nextfew years, causing much concern in the US. Once completed, it will enable theChinese navy to dock at a friendly port in a key strategic area.

Pakistan was the most active external sponsor of the Afghan guerrillas duringtheir war against the Soviet army and Afghanistan�s Moscow-backedgovernment in Kabul, but has not enjoyed consistently good relations with anymujahideen group since the defeat of the communists in April 1992. In 1994 itactively backed the formation of the Taliban, the ultra-orthodox Sunni Muslimmilitia group that by 1998 had seized most of Afghanistan. However, Pakistan�s

China is a close friend

Relations with Afghanistan aretentative

Pakistan 15


attempt to gain �strategic depth� through the installation of an ally in Kabulcaused it problems, particularly with the US and Iran. At first, the imposition ofsanctions on the Taliban regime by the UN forced Pakistan to be morecircumspect in its relationship with the Afghan government. Then, followingthe al-Qaida attacks in the US on September 11th 2001, Pakistan sided with theUS in its war against the Taliban in Afghanistan. Pakistan is trying to build arelationship with the new Afghan government installed by the US and led byHamid Karzai, but its past support for the Taliban counts against it. Mr Karzaihas alleged that Taliban remnants have taken refuge on Pakistan�s side of thetribal borderlands, whence they launch attacks on US and Afghan forces inAfghanistan.

Recent governments have sought to ingratiate themselves with the US in orderto secure a resumption of military and economic assistance, which was cut offin 1990 after Pakistan was suspected of having attained nuclear weaponscapability. Partly because the collapse of the already fragile economy after theMay 1998 nuclear tests threatened a possible sale of nuclear technology torogue states, the administration of the then US president, Bill Clinton,persuaded the US Congress to allow it to waive sanctions temporarily in theinterests of national security. In July 1999, facing worldwide censure for itsorganisation of the incursion into Indian-administered Kashmir, Pakistan wascompelled to negotiate the details of its withdrawal from Kargil with the helpof the US. Although the US expressed regret following the military takeover inOctober that year and urged General Musharraf to restore civilian rule as soonas possible, it opted to engage the new regime so that strategic concerns!nuclear and missile proliferation, regional instability and Islamic terrorism!could be addressed.

The September 11th 2001 terrorist attacks on the US transformed relationsbetween the two countries. Pakistan�s important strategic position borderingAfghanistan, its vital role as a Muslim ally in the US-led �war on terror� andGeneral Musharraf�s willingness to support the US military effort inAfghanistan overrode all other US concerns. This led to the lifting of all USsanctions in October and November 2001, allowing the US to supportmultilateral lending to Pakistan. In addition, the US rescheduled US$2.3bn ofPakistani debt, provided up to US$1bn in soft loans and grants and alsopersuaded the IMF and the World Bank to extend assistance of over US$2bn forpoverty alleviation and growth over the following three years. In June 2003 theUS president, George W Bush, promised Pakistan US$3bn in economic andmilitary assistance over the next five years, largely in return for Pakistan�s helpin the war on terror. In 2004, in response to Pakistan�s lobbying to cementrelations over the long term, the US accorded Pakistan the status of Major Non-NATO Ally, enabling the Pakistani government to receive substantial economicand military assistance. Scores of suspected al-Qaida activists have beenhanded over to the US authorities since September 11th 2001, and the USFederal Bureau of Investigation has been given a relatively free hand toinvestigate and track down terrorists in Pakistan.

US relations with Pakistan

16 Pakistan


Military forces in the region, 2003/04Pakistan India China

ArmyPersonnel 625,000 1,100,000 1,700,000Main battle tanks 2,317 3,898 7,180NavyPersonnel 25,000 55,000 250,000Frigates 8 16 42Submarines 10 19 69Air forcePersonnel 45,000 170,000 400,000Combat aircraft 374 744 >1,900

Source: International Institute for Strategic Studies, The Military Balance 2003/2004.

Security risk in Pakistan

Armed conflict

Tension between India and Pakistan was very high in 2001 and the two countriesstood on the brink of war, although US intervention has since led to an improve-ment in relations. Further improvement is hindered by domestic pressure on eachside to resist giving concessions to the other. Peace talks have foundered over thediffering importance attached by the two sides to the issue of Kashmir. India has inthe past argued that the Kashmir dispute is one of several issues that need to beresolved, while Pakistan has insisted that talks must focus on Kashmir, which it hasargued is central to the two countries� poor relationship.

Relations have improved since April 2003, when India unilaterally offered a �handof friendship� to Pakistan. This was followed by host of conciliatory measures, andin November 2003 India declared a ceasefire on the Line of Control (which separatesthe Indian- and Pakistani-controlled areas) in Kashmir. India and Pakistan resumeddialogue in early 2004 when the then Indian prime minister, Atal Behari Vajpayee,met Pakistan�s president, General Pervez Musharraf, in the Pakistani capital,Islamabad, in January and the two countries agreed to continue an all-encompassingdialogue. Following the general election in India in May 2004, the new Indian primeminister, Manmohan Singh, pledged to continue the peace efforts. A meetingbetween Mr Singh and General Musharraf on the sidelines of the UN GeneralAssembly discussions in New York on September 24th was amicable. Nevertheless,relations could sour quickly, and armed conflict is always a possibility.

Terrorism

Pakistan has been subject to several ethnic and religious conflicts that have eruptedinto violence. Sporadic bombings continue to occur nationwide, primarily on trains,buses and in marketplaces. Responsibility for bombings is rarely, if ever, claimed byany group, and they are often blamed on the Indian intelligence service, theResearch and Analysis Wing (RAW). Extremist Shia and Sunni Muslim groups havekilled members of rival sects, including senior business people. The government hasattempted to crack down on some of these militant groups, which are believed toreceive external assistance!the Shia groups from Iran, and the Sunni groups fromprivate sources in Saudi Arabia. The proliferation of these groups can be linked tothe growing prevalence of madrassas (Islamic schools). As successive governments

Pakistan 17


have failed to improve the educational system, sect-based Islamic schools have filledthe void, some of them inculcating an extreme outlook. The problem has beenaccentuated in recent times by the infiltration of al-Qaida militants into the urbanareas of Pakistan in the aftermath of the US war in Afghanistan. There werenumerous high-profile terrorist attacks in 2002, although the situation improvedmarginally in 2003. In 2004 a large bomb blast in Karachi killed over 20 people; rivalShia and Sunni groups blamed each other.

General Musharraf and the prime minister, Shaukat Aziz, have both survivedassassination attempts. It is clear that a number of militant units are focused onassassinating leading politicians; on a number of occasions they have come veryclose to their targets.

Civil unrest

Opposition political parties have historically held large rallies and called for strikeaction, and violence is commonplace during such demonstrations. The militarygovernment initially banned political rallies, although some were in the endallowed, and political parties generally did not seek to alienate themselves from themilitary in the run-up to the October 2002 elections by holding rallies ordemonstrations. However, new laws, such as the condition that candidates forelection must be university graduates, and the barring from participation in electionsof two former prime ministers, Benazir Bhutto and Nawaz Sharif, and many of theirallies, angered the mainstream parties. The elections were nevertheless not marredby undue violence. Nor, despite occasional threats by some political groups, havethere been any significant anti-government rallies or civil unrest in 2004. But theycannot be ruled out altogether in the near future if there is no compromise betweenthe opposition and General Musharraf over a constitutional package to legitimise thelatter�s position as president.

Violent crime

Levels of crime are high in Pakistan. �Car-jacking� is common, particularly in Karachi.The incidence of robbery and murder is increasing. The widespread availability offirearms has been reflected in an increase in armed robbery in urban areas. Tribal,rather than federal, laws apply in the tribal areas of the North West Frontier Province.Armed clashes between rival tribal groups have affected extractive industries inBaluchistan. Crimes against women, in particular, have shown an alarming rise inrecent times, ranging from �honour killings� to gang-rapes in isolated rural areas.However, the government is making a belated effort to take firm action in the mostglaring cases, largely to avoid negative publicity in other countries.

Drug smuggling

Pakistan remains an important transit route for opium from Afghanistan. Many ofthe laboratories that process raw opium into heroin are thought to be either locatedin areas of Pakistan bordering Afghanistan or to be run by Pakistanis working inAfghanistan. One report has suggested that heroin exports contribute about US$1.5bnto the Pakistan economy. Some senior officials within Pakistan�s government andsecurity apparatus have been linked to the export of drugs. The fall of the Taliban inAfghanistan has led to an increase in the area given over to opium cultivation in thatcountry under the control of autonomous warlords

18 Pakistan


Resources and infrastructure

Population

It is officially estimated that the population of Pakistan reached 159.2m in July2004, up from 131.5m in March 1998 when the last census was conducted. Thecensus showed that Punjab�s share of the total population had declined to 55.6%in 1998, from 56.2% in 1981 (the year of the previous head count), Sindh�s shareedged up to 23% from 22.6%, that of the North West Frontier Province (NWFP)increased to 13.4% from 13.1%, and Baluchistan�s share slipped to 5% from 5.1%.The remainder of the population lived in the Federally Administered TribalAreas (2.4%) and in the capital, Islamabad (0.6%). The population growth ratefell to an estimated 1.9% in 2004 from 2.4% in 1998 and 3.1% in 1972-81, a trendthat derives in part from the increased, if still modest, coverage of family planningprogrammes.

Population according to age, 1998a

Years m % of total0�14 55.0 43.2

15�64 68.0 53.465+ 4.4 3.4

Total 127.4 100.0

a Excludes Federally Administered Tribal Areas.

Source: Census Organisation, Islamabad.

Although infant mortality (the number of deaths per 1,000 live births) fell froman average of 112 in the latter half of the 1980s to 74 in fiscal year 2003/04 (July-June), there is a large disparity between the rate in urban areas (72.7) and that inrural areas (89.2), according to a 1997 survey. In 2000 the male/female ratio inthe total population rose to 108:100, attributable partly to female infanticide.The labour force grew at an annual average rate of 4.5% during 1991-2000, butgrowth slowed to 2.2% in 2002/03. The official unemployment rate (a crudemeasure in most countries, but even more so in a country with a massiveundocumented labour force) has risen continuously over the past decade, from3.1% in 1989/90 to 7.8% in 2002/03.

The average population density rose from 106 per sq km in 1981 to 176 persq km in 2000, but this masks regional differences, ranging in 1998 from 353per sq km in Punjab to just 19 in Baluchistan. Although the March 1998 censusput the proportion of the population in the countryside at 67.5%, only slightlydown from 71.7% in 1981, urbanisation is accelerating. Karachi�s population, forexample, is said to be expanding at 6% per year. In 2000 nearly 33% of thecountry�s population lived in urban areas.

Education

Pakistan�s education system is among the most deficient and backward in Asia,reflecting the traditional determination of a feudal ruling elite to preserve its

The population growth rate isslowing

Disturbing development trendspersist

Rural-urban drift isaccelerating

An unwise bias towardstertiary education

Pakistan 19


hegemony and, to a lesser extent, the mushrooming over two decades ofmadrassas (Islamic schools). The key problem of the education system wasillustrated by the 2003/04 budget, which allocated around 50% more funds tohigher education than to primary and secondary education combined.Pakistan has a mass of poorly educated people and a well-educated elite,many of whose children choose to emigrate.

