Overview of Pakistan's Economy

By Pakistan Ministry of Finance

Riding on the strong economic fundamentals of last year Pakistan's economy has gathered greater momentum during the fiscal year 2003-04. Acceleration in growth accompanied by a sharp pick up in industrial production, a strong upsurge in investment, and a further strengthening of the external balance of payments have been the hallmarks of this year's performance. The pre-payment of high cost external debt, the strategic re-entry into the international capital markets through the floatation of a Eurobond and the re-basing of Pakistan's national accounts have been the other stellar occurrences of the fiscal year 2003-04. No efforts to revive the economy will be complete unless these macroeconomic gains are transferred to the masses in terms of an improved standard of living. The efforts of the last five years have started yielding positive results and this year has seen the incidence of poverty declining, enrolment in primary, middle and matric levels rising, and various quality of life indicators improving.

During this fiscal year, Pakistan succeeded in attaining; a higher than targeted growth in real GDP, powered by stellar growth in large-scale manufacturing and a continuing robust performance in services; a double-digit growth in per capita income, reaching $ 652; a strong rebound in investment, particularly in private sector investment owing to a rare confluence of various positive developments on the economic scene; low inflation and an investment-friendly interest rate environment; an unprecedented increase in credit to the private sector; sharp increases in the consumption of electricity and gas reflecting rising levels of economic activity; a reduction in the fiscal deficit; on target tax collection; a buoyant stock market with an all-time high aggregate market capitalization; a double-digit growth in exports and imports; workers' remittances maintaining their momentum with the current account balance remaining in surplus for the third year in a row; a continued accumulation of foreign exchange reserves and stability in the exchange rate; a sharp decline in the public and external debt burden; a lowering of the interest cost through the pre-payment of $ 1.17 billion of high cost external debt; and a successful return to the international capital markets through the floatation of a Eurobond.

From the grassroots perspective, the incidence of poverty has declined by 4.2 percentage points over 2001 figures. Other social indicators such as enrolment in primary, middle and matric levels; access to sanitation, safe drinking water, housing, electricity and gas have all showed marked improvements. Two successive years of strong growth along with over Rs.860 billion of cumulative spending over the last five years on social sector and poverty related programs is now beginning to bear fruit. Notwithstanding these improvements, much remains to be done, and this is that critical juncture in time when maintaining momentum through policy stability is paramount. While socio-economic and macroeconomic policies pursued during the year have had a strong influence on this across-the-board improvement, an increasingly broad and dynamic global recovery with industrial production and global trade picking up sharply, have aided Pakistan in this endeavor.

International Environment: Unlike in the past two to three years, this year has seen a relatively benign global economic environment after almost three years of weak and fragile growth in the world economy. A strong rebound in world trade, a robust recovery in the United States and emerging Asia, especially China, and the strongest showing for the Japanese economy since 1996 are offering grounds for optimism for the global economy in general and developing countries in particular. This optimism has encouraged the staff of the International Monetary Fund (IMF) to raise its forecast for global growth by about 0.5 percentage points to 4.6 percent in 2004 and 4.4 percent in 2005. Notwithstanding a strong and broad-based recovery in the major growth poles of the world economy, the Euro area is still exhibiting anemic growth of 1.7 percent for 2004. The United States has led the way with growth of 4.6 percent in 2004, supported by a resurgent Japan, with 3.4 percent. The growth momentum is exceptionally strong in emerging Asia where the Chinese economy is leading the way and is projected to grow by 8.5 percent in 2004. More robust income growth in the advanced economies is expected to stimulate activity in developing countries through trade, mainly in the form of higher export volumes. Developing countries including Pakistan have suffered from the slowdown in world trade in 2002, chiefly because of weak demand in the advanced economies. The pickup in global activity that began in 2003 and intensified in 2004 should translate into stronger and more sustained export growth for developing countries and this could be further augmented if progress is made in reducing trade barriers as envisaged in the Doha Round.

Notwithstanding a strong and broad-based recovery in the world economy there remain risks to the short-term outlook which will have a direct bearing on developing economies, including Pakistan. Oil prices have increased substantially from $ 26.5 per barrel in September 2003 to almost $ 42 per barrel on June 1, 2004. According to one estimate, a $ 5.0 per barrel increase in oil prices over the baseline price persisting for one full year will reduce global growth by 0.3 percent with an attendant impact on developing countries. Furthermore, the extra-ordinary rise in the price of oil fuels headline inflation which can have severe monetary policy implications. The stronger-than-expected global economic recovery, the depreciation of the US dollar against other major currencies, relatively low inventories, OPEC announcements of prospective production cuts, the 'fear factor' surrounding a possible disruption of supplies from the Middle East and some speculative activity have been mainly responsible for this unprecedented surge in oil prices. Without a stable and low oil price outlook, this global recovery seems tenuous at best.

GDP Growth: Real GDP growth, once again, surpassed the target (5.3 %) with a headline number of 6.4 percent during 2003