In recent years the Pakistani government has increasingly become aware of theserious flaws in the education system, and attempted to tackle thesedeficiencies in the 2003/04 and 2004/05 budgets. In the 2004/05 budget, thegovernment allocated a total of PRs4.5bn for education!a year-on-year rise ofalmost 80%. Budgeted spending on higher education rose by more than 20% toPRs4.5bn (US$75m). PRs700m (US$12m) was spent on the Tawana Pakistanprogramme, which is intended to improve female enrolment in schools, and onimproved nutritional support.

Education statistics1991/92 2001/02

Total primary school enrolment (m) 10.7 19.5

Male/female ratio in primary schools 100:53 100:73University attendance 65,944 117,863

Professional college enrolment 76,249 161,191

Source: Ministry of Finance, Economic Survey 2003-2004.

Health

The government is taking steps to improve Pakistan�s health services anddevelopment spending on health. In 2003/04 expenditure on health rose by37% to PRs4.4bn. The 2004/05 budget allocated PRs6bn to healthcare, whileexpenditure on population welfare (a component of total healthcare spending)rose to PRs2.6bn. Nonetheless, official negligence over the years has meant thatthe provision of healthcare is poor, notwithstanding government statisticsindicating a slow but steady increase in the numbers of doctors and nurses. In2003/04, 108,062 doctors were registered in Pakistan, almost double thenumber a decade earlier, while the number of nurses had more than doubledto 46,311. A greater impact on health has been achieved as a result of the rise inthe number of rural health centres, from around 2,000 in 1990/91 to 5,000 in2002/03, although medical staff assigned to rural clinics frequently fail to turnup for work.

Daily calorie intake per head was officially estimated at 2,529 in 2003/04,slightly lower than the UN�s recommended minimum of 2,550, whereas proteinconsumption averaged 65.8 g, about 15% above the recommended minimum.Given the tendency of governments to exaggerate their achievements, and thevast differences in income levels, it is reasonable to conclude that a substantialproportion of Pakistanis are undernourished, many of them seriously. Thegovernment has started various programmes, with limited success, whichinclude control of iodine deficiency disorder, anaemia and vitamin Adeficiency, and promotion of a breast-feeding programme. However, just as richPakistanis tend to send their children abroad for their education, so they or

Healthcare provision remainspoor

20 Pakistan


members of their families travel overseas to obtain medical attention, and ifthey are on the right side of the political divide the government will often paythe bill.

Natural resources and the environment

Pakistan experiences some of the most extreme temperatures on earth, rangingfrom 50°C or more at the height of summer in the deserts of Sindh to -50°C andbelow in the depths of winter on the northern mountain ranges. Droughtsfrequently ravage herds and standing crops, as do floods, which also destroyphysical infrastructure.

Parts of the North West Frontier Province (NWFP) and Baluchistan seek tocompensate for the bareness of their soil and their perceived victimisation atthe hands of successive central governments by resorting to the �black�economy, notably the processing of opium (much of which is grown inAfghanistan) into heroin. Smuggling across the porous border with Afghanistanis also important to the economies of these areas.

Sindh�s proven hydrocarbon deposits are to a large extent being tapped.Baluchistan is believed to possess massive reserves, particularly of natural gas,but the province�s tribal chiefs, over whom the central government exerts littlecontrol, have been demanding too high a price for permission to drill. Some ofthe foreign companies awarded concessions there have been obliged to declareforce majeure, faced with obstruction from Baluchi tribesmen mostly belongingto the Marri and Bugti tribes. In recent times violence has broken out in theBugti tribal area, and paramilitary forces and tribal bands have clashed overalleged violation of hiring, firing and compensation agreements with the oiland gas companies.

Transport, communications and the Internet

If the high economic growth rates needed to sustain the rapidly growingpopulation are to be achieved and sustained, massive investment will berequired in physical infrastructure, including roads, ports, air transport andtelecommunications, most of which currently suffer from severe bottlenecks.Securing the requisite capital!from private investors and commercial banks,given the paucity of public funds!is one of the biggest challenges that thecountry faces in terms of development.

Despite its poor condition, Pakistan�s road network of 252,000 km hasbecome increasingly important for freight movement, carrying 65% of freight in2000/01. This is the consequence, in large part, of the decline in PakistanRailways. In 1990/91 the railway network carried 84.9m passengers, but by2002/03 passenger numbers had fallen to 72.4m. Rail freight similarly declined:after peaking at 8.1m tonnes in 1994/95, in the first nine months of 2002/03 just4.4m tonnes of freight was carried. The government is trying to encourageprivate-sector participation in the railways, but full privatisation is unlikely.

Tribal groups hinder resourceexploitation

The state of infrastructureis poor

Pakistan 21


Instead, private companies have been invited to operate trains by paying trackaccess charges.

The number of vehicles registered rose from 2.7m in 1990 to 4.8m in 2002/03.However, government funding for roads is not only insufficient but also, in theview of the country�s creditors, often unwisely spent. The motorway betweenLahore and Islamabad cost PRs35.5bn; it was initiated by Nawaz Sharif duringhis first term as prime minister, and was completed in November 1997. Withtraffic a mere 10% of the targeted level, the government has had little success inleasing the motorway to a private operator. Nevertheless, the Pakistan MuslimLeague (PML) government under Mr Sharif awarded another contract for thePeshawar-Islamabad motorway, which was due to be completed by December2001 but was cancelled after the military takeover of government in 1999. Themilitary government took over the control of national highways, previously inthe hands of provincial governments, planning to lease them to groups thatwould develop toll roads. The Fauji Foundation, which manages militarypension funds, was given control over the Karachi-Hyderabad highway and theroad that runs between Lahore and Rawalpindi as a first step.

Although recent governments have opened up the transport sector to privateparticipation, they have failed to follow this up by offering sufficientlyattractive incentives, such as effective regulatory frameworks for non-government operators. Bureaucratic obstruction is a problem, as is politicalexpediency. Private airlines continue to complain of the perceived unfairadvantage enjoyed by the state carrier, Pakistan International Airlines, and themilitary-owned Shaheen Airlines. The Privatisation Commission has appointeda financial advisory consortium led by Goldman Sachs International and JPMorgan to work on the privatisation of Pakistan Telecommunications Company(PTCL), which has been continually delayed. A lack of investor interest and thefact that it is a major foreign-exchange earner for the government may work todelay the sale further.

The telecoms sector in Pakistan is nevertheless seen as possessing high growthpotential, given the low levels of both fixed-line and cellular penetration, at2.8% and 2.3% respectively. Given rising GDP growth and expectations of asteady climb in GDP per head, cellular operators can look forward to rapidlygrowing demand. The lethargy of current cellular players means that, evenwithout leaps in demand, existing customers are likely to be easy prey. ANorwegian telecoms company, Telenor, recently entered the market, but thefederal cabinet has given an assurance that no new cellular licences will beissued in the next five years. The government plans to increase the number ofcellular phone users to 10% of the population by 2008, and to attract US$1.5bnin investment in the telecoms sector. It also plans to attract foreign companiesto bid for licences to operate fixed-line networks, and to privatise PakistanTelecommunications Company Limited (PTCL). Singapore Telecommunicationssaid in February 2004 that it might consider investing in PTCL, possibly byacquiring a stake in the company. On February 9th PTCL launched a wirelesslocal loop project to provide new telephone connections to remote parts of thecountry; it entered into a US$500m agreement with a Chinese company,

Private-sector interest is patchy

The telecoms sector displayspotential

22 Pakistan


Huawei Technologies, to implement the plan. The new plan should providetelephone access to 127 cities around Pakistan, with 200,000 new connections.

Reflecting that potential, on April 14th 2004 the Pakistan TelecommunicationsAuthority awarded two licences for cellular phone operators in the country, forUS$291m each, netting the government an expected US$582m. This was nearlydouble the consensus estimate of a total of US$300m for the two licences. Ofthe 33 companies that submitted expressions of interest, nine were shortlistedfor the bidding, five battled it out to make the second round and two emergedas winners. The winning bids came from Telenor and from Space Telecom, aconsortium of Syria Telecom, Pakistan Oilfields and Attock Refinery. However,Space Telecom failed to pay its first instalment, and was disqualified. Telenorexpects to start operations in the next 9-12 months.

Energy provision

Electricity generating capacity is dominated by the two public energy producersand distributors, the Water and Power Development Authority (WAPDA) andthe Karachi Electricity Supply Corporation (KESC), which contributed aroundtwo-thirds of Pakistan�s total installed capacity of 17,776 mw in 2003/04. Theremainder is largely provided by private producers, which Benazir Bhutto�sgovernment in the mid-1990s had hoped would fill Pakistan�s rising demandfor power. Thermal power, which in 1993/94 replaced hydro-power as thelargest source of energy, now accounts for almost 70% of total installed capacityas well as energy supply.

Demand for energy is accelerating, but the government is locked in a tusslewith international oil and gas exploration companies over the price at whichgas is bought by the gas distribution companies, while the World Bank hascriticised the manner in which the government sets gas prices for domestic andcommercial consumers. Plans to import gas have been pushed back because ofthe impressive discoveries made by oil and gas exploration companies in recentyears. The government intends to increase dependence on domestic gas ratherthan oil imports. The long-mooted gas pipeline connecting Central Asian gasfields with Pakistan via Afghanistan is once again under discussion, althoughconstruction is unlikely to begin while Afghanistan remains unstable.

Investment in the power sector was harmed in the late 1990s by a rowbetween independent power producers (IPPs) and the second Sharif govern-ment over tariffs. Particularly messy was the row between the Hub PowerCompany (Hubco), partly owned by the UK�s National Power, and WAPDA.The government accused various IPPs, including Hubco, of bribing officials ofthe previous Pakistan People�s Party (PPP) government and of raising powerprices above what was initially agreed. The IPPs rejected this criticism at first,but then agreed to reduce prices significantly after pressure from the militarygovernment. Before its removal, the PML government managed to settle issueswith some of the smaller IPPs.

Pricing issue resolution is keyto boosting supplies

One new cellular phonelicence is issued

Pakistan 23


Reform of the power sector, initiated by the World Bank, stalled as a resultof disagreements, but is now moving ahead. The transfer of WAPDA�sadministration to the army early in 1999 helped to increase revenue byreducing power theft. The government then unveiled plans to carve up WAPDAinto three generation companies, eight distribution concerns and a transmissionentity, and to privatise it. The federal government funded bail-out packagesworth PRs63.6bn to WAPDA and KESC in 2002/03, and the two utilitiesreceived a further PRs33.2bn in 2004/05; the utilities remain a drain on theexchequer, contributing to the fiscal deficit.

The end-2003 deadline for WAPDA�s privatisation was missed. The ministryblamed the delay on nine international lenders that had not given theirapproval for the transfer. The World Bank has since provided a letter of consent,and the Ministry of Finance plans to transfer assets worth PRs400bn. Inaddition, about PRs90bn, out of total liabilities of PRs129bn, is to be transferredto the 12 new companies. The setting of power tariffs is an area of concern forbidders for WAPDA�s unbundled companies, which are being placed on theprivatisation agenda. The National Electric Power Regulatory Authority said inApril 2004 that it would determine different power tariffs for each of theunbundled entities, bearing in mind their financial health and the fact that thegovernment would ultimately decide whether to extend differential or unifiedpower tariffs to final consumers. Nevertheless, the Asian Development Banksaid in March that reform in the power sector has remained slow and thatpolicy has not produced tangible results.

The government has also tried unsuccessfully to persuade Karachi�s businesscommunity, through the Karachi Chamber of Commerce & Industry, to form aconsortium to buy KESC. It is now considering asking bidders to take KESCover without paying the government, based on a promise that US$400m willbe invested in the company. The company is a tough sell, since it is achronically loss-making entity and requires large investment in rehabilitation,modernisation and expansion to reduce theft of electricity. KESC said in April2004 that in the nine-month period to end-March it had reduced losses toPRs4.9bn, as against PRs9.8bn in the year-earlier period. The privatisationcommission has received expressions of interest in KESC from severalmultinational consortiums.

Utility sector reformremains slow

Private banks havereservations about WAPDA

Investors remain reluctant tobuy Karachi�s electricity utility

24 Pakistan


The economy

Economic structure

Main economic indicators, 2003GDP growth at factor cost (%)a 5.1Consumer price inflation (av; %) 2.9

Current-account balance (% of GDP) 5.2Total external debt (US$ bn; year-end) 34.7

Exchange rate (PRs:US$; av) 57.8

a Fiscal year (July 2002-June 2003).

Sources: Ministry of Finance, Economic Survey 2003-2004; IMF, International Financial Statistics; Economist Intelligence Unit.

Real GDP grew by 6.4% year on year during the first nine months (July-March)of fiscal year 2003/04 (July-June), compared with a target of 5.3% for the wholeyear and last year�s rate of 5.1%. The high growth rate during the first ninemonths came on the back of 13.1% year-on-year growth in manufacturing and5.2% growth in the services sector, with only agriculture missing its growthtarget of 4.2% and coming in at 2.6%, below the rate of 4.1% in 2002/03 asa whole.

Agriculture contributed 23.2% of GDP in the first nine months of 2003/04,according to the government. The size of the annual cotton crop, the bulk of itgrown in Punjab province, is a crucial barometer of the health of the overalleconomy, as it determines the availability and cost of the main raw material forthe yarn-spinning industry!much of which is concentrated around thesouthern port city of Karachi!and has a large bearing on the level of exports.Pakistan produced around 11.5m 170-kg bales in 2002/03, after averaging 9.3mbales a year over the previous decade. As more land is being used for cottonproduction, the government hopes that production will soar to 15m bales a yearby 2010. Historically, although Pakistan has been one of the world�s largestproducers of raw cotton, value added in cotton production was minimal.However, increased quotas for higher-end textile products, largely stemmingfrom Pakistan�s support for the US action in Afghanistan and more recently inIraq, have raised exports of higher-value products.

Comparative economic indicators, 2003Pakistan India Bangladesh Sri Lanka China

GDP (US$ bn) 69.0 592.0 51.9 18.6 1,409.0GDP per head (US$) 455 558 354 972 1,090

GDP per head at PPP (US$) 2,089 2,690 1,270 3,350 4,910Consumer price inflation (av; %) 2.9 3.8 5.6 6.3 1.2

Current-account balance (US$ bn) 3.6 3.4 0.4 -0.4 45.9Current-account balance (% of GDP) 5.2 0.6 0.7 -2.0 3.3

Exports of goods fob (US$ bn) 11.9 57.2 6.9 5.1 438.3Imports of goods fob (US$ bn) 12.0 -74.4 -9.3 -6.7 -393.6External debt (US$ bn) 34.8 104.4 18.1 10.6 196.8

Debt-service ratio, paid (%) 12.1 13.9 7.5 9.2 4.8

Source: Economist Intelligence Unit, CountryData.

The economy rebounded in2003/04

Pakistan 25


Private consumption accounted for 72.7% of expenditure on GDP at marketprices in 2002/03, and government consumption for 11.7%. Gross fixed capitalformation has fallen as a percentage of GDP over the past decade, from around17% in the late 1980s to 12.3% in 2001/02, but rose in 2002/03, largely owing toincreased investment in the textile sector.

Economic policy

The federal budget for fiscal year 2004/05 (July-June), announced by thefinance minister, Shaukat Aziz, in parliament on June 12th 2004 was fairlybalanced, generally pro-business and emphasised aggressive economic growththrough duty incentives and a reasonable taxation policy. It also substantiallyincreased expenditure on development schemes. The budget set out a range ofmedium-term macroeconomic targets, which include raising annual GDPgrowth to 8% in the next three years, increasing the investment to GDP ratio to20%, narrowing the fiscal deficit to 3% of GDP, ensuring that inflation remainsbelow 5% and ensuring that foreign-exchange reserves equal or exceed theequivalent of 28 weeks of import cover.

The military government has taken some steps to tackle the severe structuralproblems that contributed to Pakistan�s low or declining GDP growth rate in thelate 1990s. Foremost among these problems is the fiscal deficit, caused by aninability to contain spending, improve tax compliance and expand the tax base.The government has been aided by a substantial external debt-servicingpackage, stemming from its support for US action in Afghanistan and Iraqfollowing the September 11th 2001 terrorist attacks. Prior to this package,spending on the military and debt servicing had absorbed as much as two-thirds of government spending. The government has also taken steps to tacklecorruption, although progress has slowed since the parliamentary election inOctober 2002.

Revenue receipts and expenditure, 2003/04(PRs bn)

Estimated % changeTax revenue 724.4 8.7 Direct taxes 161.1 11.1 Indirect taxes 349.0 11.2Expenditure 714.2 1.7 Defence 180.5 12.7 Debt-servicing 202.5 -3.4 Development 152.0 17.7


The formulation and direction of economic policy have been largely governedby agreements reached with multilateral creditors, particularly the IMF and theWorld Bank. The slow pace of progress, particularly relating to the restructuringand privatisation of inefficient power utilities such as the Water and PowerDevelopment Authority (WAPDA) and Karachi Electricity Supply Company(KESC), reform of the Central Board of Revenue and poverty alleviation, hasbeen criticised by the multilateral agencies. Nonetheless, since 1999 the military

Some progress on structuralissues

Multilateral donors� role inpolicymaking

The budget for 2004/05 isgrowth orientated

26 Pakistan


government has been praised by the IMF and other international donors foradhering to guidelines for structural change and poverty alleviation despite thehardships imposed by austerity measures.

Until the November 2000-September 2001 IMF stand-by package, Pakistan hadnever completed a lending programme with the Fund. Problems typically arosewhen the government became unwilling or unable to comply with conditionsattached to a particular loan package.

In October 1997 the IMF approved a three-year package worth US$1.56bn fromits enhanced structural adjustment facility (ESAF) and extended fund facility(EFF). In return, the government led by Nawaz Sharif pledged to push throughreforms aimed at substantially reducing the fiscal and current-account deficits.However, as ever implementation was weak, partly because of domesticopposition.

After the May 1998 nuclear tests the IMF, which had disbursed only US$450mof the three-year package, froze further lending, as did other multilateral andbilateral creditors. The following November, after the US had decided to endthe sanctions that had blocked its funding, the Fund agreed a new US$1.6bnESAF. This envisaged a sharp reduction in the fiscal deficit, faster tax reform,tariff cuts and privatisation, and higher investment in the social sector. The dealwas accompanied by a US$350m structural adjustment loan from the WorldBank. In mid-1999, with two ESAF tranches totalling some US$500m alreadydisbursed, the IMF again suspended flows, initially owing to the hostilities inKargil, Kashmir, and then because of the government�s refusal to comply withpreviously agreed conditions, including the imposition of a 15% general salestax (GST) on the retail trade, the introduction of an agricultural income tax,higher petroleum product taxes and the settlement of the disputes with theindependent power producers (IPPs) over power tariffs.

After the October 1999 military coup, the IMF initially said that all loandiscussions with Pakistan would remain suspended until democracy wasrestored. However, as the US stance softened, so did that of the Fund, whichpledged to restart talks on outstanding issues. Some in the US felt that themilitary regime would be prepared to take the sort of tough economic policydecisions that civilian politicians had long avoided. That view did not last. Bymid-2000 senior officials in the government were making clear their reluctanceto introduce the GST and an agricultural income tax, and said that they wereprepared to abandon the ESAF. Negotiations began with the Fund on a povertyreduction and growth facility (PRGF) of up to US$2.5bn spread over three years.The military-led administration also revealed that its civilian predecessor hadhugely understated the fiscal deficits of 1997/98 and 1998/99 to ensurecontinued assistance from the Fund.

However, in November 2000 the IMF finally agreed to a stand-by creditamounting to US$600m until end-September 2001. The government thenimplemented most IMF conditions, raising utility rates and revenue andcurtailing expenditure. It imposed a 15% GST on retail trade with effect fromJuly 1st 2001. In December 2001 the IMF approved a three-year PRGF worthUS$1.3bn. The IMF then helped Pakistan to reschedule over US$12bn in debt to

Relations with the IMF haveimproved

Pakistan 27


the Paris Club of bilateral lenders and the London Club of commercialcreditors, giving Pakistan enormous budgetary relief in debt payments andallowing the State Bank of Pakistan (the central bank) to build unprecedentedlevels of foreign-exchange reserves, which exceeded US$10bn in 2003.

On June 12th the government unveiled its budget plans for 2004/05. Thegovernment reduced taxes and the number of tax bands, as well as loweringimport tariffs. It also increased expenditure on health, education and develop-ment by a substantial 31%, and launched a number of micro level reforminitiatives. Increasing tax revenue, privatisation and improving Pakistan�s socialinfrastructure have dominated economic policy for the past few years.

In October 2004 Pakistan�s US$1.3bn PRGF ended. The IMF has commendedPakistan, stating that a host of structural reforms have been implemented andthat the debt position has improved. However, the Fund remains concernedabout the pace of reform of the power sector and of public-expendituremanagement.

Economic performance

The estimated 6% growth in GDP (at factor cost) in 2003/04, if achieved, isthe highest rate recorded since 1995/96. The slowdown in the interveningyears stemmed from political instability, but more fundamentally from theeconomy�s narrow production base (namely its dependence on cotton-basedmanufactures), which renders it vulnerable to exogenous shocks such asadverse weather and fluctuating prices. Macroeconomic imbalances, parti-cularly the public-sector deficit, also constituted a major impediment to highergrowth. However, the fiscal space provided by the rescheduling of Pakistan�sexternal debt, and moves to invest in the modernisation of the textile sector,have underpinned a pick-up in growth.

Gross domestic product(% real change, year on year)

Annual average2003/04 1998/99-2003/04

Agriculture 2.6 2.0

Industry 13.1 5.7Services 5.2 4.7GDP 6.0 4.2


The agricultural sector has been subject to even sharper fluctuations than thebroader economy; its excessive dependence on a cotton crop vulnerable todrought and flooding, as well as to pest and viral damage, is largely to blame.Manufacturing output has been below potential, despite official figures thathave put the annual average growth rate in manufacturing over the past tenyears at around 5%. The narrow production base is partly a product of over-generous concessions bestowed by successive governments on a handful ofsectors, including yarn spinning and sugar refining.

Growth rates have picked up

28 Pakistan


However, the textile sector has recently begun to invest in new technology inthe run-up to the cessation of the Multi-Fibre Arrangement (a global export-import quota regime for the textile industry) at end-2004, and this, coupledwith improved quotas from the EU, the US and Turkey owing to Pakistan�spolitical support for US action in Afghanistan, gave the industrial sector a boostin both 2002/03 and 2003/04. This has reversed the declining trend in textilesector investment in recent years. According to official figures, total investmentin textile manufacturing averaged about 17% of GDP a year in the 1970s andabout 18% in the 1990s. From 1995/96 to 1999/2000 it averaged about 16.8%,falling to 15.9% in 2000/01 and 13.2% in 2001/02. However, with investmentgrowing by 10% in 2002/03, the share of textile investment in GDP rose to 13.7%.

Since 2000 consumer price inflation has declined, although this owes much tocontinued good harvests. In the past, excessive public-sector borrowing to fundthe fiscal deficit has fuelled consumer price inflation. Annual inflation averaged3.8% between 2000 and 2004, after having averaged over 10% in the late 1990s.However, anecdotal evidence suggests that actual price increases are running atwell over the official rate.

Regional trends

Pakistan, a product of the break-up of British India and the subsequentsecession of Bangladesh, has continued to be dogged by the threat of sub-nationalism and provincialism, primarily stemming from perceived biases infavour of the most populous state, Punjab. An uprising by Baluchi nationalistsin the 1970s and Pashtun campaigns for a separate name for their provincehave been motivated by a sense of neglect and victimisation, economic as wellas political, and similar sentiments have been expressed in Sindh and theNorth West Frontier Province (NWFP).

Punjab has always been the most privileged of Pakistan�s four provinces, fillingthe upper echelons of the army and the bureaucracy!by far the country�s mostinfluential institutions!and accounting for the bulk of the agriculturalproduction that is the economy�s mainstay. Owing to the role of NWFP in theAfghan war, and its importance as a major transit point for the drug traffickingand arms trades, this province is the next most influential!after Punjabis, thenext highest number of government employees come from here.

Barren Baluchistan and politically difficult Sindh, by contrast, remain poor andbackward (although the country�s main business centre, Karachi, is in Sindh).Federal development programmes have done little to redress the imbalances,and until Zafarullah Jamali took office none of Pakistan�s prime ministers hadhailed from Baluchistan. Corruption and political interference mean that thestandard of living in the rural areas is generally low, and few governmentprojects actually end up helping the people. In recent times provincialsquabbles have erupted over the issue of water sharing, Sindh in particularaccusing Punjab of diverting more than its share of scarce winter waterreservoir resources for crop irrigation. Perceptions of Punjabi ethnic bias havealso provoked the smaller provinces to resist the construction of big dams

Provincial suspicions mar damconstruction

Pakistan 29


upstream, which are desperately needed to store water for use in the winterwhen the existing reservoirs are running low.

Economic sectors

Agriculture

Fundamental problems afflict the agricultural sector, which accounts for almostone-quarter of GDP and generates 45% of employment. One symptom is anexcessive dependence on a cotton crop that is highly susceptible to adverseweather conditions and pest damage. After peaking at 12.8m 170-kg bales infiscal year 1991/92 (July-June), the lint harvest has fluctuated considerably,ranging from a low of 8m bales in 1993/94 to a high of 11.5m bales in 2002/03,and then falling again to 10m bales in 2003/04. Another symptom is the foodimport bill, which is rising rapidly despite a steady increase in crop, livestockand fruit production.

Some agronomists claim that the sector�s traditional sources of growth!including improvements in seeds and fertilisers, better crop management andincentives!are all but exhausted. As a result, the need for major institutionaland policy changes is more urgent than ever. The potential for improvement isconsiderable: the difference between the average and highest yields for staplecrops such as wheat, rice and maize, for example, is in the range of 30-50%. In2003/04 yields of all major crops, apart from rice and cotton, rose.

The key to better productivity lies in the more efficient use of scarce resources,principally land and water. Change is difficult, not least because the status quosuits the wealthy landowners who dominate the sector, as well as federal andprovincial parliaments. Large landowners own 40% of the arable land andcontrol most of the irrigation system. Yet assessments by independent agencies,including the World Bank, show them to be less productive than smallholders.They are also poor taxpayers, heavy borrowers and bad debtors. Smallholdingspredominate numerically!almost one-third of farms cover less than one acre(0.4 ha), and about three-quarters are under five acres.

The total area under crops has remained largely static in recent years, increasingslightly from 21.8m ha in 1990/91 to 22.1m ha in 2001/02, and then falling to21.9m ha in 2002/03 and 2003/04. Almost one-third of the land is lessproductive than it should be because of soil erosion, waterlogging and salinity.Land is also damaged by farmers who seek to maximise short-term gains bycultivating unsuitable crops. An optimal allocation of resources cannot beachieved because tenure systems prevent the distribution of land to those whowould use it more efficiently. Insecurity of tenure, which derives in largemeasure from the powers of arbitrary eviction that large landowners enjoy, is amajor problem. The irrigation system is also deficient. Reservoir capacity isinadequate, and water deliveries are supply- rather than demand-driven,inequitably distributed and inefficiently used. Finally, the freeing of farm-gateprices of key crops such as cotton, sugarcane, wheat and rice, traditionally set

Cotton crop dependenceremains excessive

30 Pakistan


by the government, would discourage the smuggling of farm produce intoneighbouring India, Iran and Afghanistan, and would raise farm incomes.

Forest cover has been severely depleted as a result of overexploitation, althoughgovernment data suggest that the area covered by forests expanded from3.46m ha in 1990/91 to 4.04m ha in 2003/04. Forestry production, however, fellfrom 1.07m cu metres of timber in 1990/91 to 383,000 cu metres in 1998/99.Renewed efforts in tree plantation and forestry then took production up to789,000 cu metres in 2002/03.

Mining and semi-processing

Crude oil production averaged 62,139 barrels/day in 2003/04. This remainsbelow production levels in 1990/91. Recoverable reserves were estimated at288m barrels in April 2004. Crude and petroleum product imports cost justunder US$3bn in 2001/02, accounting for 27.2% of all imports, although thisproportion fell back slightly in the first nine months of 2002/03. The petroleumimport bill for 2000/01 had been inflated by about US$600m because of a fallin hydro-electric power generation, owing to a significant drop in winter rainfallin the Himalayas.

Natural gas production averaged 2.6bn cu ft/day in the first nine months of2002/03, 5% above the previous year�s levels, and recoverable reserves wereestimated at over 28.3trn cu ft in April 2003. Plans to pursue understandingswith three possible foreign suppliers (Qatar, Iran and Turkmenistan), providingup to 7bn cu ft/day, have been delayed. Meanwhile, Pakistan, Iran and Indiahave also been exploring the possibility of a gas pipeline from Iran overlandthrough Pakistan to India, from which Pakistan hopes to receive transitroyalty fees.

Pakistan has an extensive range of non-fuel mineral reserves. Deposits ofmagnesite, rock salt, limestone, marble, china clay, dolomite, gypsum, silica,ochre, sulphur, barytes, bauxite, iron ore and emeralds are being exploited,albeit on a relatively small scale. The country�s biggest development project isin the remote Chagai district of Baluchistan, where the MetallurgicalConstruction Corporation of China is mining blister copper. The firm is alsohoping to exploit some of the area�s gold and silver reserves. Recently aChinese company won the right to tap the Saindak mines in Baluchistan.Chromite, antimony, phosphate, porcelain and certain gemstone depositsremain largely untapped

Since 1999 Saudi Arabia has been offering oil to Pakistan on concessionalterms!referred to as the Saudi Oil Facility!initially worth approximatelyUS$900m a year. However, the Saudi Oil Facility was cut by almost one-halfduring the period from July to December 2003. In the first half of 2003/04 totaloil imports fell by 8% year on year. Pakistan has said that in 2003/04 it willbecome a net exporter of fuel oil for the first time in over two decades. Twocompanies, Pakistan Refinery and National Refinery, have placed tenders toexport 40,000 tonnes of fuel oil. The local market is glutted with fuel oil, sincedemand has shifted to gas, coal and hydroelectric power. But Pakistan is keen to

Oil and gas productionremains insufficient

The Saudi Oil Facility isreduced by almost one-half

Pakistan 31


import diesel from India to cut transport costs. Pakistan imports 4.5m-5mtonnes of diesel every year.

Manufacturing

Before 1947 there was little manufacturing in the area that makes up present-day Pakistan. Its primary role was that of a supplier of raw materials, includingcotton, to industrial hubs across British India. Manufacturing growth sub-sequently fluctuated dramatically, averaging 9% per year during the first twodecades of independence but dropping to less than 3% in the 1970s, whenlarge-scale nationalisation sent investment levels tumbling. The growth raterecovered in the 1980s, averaging 8.2% per year, but fell back to 4.8% in the firsthalf of the 1990s and 2.8% in the second half. The increase in textile quotas inthe EU, the US and Turkey underpinned higher levels of industrial growthin 2002/03.

Industry has made an increasingly important contribution to exports. In rupeeterms, manufactured products made up 72% of all exports in 2001/02, when thesector accounted for 17.9% of GDP. Despite the introduction in the early 1990s ofreforms designed to stimulate investment!including the removal of importlicensing, the liberalisation of exchange controls, easier access to credit, taxbreaks and more equal treatment of foreign investment!manufacturing stillcharacteristically utilises relatively basic technologies, generates little valueadded and has a narrow production base. Successive governments havefavoured a handful of industries, notably yarn spinning and sugar refining, byoffering subsidies and other concessions.

Large-scale manufacturing was targeted by the government to grow by 8.8% in2003/04, and the sector registered growth of 15% in the period from July 2003 toFebruary 2004, compared with 7.7% in the same period a year earlier. Theleather sector made a particularly strong comeback, with a growth rate of 47.5%year on year during the eight-month period, while the booming automotivesector registered growth of 56.7%.

Successive governments have promised to work towards a substantialdiversification of the manufacturing base, to encourage the production of highvalue added goods and to achieve significantly increased levels of capitalformation in the sector. Their subsequent records have proved less thanimpressive. Despite recent reforms designed to attract manufacturers fromoverseas, disincentives!including a shortage of skilled workers, inadequatephysical infrastructure, pervasive official corruption, discrepancies betweendeclared policy and actual practice, political instability, and urban terrorismaimed at foreigners since the attacks on the US on September 11th 2001,notably in Karachi!still outweigh the incentives. Foreign direct investmenttotalled US$469.9m in 1999/2000, just US$322.4m in 2000/01 and US$485m in2001/02, but rose to over US$600m in the first nine months of 2002/03. Thisreflected a massive increase in investment by US oil and gas companies, andthe privatisation of United Bank, which was sold to a consortium from the UAEand the UK.

Industrial growth has beenerratic

Export diversification remainsan unachieved ambition

Manufacturing growth in2003/04 is impressive

32 Pakistan


The privatisation of public-sector manufacturing companies got under way,after considerable debate, in mid-1991. Over the following two years 63 unitswere sold, but thereafter the disposal rate slackened, as most of the remainderwere heavily indebted loss-makers. By mid-1999 only 103 firms had beenoffloaded. Current privatisation targets include the flagship Pakistan Tele-communications Company (PTCL), the Karachi Electric Supply Company(KESC) and some public-sector banks, including United Bank and Habib Bank.

Construction

The government has taken steps to stimulate the construction sector, whichstagnated over the past decade. In 2002/03 the sector�s performance improved,delivering a real growth rate of 3.1%. A new housing policy has been put inplace to tackle Pakistan�s estimated shortfall of 5.1m homes!a backlog which isgrowing at the rate of around 300,000 per year. The 2003/04 budget includedspecial incentives, including a boost to mortgage financing and a reduction oftaxes on construction inputs, to boost the housing and construction sector.

The 2003/04 budget also focused on improving roads and railways as well aspower supplies. Work on two road projects in Karachi!the US$100m LyariExpressway and the US$300m Northern Bypass project!is due to be completedin 2008-09. The Asian Development Bank is providing US$150m to improveroads in Punjab in a project due for completion in 2007. According to a WorldBank report, 45% of the national road network is in a state of disrepair,and massive investment is required to cope with the expected increase inroad traffic.

In the 2004/05 budget the government provided further incentives to theconstruction sector. Excise duty on paint was eliminated, duties on a host ofbuilding materials were reduced and duty on imported machinery was slashed.The government encouraged banks to increase lending to the constructionsector. It also undertook a large computerisation programme, creating adatabase of land titles and ownership details to enable properties to betransferred without fear of misrepresentation and fraud. A lack of claritysurrounding titles to property has been a key constraint facing the sector.

The net effect of the incentives, against a backdrop of sound economic growth,was that the construction sector grew by 7.9% in real terms in 2003/04, against agovernment target of 5.4%. Nevertheless, Pakistani companies have notbenefited as much as they had hoped to from reconstruction projects inAfghanistan, and in May 2003 Pakistan expressed concern about the number ofprojects going to Iranian or Indian companies.

Financial services

The financial sector underwent major liberalisation in the first half of the1990s. Several new banks were licensed, exchange controls were all buteliminated, prudential regulations were tightened and monetary and creditpolicies were rendered more market-oriented. However, although the numberof foreign and private banks increased in absolute terms, two of Pakistan�s five

Construction incentives werefeatured in the 2003/04 budget

The financial sector wasliberalised in the 1990s

Pakistan 33


major banks are still government-owned. The government sold a 51% stake inUnited Bank (UBL) in October 2002 to the UAE-based Abu Dhabi Group and aBritish company, Bestway. The National Bank of Pakistan (NBP) has been�corporatised�, with a minority of its shares being floated on the stockexchange. Meanwhile, the Privatisation Commission sold Habib Bank forPRs22.4bn (US$388m) to the Aga Khan Fund for Economic Development inJanuary 2004; the bank was handed over to its new owner in late February.

Traditionally, the state-owned banks had little incentive to be competitive or tomanage their portfolios carefully. Political pressure to make bad loans and ceasecollection efforts resulted in high rates of default. With the onset ofprivatisation, however, the situation has improved. Rationalisation andloan-recovery drives helped to restore UBL, Habib Bank and NBP to profitabilityin 1999. The campaign against defaulters intensified following the takeover ofthe government by General Pervez Musharraf. As a result, the value of non-performing loans (NPLs) has gradually declined. Having stood at PRs173.4bn atend-December 1999, NPLs fell to PRs167.7bn at end-June 2003. As a proportionof advances, the percentage fall in NPLs has been much greater.

The inefficiency of most banks, together with their excessively highadministrative costs and poor record in attracting savings, has contributed torelatively high interest rates. This situation has been exacerbated by the highyields paid by national savings schemes (NSS). The NSS hold deposits in excessof PRs800bn, and their high rates have long deterred banks from cutting theirown lending rates. However, the government has taken steps to cut theseinterest rates, providing a boost to the banking sector.

Nonetheless, portfolio inflows from abroad have always been modest.Overseas interest in the market tends to be highly speculative and narrowlybased. One reason for this is the poor enforcement of rules relating to investorprotection. Suspicions that corporate insiders do not act in the best interest oftheir shareholders remain widespread. Many companies, for example, arebelieved to conceal income in order to avoid paying taxes. Rumours of warwith India, the rise of violent sectarianism and Islamic fundamentalism, andattempts by the judiciary to declare the payment of interest un-Islamic, havealso harmed foreign investors� confidence (although in June 2002 the SupremeCourt finally overturned its earlier ruling that all forms of interest were to beoutlawed and Islamic financial institutions established by the end of thatmonth.) In recent times, however, the Securities and Exchange Commission ofPakistan has become a vigilant regulatory watchdog, and the income taxdepartment is getting tougher with tax evaders.

The Karachi Stock Exchange (KSE) benchmark index of 100 shares, the KSE-100,crossed the 5,000-point level for the first time ever earlier this year: on March19th it closed at 5,000.1 points. At its peak the KSE-100 exceeded the 5,600-pointlevel, but then declined to 5,400 points. Market capitalisation has increased toPRs1.4trn. The index had previously stood at 3,433 points on July 1st 2003, whenmarket capitalisation was PRs754bn. The KSE was one of the best-performingstock exchanges in the world in 2003: after ending 2002 at 2,701 points, the

Inefficiencies have led to highinterest rates

Financial markets rebound in2003 and 2004

Portfolio inflows are modest

34 Pakistan


KSE-100 index rose by 67% in 2003. Market capitalisation crossed the PRs1trnmark on September 12th 2003, when the index closed at 4,604 points. The rallycontinued throughout the first quarter of 2004. Strong corporate earnings,ample liquidity and local investors� expectations that the privatisation processwill pick up have kept the market buoyant. The unprecedented increase inforeign-exchange reserves, sustained inflows of remittances and the prospect ofa better relationship with India have also improved sentiment. The best-performing sectors have been oil and gas, cement, automotive and banking.

The government�s moves to develop a private pension-fund industry arecontinuing, although the pace has been slower than expected. A task-forcemade its recommendations to the Securities and Exchange Commission ofPakistan (SECP) in January 2004. The task-force outlined the fiscal andregulatory incentives that will be required in order to boost the private pensionindustry. It recommended that anyone not covered by an employment-relateddeferred benefit should be entitled to tax relief on up to 20% of their annualincome. The SECP has submitted the plan to the finance ministry for approval.

Several open- and closed-end mutual funds were launched in 2004, worth upto PRs20bn in total. Banks, brokerages and existing asset-managementcompanies have plans to launch funds. Since the State Bank of Pakistan (thecentral bank) allowed banks to set up asset-management companies assubsidiaries last year, most banks have made plans to launch mutual funds in2004. In April Faysal Bank and AKD Securities jointly launched a balanced-growth fund. Muslim Commercial Bank, Bank Al-Habib and Bank Al-Falah allplan to launch mutual funds. The NBP plans to launch three or four open-ended funds within the next year, with an average value of about PRs600meach. Among the brokerages, AKD plans to introduce three funds this year: asmall cap, closed-end equity fund worth PRs400m, another equity fund worthPRs1.5bn and a fixed-income fund. The company plans to have PRs5bn-7bn inassets under management. The mutual-fund sector is in the midst of a majorboom: market capitalisation in the sector rose by 92% in 2003.

Other services

Pakistan has persistent weaknesses in its services provision. Historically, thecountry has attracted few tourists, and its small!and shrinking!shipping fleethas led to mounting net payments for transport and associated services. Theretail sector is underdeveloped, and a substantial proportion of goods sold inPakistan are smuggled in through Afghanistan and are sold tax-free, deterringdomestic production.

The government creates apension fund industry

A number of mutual funds arelaunched in 2004

Pakistan 35


The external sector

Trade in goodsForeign trade, 2003/04a

(US$ bn; fob)

Exports 10.0Imports -12.0

Trade balance -2.0

a July-April.


Pakistan has recorded a trade deficit every year since fiscal year 1972/73(July-June). Although exports in US-dollar terms expanded by an annualaverage of 5.7% between 1990/91 and 1998/99, they contracted by around 3.5% ayear from 1996/97 to 1998/99, despite a steady erosion in the value of the rupeein relation to the currencies of most of the country�s major trading partners.Exports have since recovered, rising to US$8.2bn in 1999/2000 and to US$9.1bnin 2001/02, fuelled by a bumper cotton crop, a steady depreciation in theexchange rate and strong overseas demand. In 2002/03 exports then surged tojust over US$11bn, largely on the back of increased quotas for textile productsfrom the US, the EU and Turkey. In 2003/04 they rose again, to total US$10bn inthe July-April period.

Nonetheless, Pakistan�s export base remains narrow. Five categories of goods!cotton yarn, garments and hosiery, cotton cloth, raw cotton and rice!stillaccount for over 60% of export earnings. Key exports, notably cotton, remainvulnerable to exogenous shocks. But there are indications that Pakistanicompanies, particularly in the textile sector, are beginning to tackle otherimpediments to export growth, including the small proportion of high valueadded goods in the sales mix, low product quality and poor marketing.

Main items traded, 2003/04a

(PRs bn; fob)

ExportsGarments & hosiery 196.6Cotton cloth 79.2Cotton yarn 55.7Rice 29.3Synthetic textiles 22.9Leather goods 30.8

ImportsPetroleum & products 121.3Chemicals 84.2Non-electrical machinery 96.4Transport equipment 37.8Drugs & medicines 11.6Edible oils 29.1

a July-March.


36 Pakistan


Imports stood at US$9.4bn in 2001/02. The rise in oil prices in early 2003, in therun-up to the US-led war in Iraq, caused the value of Pakistan�s imports in2002/03 to rise to US$11.3bn. Industry depends on foreign raw materials andcapital goods. Petroleum and refined-product purchases have continued togrow. Changes in consumption patterns and the failure of domestic manu-facturers to adjust to them have led to a rapid acceleration in edible-oil imports.

Main trading partners, 2003Exports to: % of total Imports from: % of totalUS 21.2 China 14.2UAE 8.4 UAE 13.6

UK 6.7 Saudi Arabia 12.6Germany 5.0 Kuwait 7.7

Source: UN, Trade Statistics Yearbook.

The US has long been Pakistan�s largest export market, absorbing 22.2% of totalexports in 2003. The UK, Hong Kong and Germany have also been majoroutlets. Gulf countries were again to the fore in 2002, as oil prices increasedsharply.

Invisibles and the current account

Current account, 2003/04a

(US$ m)

Merchandise exports (fob) 9,175

Merchandise imports (fob) -9,932Trade balance -757Net services -2,260Net transfers 4,386Current-account balance 1,859

a July-March.


Since the early 1990s the services account has remained in deficit. However, inthe breakdown of �non-net factor services� that is provided by State Bank ofPakistan (SBP, the central bank), the rise stems from an unexplained increase in�other goods, services and income�!a residual category for the overall currentaccount. As expected, given the upsurge in trade, shipping costs!one of thelargest components of the services account!were higher. Net investmentoutflows have been increasing over the past few years, not least because ofrising debt-servicing commitments. Owing to the reduction in debt-servicingcosts in 2002/03 and higher foreign-exchange reserves, the net investmentincome deficit narrowed to US$1.5bn.

Private transfers are an important positive contribution to the current account.Remittances from Pakistanis abroad, most of them in the Arab Gulf states andNorth America, accounted for 80% of total private transfers until the mid-1980s.However, after peaking at US$2.9bn in 1982/83, remittances fell to under US$1bnin 1999/2000, and totalled less than US$1.1bn in 2000/01. The freeze onwithdrawals from foreign-currency accounts following nuclear tests by Pakistanin May 1998 may have scared away fresh inflows during that year and in 1999,

Pakistan 37


and the gap between the official and open-market exchange rates for the rupeedeterred inflows through official channels (although the rationalisation of theexchange rate in 1999 partly addressed the latter problem).

However, following an international crackdown on informal fund transfers viathe hundi or hawala (black market) system in the aftermath of the September11th 2001 terrorist attacks in the US, Pakistani expatriates have again started tochannel their remittances through formal banking channels and remittanceshave soared, reaching US$4.2bn in 2002/03. As a consequence of these develop-ments, the current account moved into surplus from 2001/02 onwards, afterrecording sustained deficits in previous decades.

Capital flows and foreign debt

Pakistan has relied heavily on official borrowing to finance its sustainedcurrent-account deficits and help offset the low level of national savings.Nonetheless, as international interest in Pakistan waned from the late 1980s,largely because of the Soviet Union�s withdrawal from Afghanistan, theproportion of grant and grant-like aid fell, from 80% of total aid inflows in thelate 1950s to around 10% in the late 1990s. However, disbursed and outstandingmedium- and long-term debt grew steadily to an estimated US$26.3bn at March2002, from US$14.2bn in 1988/89, according to national sources. The situationchanged again following the renewed foreign interest in Afghanistan after theSeptember 11th 2001 terrorist attacks on the US. Pakistan benefited from amajor debt-rescheduling package and higher inflows of grant aid!in 2001/02,the US alone provided US$703.9m of grant assistance. Pakistan�s total externaldebt stood at US$35.9bn at end-March 2004.

The major source of external funding is the Pakistan Development Forum(previously known as the Aid to Pakistan Consortium), which comprises themain multilateral lending institutions and a large number of bilateral creditors.Its members accounted for over 92% of the stock of outstanding disbursed debtas of mid-2000. The World Bank and its soft-loan arm, the InternationalDevelopment Bank, accounted for 29.9% of the total, the Asian DevelopmentBank for 21.2%, Japan for 18% and the US for 10.5%. The US had suspended fresheconomic assistance in 1990 amid concerns over Pakistan�s nuclear programme;other bilateral and multilateral creditors followed suit after the May 1998 tests,causing some slippage in debt and aid disbursal totals. Thinner inflows fromdebt and aid sources as well as from private remittances and trade receiptsforced Pakistan to reschedule some of its external debt payments with the ParisClub of bilateral creditors and the London Club of commercial lenders.Payments that were originally scheduled to fall due in 1999 and 2000 wererescheduled, as were those falling due in January 2001. In early 2002international donors rescheduled US$12.5bn in debt over 30 years, providingbudgetary relief of US$2.7bn in debt payments for 2002.

The rapid accumulation of foreign loans and the steady decline in the value ofthe rupee against the currencies of Pakistan�s main creditors led to anexpansion in the debt-servicing requirement during the early and mid-1990s;according to government data, it rose from US$1.22bn in 1988/89 to a record

Official borrowing funds thecurrent-account deficit

38 Pakistan


US$2.35bn!equivalent to 3.8% of GDP and 27.3% of export earnings!in 1997/98.As a result of rescheduling agreements, the requirement fell to US$1.5bn in1998/99. Debt-service payments rose to almost US$2bn in 2000/01. In 2003/04the government�s provisional figures indicate that debt-service payments stoodat US$5.2bn.

Until recently, low investor confidence has harmed direct foreign investmentinflows, which fell to US$322m in 2000/01. Political unrest and the poorlyperforming stockmarket led to net portfolio investment recording an outflow ofUS$140m. As Pakistan began to reap economic rewards for its political supportfor the US, so foreign investment increased. Portfolio outflows exceededinflows by US$10m in 2001/02, but inflows exceeded outflows by US$22m in2002/03. However, Pakistan received net foreign direct investment of US$352min 2001/02, US$795m in 2002/03 and US$515m in 2003/04. The poor securityclimate has deterred some Western companies from investing in Pakistan,whereas investment by Middle Eastern companies has increased.

The Pakistan government made a re-entry into the international capital marketswith a US$500m Eurobond in February 2004, for which roadshows were heldin Hong Kong, Dubai, Germany, Bahrain, the UAE, Singapore and the UK. Thebond was oversubscribed four times, and carried a fixed rate of 6.75%. TheEurobond launch was lead-managed by JP Morgan of the US, Deutsche Bank ofGermany and ABN AMRO of the Netherlands. It is redeemable in 2009, andwas sold at 370 basis points above US Treasury bonds. A credit-rating agency,Standard & Poor�s, assigned a �B� long-term senior unsecured foreign-currencydebt rating to the Eurobond before the issue. In April Pakistan swapped itsEurobond from fixed to floating rates, which marked the country�s first-evergovernment deal in the international derivatives market.

Foreign reserves and the exchange rate

In late 1998 low levels of foreign-exchange reserves threatened the country�scapacity to pay some significant import bills and, more ominously, its ability toservice foreign debt, forcing Pakistan to reschedule payments with its externalcreditors. Reserves subsequently picked up slightly, averaging US$1.5bn in 1999and 2000!the SBP bought US$1.6bn in 1999/2000 and US$2bn in 2000/01from the free market in order to shore up reserves as required by the IMF.Several developments in the aftermath of the September 11th 2001 attacks!higher inflows of grants, the substantial debt rescheduling associated with theIMF package and the rise in foreign remittances that stemmed from thecrackdown on unofficial means of money transfer!combined to cause foreign-exchange reserves to surge. Reserves have grown steadily in the past threeyears, and stood at US$10.9bn at end-June 2004. Of this, US$1.36bn was held bycommercial banks and the remainder by the SBP.

Before mid-1998 Pakistan maintained a so-called managed float, whereby theSBP administered a downward drift in the value of the rupee in relation to thecurrencies of Pakistan�s main trading partners so as to help offset often sizeableinflation differentials. The rupee�s average value against the US dollar fell from

Reserves grow steadily

Pakistan issues a US$500mEurobond

Pakistan 39


PRs12.7:US$1 in 1982/83 to stand at PRs46:US$1 in May 1998. FollowingPakistan�s nuclear tests that month, and the resulting imposition of sanctions,the exchange rate plunged to PRs65:US$1, forcing the government to introduce aregime of multiple exchange rates to discourage imports and encourage therapid repatriation of export proceeds. This saw the rupee appreciate toPRs52:US$1 by end-March 1999. Two months later, at the insistence of the IMF,the rates were unified under the so-called floating interbank exchange rate. Therupee came under pressure following the depreciation of the Indian rupee, andin September 2000 the rupee was allowed to float. It subsequently fell rapidly.

The post-September 11th 2001 factors that led to the rise in foreign-exchangereserves!higher inflows of remittances and grant assistance, and lower debt-servicing costs!coupled with a surge in exports largely stemming from higherquotas for textile exports, as well as US-dollar weakness, led the rupee tostrengthen against the US dollar. The currency appreciated in 2002 and the firstthree months of 2003. It has since stabilised, and stood at PRs59.13:US$1 inSeptember 2004.

40 Pakistan


Regional overview

Membership of organisations

The South Asian Association for Regional Co-operation (SAARC), whichcomprises India, Pakistan, Sri Lanka, Bangladesh, Nepal, the Maldives andBhutan, was established in 1985 at a meeting in Bangladesh. SAARC�s aimsinclude promoting welfare, accelerating economic growth, eradicating povertyand improving relations between member states.

Summit meetings are intended to be held annually and are complemented bytechnical committees, meetings of foreign ministers and a standing committee,which comprises the foreign secretaries (civil servants) of each country. Anunder-resourced secretariat, established in 1987 and based in the Nepalesecapital, Kathmandu, co-ordinates SAARC�s activities.

In the early years agreements were made to create a food security reserve (anagreement that has never been implemented), to establish a meteorologicalcentre, to combat terrorism and to initiate various cultural exchanges betweenmember states. Along with micro-level issues, SAARC has also proposed thecreation of a South Asian Free-Trade Area (SAFTA). SAFTA, seen as areplacement for the South Asian Preferential Trading Arrangement, whichwas agreed in 1995 and which had by 1996 identified more than 2,000 productsas eligible for preferential treatment, was initially scheduled to be put in placeby the ambitious target date of 2001. After the 1997 SAARC conference, aneminent persons group was constituted to plot the way forward for theassociation. The group argued that closer economic ties were the key to thefuture, and proposed that a free-trade area be implemented by 2008 (2010 forthe least developed member states), a customs union by 2015 and an economicunion by 2020. But political factors weigh against adherence even to thisextended timetable.

India�s refusal to participate in the SAARC summit scheduled for November 1999,in protest at the military coup in Pakistan in October of that year, led to thecancellation of both the 1999 and the 2000 summits. A summit did take place inearly 2002, but it was overshadowed by India�s allegation that Pakistan had beenbehind an attack by Islamic militants on the Indian parliament in December2001. Tensions between India and Pakistan have hampered SAARC�s progress onwider issues, although the association has been relatively effective in providing aforum for meetings of non-governmental organisations and professionalgroupings. Some progress was made on economic issues during January 2004summit, as tensions between Pakistan and India eased. There is nevertheless astrong feeling that political tensions between SAARC�s two largest membersprevent multilateral progress on economic issues, and this has led to an increasedemphasis on bilateral trade relationships. India has signed bilateral free-tradeagreements (FTAs) with Nepal (in 1996) and Sri Lanka (in 2000), in effect by-passing SAARC. Bhutan and India also have an FTA, and India is currentlynegotiating a bilateral trade deal with Bangladesh. Moreover, much of SAARC�s

The South Asian Associationfor Regional Co-operation

Pakistan 41


work is likely to be superseded in the future by World Trade Organisationregulations.

SAARC�s ability to reposition itself as the preferred conduit for bilateralrelationships within South Asia is likely to determine the success or otherwiseof the organisation. The association�s achievements in facilitating greater civil-society linkages within South Asia contrast strongly with its failure to boostgovernment-level ties. Poor relations between India and Pakistan!the largestmembers of SAARC!have severely hampered the body�s effectiveness.

42 Pakistan


Appendices

Sources of information

Agricultural Development Bank of Pakistan, Annual Report

Federal Bureau of Statistics, Labour Force Survey (annual)

Federal Bureau of Statistics, Monthly Statistical Bulletin

Federal Bureau of Statistics, Pakistan Democratic Survey (1993)

Federal Bureau of Statistics, Pakistan Statistical Yearbook

Ministry of Finance, Economic Survey (annual)

Ministry of Finance, Annual Budget Statement 2003-2004

Ministry of Food, Agriculture and Co-operatives, Annual Report

Ministry of Food, Agriculture and Co-operatives, Census of Agriculture, 1990

State Bank of Pakistan, Annual Report

State Bank of Pakistan, Bulletin (monthly)

Bank for International Settlements, International Banking and Financial MarketDevelopments (quarterly)

International Institute for Strategic Studies, The Military Balance (annual)

IMF, International Financial Statistics (monthly)

OECD, Geographical Distribution of Financial Flows to Developing Countries(annual)

UN, Monthly Bulletin of Statistics

World Bank, World Development Report (annual)

World Bank, World Investment Report (annual)

Benazir Bhutto, Daughter of the East, Hamish Hamilton, London, 1988

S J Burki, Pakistan under Bhutto, 1971-77, Macmillan, New York, 1980

Stephen Philip Cohen, The Idea of Pakistan, Brookings Institution Press,Washington, DC, 2004

Emma Duncan, Breaking the Curfew, Michael Joseph, London, 1989

Owen Bennett Jones, Pakistan: the Eye of the Storm, Yale University Press, 2002

J Keay, The Gilgit Game, John Murray, London, 1979

Christina Lamb, Waiting for Allah, Viking/Penguin, Harmondsworth, 1991

Geoffrey Moorhouse, To the Frontier, Hodder and Stoughton, London, 1984

V S Naipaul, Among the Believers, Penguin, Harmondsworth, 1982

National statistical sources

International statistical sources

Select bibliography andwebsites

Pakistan 43


Omar Noman, Pakistan: Political and Economic History since 1947, Kegan Paul,London, 1990

Seyyed Vali Reza Nasr, The Islamic Leviathan: Islam and the Making of StatePower, Oxford University Press, 2001

Mary Anne Weaver, Pakistan: In the Shadow of Jihad and Afghanistan, Farrar,Straus & Giroux, New York, 2003

Stanley Wolpert, Zulfi Bhutto of Pakistan, Oxford University Press, 1993

Lawrence Ziring, Pakistan: at the Crosscurrent of History, Oneworld, 2004

Business Recorder newspaper, www.brecorder.com

Daily Times newspaper, www.dailytimes.com.pk

Dawn newspaper, www.dawn.com

The Friday Times newspaper, www.thefridaytimes.com

Government of Pakistan, Ministry of Finance, www.finance.gov.pk

Reference tables

These reference tables provide the most up-to-date statistics available at the time ofpublication.

Population1999 2000 2001 2002 2003

Population (m; mid-year) 136.69 139.76 142.86 145.96 148.20 % change 2.3 2.2 2.2 2.1 1.5


Labour force(m; end-Jun)

1999 2000 2001 2002 2003Employed labour force 37.78 37.32 38.14 39.64 40.47 Agriculture 17.85 18.07 18.47 16.68 17.03 Mining & manufacturing 3.84 4.31 4.40 5.51 5.56

Construction 2.37 2.16 2.21 2.40 2.45 Utilities 0.26 0.26 0.26 0.32 0.33

Transport 2.07 1.88 1.92 2.34 2.39 Trade 5.24 5.04 5.15 5.89 6.01 Others 6.15 5.60 5.73 6.50 6.63

Unemployed 2.37 3.17 3.24 3.57 3.65Total labour force 40.15 40.49 41.38 43.21 44.12


44 Pakistan


Energy supplies1999/2000 2000/01 2001/02 2002/03 2003/04 a

Crude oil extraction (m barrels) 20.4 21.1 23.2 23.5 17.6Crude oil imports (m barrels) 32.9 52.5 52.0 39.3 a n/a

Natural gas output (bn cu m) 23.2 24.8 26.2 28.1 23.8Refined oil production (�000 tonnes) 6,115 8,723 9.410 7,140 n/a

Refined oil imports (�000 tonnes) 11,878 10,029 9,023 6,163 n/aCoal production (�000 tonnes) 3,164 3,285 3,512 3,609 2,510Coal imports (�000 tonnes) 957 950 917 750 n/a

Hydroelectricity (gwh) 19,288 17,194 18,941 22,254 20,833Thermal power (gwh) 46,064 48,926 51,174 51,278 34,237

Nuclear power (gwh) 339 1,997 2,291 1,740 1,571

a July-March; provisional.


Transport infrastructure1998/99 1999/2000 2000/01 2001/02 2002/03

RailPassengers carried (m) 64.99 68.00 68.80 69.00 72.40Freight carried (m tonnes) 5.5 4.8 5.9 5.9 5.9Length of track (km) 7,791 7,791 7,791 7,791 7,791RoadVehicles registered, year-end (m) 4,560 4,702 4,844 5,049 5,232 Cars & jeeps (�000) 1,162 1,182 1,202 1,246 1,286 Trucks (�000) 145 149 157 170 178 Buses (�000) 150 154 158 163 163 Taxis (�000) 84 84 94 91 91 Motorcycles, 2- & 3-wheel (�000) 2,271 2,360 2,449 2,533 2,667Network (�000 km) 247.5 248.3 250.0 251.7 252.2

AirPassengers carried (�000) 4,914 5,297 2,729 4,290 4,391Passenger load factor (%) 59.7 64.5 63.8 68.7 69.3No. of aeroplanes 51 46 45 44 43SeaExports (�000 tonnes)a 5,735 5,612 5,918 6,362 6,273Imports (�000 tonnes)a 18,318 18,149 20,063 20,330 19,609No. of vesselsb 15 15 14 14 13Deadweight tonnes (�000) 261.8 261.8 243.8 243.7 229.6

a Through Karachi port. b Pakistan National Shipping Corporation.


Pakistan 45


Federal and provincial government budgets(PRs bn; outturn unless otherwise indicated)

2000/01 2001/02 2002/03 2003/04 2004/05 a

Total gross revenue 553.0 624.1 706.1 760.9 796.3 Tax revenue 441.6 478.1 553.3 580.0 654.8 Non-tax revenue 111.4 146.0 152.8 180.8 141.5Total spending 717.9 826.2 892.5 868.3 902.8 Current 645.7 700.2 728.8 714.0 700.8 Development 89.8 126.2 134.0 154.4 202.0Balance -179.7 -189.1 -186.4 -107.4 -106.5

a Budgeted.

Sources: Ministry of Finance, Economic Survey 2003-2004; Federal Budget in Brief 2003/04.

Money supply(PRs m unless otherwise indicated; end-period)

1999 2000 2001 2002 2003Money (M1) incl others 795,370 876,014 964,921 1,118,403 1,387,601 % change, year on year 8.6 10.1 10.1 15.9 24.1Quasi-money 521,619 600,662 685,205 809,592 878,563Money (M2) 1,316,989 1,476,676 1,650,126 1,927,995 2,266,164 % change, year on year 4.3 12.1 11.7 16.8 17.5

Source: IMF, International Financial Statistics.

Interest ratesa

(%; end-Jun)

1999 2000 2001 2002 2003Advance rate 14.47 13.25 13.07 13.00 11.87

Stock exchange 14.15 13.76 13.54 11.27 11.97Real estate 14.08 12.23 12.84 12.72 12.63

Financial obligations 14.95 13.65 13.07 13.88 7.74

a Weighted average of rates offered by scheduled banks.


Gross domestic product(market prices; fiscal years Jul-Jun)

1999/2000 2000/01 2001/02 2002/03 2003/04 a

Total (US$ m)At current prices 68,174 66,325 66,665 76,592 88,431

Total (PRs m)At current prices 3,529,345 3,876,025 4,095,212 4,479,873 5,088,321At constant 1999/00 prices 3,793,436 3,863,994 3,988,377 4,193,757 4,445,805 % real change, year on year n/a 1.9 3.2 5.2 6.0Per head (PRs)At current prices 27,234 29,269 30,910 34,074 37,495At constant 1999/00 prices 27,234 27,192 28,015 29,602 30,485 % real change, year on year n/a -0.2 3.0 5.7 3.0

a Provisional.

Sources: Ministry of Finance, Economic Survey 2003-2004.

46 Pakistan


Gross domestic product by sectora

(PRs m at constant 1999/00 prices; factor cost; % of total in brackets)

1999/2000 2000/01 2001/02 2002/03 2003/04 b

Agriculture 923,609 903,499 904,433 941,275 965,372(26.2) (25.1) (24.4) (24.2) (23.3)

Mining 48,377 47,561 51,031 59,266 59,272(1.4) (1.3) (1.4) (1.5) (1.4)

Construction 87,386 87,846 89,241 91,976 99,283(2.5) (2.4) (2.4) (2.4) (2.4)

Electricity, gas & water supply 139,626 120,465 112,026 109,163 133,740(4.0) (3.4) (3.0) (2.8) (3.2)

Manufacturing 522,801 571,357 596,841 637,964 723,335(14.8) (15.9) (16.1) (16.4) (17.5)

Services 1,807,546 1,863,396 1,952,146 2,055,608 2,163,317(51.2) (51.8) (52.7) (52.8) (52.2)

GDP at factor cost 3,529,345 3,594,124 3,705,718 3,895,252 4,144,319

a Totals may not add, owing to rounding. b Provisional.


Gross domestic product by expenditure, current prices(PRs; fiscal years Jul-Jun; % of total in brackets)

1999/2000 2000/01 2001/02 2002/03 2003/04 a

Private consumption 2,851,346 3,163,874 3,278,905 3,547,453 3,656,195(75.2) (76.0) (74.5) (73.6) (67.0)

Government consumption 330,691 327,562 388,446 438,057 493,975(8.7) (7.9) (8.8) (9.1) (9.1)

Gross fixed investment 607,410 659,325 680,373 713,859 892,513(16.0) (15.8) (15.5) (14.8) (16.4)

Stockbuilding 51,700 56,200 58,000 93,000 94,400(1.4) (1.4) (1.3) (1.9) (1.7)

Exports of goods & services 514,389 617,148 677,855 815,158 1,041,633(13.6) (14.8) (15.4) (16.9) (19.1)

Imports of goods & services -561,990 -661,455 -681,880 -786,224 -720,653(-14.8) (-15.9) (-15.5) (-16.3) (-13.2)

GDP 3,793,437 4,162,654 4,401,699 4,821,303 5,458,063

a Provisional.

Source: IMF, International Financial Statistics; Ministry of Finance, Economic Survey 2003-2004.

Pakistan 47


Gross domestic product by expenditure, constant prices(PRs m at 1999/2000 prices; % of GDP in brackets unless otherwise indicated)

1999/2000 2000/01 2001/02 2002/03 2003/04 a

Private consumption 2,851,346 2,861,780 2,900,987 2,927,781 2,759,399(75.1) (74.1) (72.7) (69.8) (62.1)

Government consumption 330,691 312,070 358,968 389,646 421,600(8.7) (8.1) (9.0) (9.3) (9.5)

Gross fixed investment 607,410 634,423 632,134 638,580 732,190(16.0) (16.4) (15.9) (15.2) (16.5)

Stockbuilding 51,700 52,914 53,491 81,308 76,973(1.4) (1.4) (1.3) (1.9) (1.7)

Exports of goods & services 514,280 576,936 634,399 814,425 991,843(13.6) (14.9) (15.9) (19.4) (22.3)

Imports of goods & services -561,990 -574,130 -591,602 -657,983 -536,200(-14.8) (-14.9) (-14.8) (-15.7) (-12.1)

GDP 3,793,436 3,863,994 3,988,377 4,193,757 4,445,805

a Provisional.


Consumer price inflation1999 2000 2001 2002 2003

Consumer price inflation (2000=100) 95.8 100 103.1 106.5 109.6 % change, year on year 4.1 4.4 3.1 3.3 2.9

Sources: IMF, International Financial Statistics.

Agriculture: basic data(fiscal years Jul-Jun)

1999/2000 2000/01 2001/02 2002/03 2003/04 a

Cropped area (m ha) 22.7 22.0 22.1 21.9 21.9

Seed distribution (�000 tonnes) 194.3 233.1 182.6 190.2 150.4Water availability (m acre ft) 133.3 134.8 134.6 134.5 n/a

Fertiliser use (�000 nutrient tonnes) 2,833 2,966 2,196 3,020 2,508Credit disbursed (PRs bn) 39.7 44.8 52.5 58.9 47.9

a Provisional; July-March.


48 Pakistan


Agricultural production1999/2000 2000/01 2001/02 2002/03 2003/04 a

Foodgrains (m tonnes)Wheat 21.1 19.0 18.2 19.2 19.8Rice 5.2 4.8 3.9 4.5 4.9Maize 1.7 1.6 1.7 1.7 1.8Total incl others 28.4 26.0 24.3 25.9 27.0Cash crops (m tonnes)Sugarcane 46.3 43.6 48.0 52.1 53.4Cotton 1.9 1.8 1.8 1.7 1.7

Fruit (�000 tonnes)Citrus 1,943 1,865 1,830 1,702 1,612Mango 938 990 1,037 1,035 1,072Apple 377 439 367 315 273Banana 125 139 150 143 153Apricot 120 126 125 130 135Guava 494 526 538 532 524LivestockMilk (m tonnes) 25.6 26.3 27.0 27.8 28.6Beef (�000 tonnes) 986 1,010 1,034 1,060 1,087Mutton (�000 tonnes) 649 666 683 702 723Poultry meat (�000 tonnes) 322 339 355 370 402Wool (�000 tonnes) 38.9 39.2 39.4 39.7 39.9Hides & skins (m) 44.8 46.0 47.1 48.5 49.8

Forestry & fishingFish (�000 tonnes) 654.5 629.0 654.5 665.8 630.0Timber (�000 cu metres) 670 736 726 823 830

a Provisional.


Pakistan 49


Non-fuel minerals production(�000 tonnes unless otherwise indicated; fiscal years Jul-Jun)

1999/2000 2000/01 2001/02 2002/03 2003/04 a

Limestone 9,589 10,870 10,820 11,880 9,285Rock salt 1,358 1,394 1,423 1,426 1,180

Marble 579 620 685 1066 648Gypsum 355 364 402 424 285

Dolomite 348 353 313 341 214Silica 167 155 157 185 167

Fire clay 139 164 171 117 98China clay 63 47 54 40 24Magnesite 4.5 4.6 4.6 2.7 3.2

Chromite 26 22 24 31 18Bauxite 48 35 37 68 46

Barytes 26 28 21 41 30Ochre 4.8 4.7 5.1 6.7 5.2Celestite 0.8 0.8 0.4 0.4 0.1

Iron ore 46.0 24.8 4.9 11.5 27.7Index of mining output (1999/2000=100) 100.0 98.3 105.5 122.5 122.5

a July-March.


Manufacturing production(�000 tonnes unless otherwise indicated)

1999/2000 2000/01 2001/02 2002/03 2003/04 a

Sugar 2,429 2,956 3,247 3,686 3,747Vegetable ghee 695 835 797 743 559

Cotton yarn (m kg) 1,670 1,721 1,809 1,935 1,464Cotton cloth (m sq metres) 437 490 568 577 485Jute textiles 86 89 82 94 79

Cigarettes (m) 46,976 58,259 55,318 49,365 39,771Beverages (�000 dozen bottles) 194 212 208 191 147

Motor tyres (�000) 856 884 908 1082 926Cycle tyres (�000) 3,767 4,051 4,569 5,411 3,575

Cement 9,314 9,674 9,935 11,020 9,272Urea 3,785 4,005 4,260 4,402 3,337Soda ash 246 218 215 281 218

Paints & varnishes (tonnes) 7,347 10,922 10,341 3,899 4,352Bicycles (�000) 534 570 553 630 491

Electric bulbs (m) 63 55 55 58 63Paper board 228 246 325 205 167Index of manufacturing output (1999/2000=100) 101 115 123 121 142

a July-March.


50 Pakistan


Karachi Stock Exchange statistics1999/2000 2000/01 2001/02 2002/03 2003/04 a

Total turnover of shares (m) 48.1 29.2 29.1 53.1 65.2

No. of new listings 1 4 4 2 9Funds mobilised from new listings (PRs bn) 0.4 3.6 15.2 23.8 61.7

a July-March.


Exports by value(PRs bn; fob)

1998/99 1999/2000 2000/01 2001/02 2002/03 a

Cotton yarn 47.4 55.5 62.9 57.1 40.8Garments & hosiery 69.9 85.9 101.6 105.9 93.2Cotton cloth 56.0 56.8 60.5 49.8 69.3

Raw cotton 0.1 3.8 8.1 1.5 2.6Rice 26.8 27.9 30.9 27.5 23.5

Synthetic textiles 20.0 23.7 31.9 25.2 22.1Leather 9.0 8.9 9.1 13.7 10.0

Sports goods 12.9 14.5 15.9 18.6 13.3Carpets & rugs 10.2 13.7 17.0 15.3 9.6Fish & products 6.2 7.2 8.0 7.8 5.7

Surgical instrument 5.6 6.2 7.3 8.9 6.2Drugs & chemicals 1.8 3.0 6.1 6.2 11.0

Footwear 1.8 1.9 2.4 3.3 3.6Total incl others 390.3 443.7 539.1 561.0 518.9

a July-March.


Exports by volume(m sq metres unless otherwise indicated)

1998/99 1999/2000 2000/01 2001/02 2002/03 a

Cotton yarn (m kg) 422 513 545 540 398Cotton cloth 1,355 1,575 1,735 1,909 1,469

Raw cotton (�000 tonnes) 2 83 135 35 51Rice (�000 tonnes) 1,789 1,916 2,294 1,684 1,356

Synthetic textiles 506 641 843 655 553Leather 13 13 18 17 11

Carpets & rugs 4 5 6 5 3Fish & products (m kg) 79 90 82 84 63Footwear (m pairs) 9 8 8 9 9

a July-March.


Pakistan 51


Imports by value(PRs bn; fob)

1999/2000 2000/01 2001/02 2002/03 2003/04 a

Non-electrical machinery 66.2 88.6 96.8 119.3 96.4Petroleum & products 145.2 195.6 172.6 141.9 121.3

Chemicals 72.8 80.1 82.3 91.0 84.2Edible oils 21.4 19.1 24.0 34.3 29.1

Transport equipment 29.2 24.9 30.6 40.0 37.9Grains, pulses & flours 19.6 8.0 11.6 9.3 4.4

Iron, steel & products 18.9 20.3 24.6 28.8 25.0Fertiliser 10.2 9.8 10.9 12.5 11.0Drugs & medicines 13.4 14.0 14.0 13.0 11.6

Tea 10.9 12.0 9.6 10.1 8.7Electrical goods 8.0 7.7 7.8 12.7 10.4

Dyes & colours 7.0 7.4 7.8 8.4 6.7Paper, board & stationery 6.4 7.7 8.6 10.5 8.7Non-ferrous metals 5.0 6.0 6.8 8.4 7.5

Silk yarn 2.5 3.5 5.1 5.4 5.3Total incl others 533.8 627.0 634.6 714.4 603.9

a July-March.


Imports by volume(�000 tonnes)

1998/99 1999/2000 2000/01 2001/02 2002/03 a

Crude petroleum 4,476 4,453 6,855 7,140 5,329Petroleum products 10,659 11,810 10,129 9,229 6,634

Chemical fertiliser 1,612 1,121 954 1,219 1,157Edible oils 1,325 1,010 1,144 1,196 978Wheat 3,240 2,006 80 267 148

Tea 120 109 111 99 83

a July-March.


Main trading partners(% share)

1998/99 1999/00 2000/01 2001/02 2002/03Exports to:All developed countries 59.6 61.0 56.7 58.1 56.1OECD 59.6 60.6 56.3 57.6 55.6All developing countries 39.7 38.6 42.9 41.4 43.3South Asia 5.0 3.2 2.9 2.5 2.4ASEAN 3.2 2.8 3.6 2.7 2.9Imports from:All developed countries 42.2 36.7 31.0 34.3 34.4OECD 41.6 36.1 30.5 33.7 33.5All developing countries 56.8 62.1 68.1 64.6 64.8South Asia 2.2 1.9 2.9 2.5 2.4ASEAN 14.1 10.2 10.6 11.7 12.2


52 Pakistan


Balance of payments, IMF series(US$ m)

1999 2000 2001 2002 2003Goods: exports fob 7,673 8,739 9,131 9,832 11,869

Goods: imports fob -9,520 -9,898 -9,739 -10,428 -11,969Trade balance -1,847 -1,159 1,880 -596 -100Services: credit 1,373 1,380 1,459 2,429 2,977Services: debit -2,416 -2,252 -2,330 -2,241 -3,288Income: credit 119 118 113 128 180

Income: debit -1,959 -2,333 -2,192 -2,414 -2,397Current transfers: credit 3,582 4,200 5,499 6,593 6,293

Current transfers: debit -42 -38 -61 -45 -68Current-account balance -920 -85 1,880 3,854 3,597Direct investment in Pakistan 532 308 383 823 534

Direct investment abroad -21 -11 -31 -28 -19Inward portfolio investment (incl bonds) 46 -451 -192 -567 -119

Outward portfolio investment 0 0 0 0 -2Other investment assets -523 -437 53 -64 -395

Other investment liabilities -2,398 -2,508 -602 -948 -1,625Financial balance -2,364 -3,099 -389 -784 -1,626Capital account nie credit 0 0 0 40 1,133

Capital account nie debit 0 0 0 0 -2Capital account nie balance 0 0 0 40 1,131

Net errors & omissions 768 557 708 974 -108Overall balance -2,516 -2,627 2,197 4084 2,994Financing (- indicates inflow)Reserve assets -842 7 -2,716 -4,525 -3,089Use of IMF credit & loans 391 -101 328 68 -112

Note. Totals may not add, owing to rounding.


Balance of payments, national series(US$ m; fiscal years Jul-Jun)

1999/2000 2000/01 2001/02 2002/03 2003/04 a

Goods: exports fob 8,190 8,933 9,140 10,889 9,175

Goods: imports fob -9,602 -10,202 -9,434 -11,333 -9,932Trade balance -1,471 -1,269 -294 -444 -757Net non-factor services -776 -981 -298 -2,128 -2,260Net investment income -2,018 -2,161 -2,319 n/a n/aNet private transfers 3,063 3,898 4,249 5,737 4,386

Current-account balance -1,143 -513 1,338 3,165 1,369Long-term capital balanceb 525 171 1,280 1,035 -154

Net errors & omissionsc -2,282 313 961 909 -271Overall balance -2,900 -29 3,579 5,109 944

a July-March. b Includes official unrequited transfers. c Includes private short-term capital.


Pakistan 53


External debt, World Bank seriesa

(US$ m unless otherwise indicated; debt stocks at year-end)

1998 1999 2000 2001 2002Public medium- & long-term 26,141 28,136 27,171 26,474 28,102Private medium- & long-term 2,602 2,221 2,560 2,098 1,998

Total medium- & long-term debt 28,743 30,358 29,731 28,572 30,100 Official creditors 23,715 25,976 25,120 25,102 27,174 Bilateral 10,590 11,844 11,643 12,030 12,371 Multilateral 13,125 14,132 13,477 13,072 14,803 Private creditors 2,427 2,160 2,051 1,372 927

Short-term debt 2,159 1,830 1,519 1,314 1,540 Interest arrears 213 0 0 0 0Use of IMF credit 1,360 1,704 1,529 1,807 2,032

Total external debt 32,263 33,891 32,779 31,692 33,672Principal repayments 1,441 1,888 1,869 2,134 2,019

Interest payments 856 1,047 985 864 825 Short-term debt 110 49 78 57 55Total debt service 2,297 2,935 2,854 2,998 2,844

Ratios (%)Total external debt/GDP 52.3 58.3 54.7 54.9 56.5Debt-service ratio, paidb 21.9 28.9 25.2 24.6 17.8

Note. Long-term debt is defined as having original maturity of more than one year.

a Totals may not add, owing to rounding. b Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance.

Foreign reserves(US$ m; end-period)

1999 2000 2001 2002 2003Foreign exchange 1,511 1,499 3,640 8,078 10,941

SDRs 0 11 4 2 248Total reserves minus gold 1,511 1,513 3,636 8,076 10,693Gold 543 543 595 684 733


Exchange rates(PRs per currency unit; annual averages)

1999/2000 2000/01 2001/02 2002/03 2003/04US$ 51.77 58.44 61.43 58.49 57.54£ 82.49 84.74 88.57 92.74 98.79¥ 0.48 0.51 0.49 0.49 0.52

� 49.57 55.46 56.43 65.39 71.70Rs 1.19 1.25 1.28 1.22 1.26

SDR 70.11 74.78 78.06 79.32 82.92


Editors: Ravi Bhatia (editor); Graham Richardson (consulting editor)Editorial closing date: September 30th 2004

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected]

Pakistan - IUJ

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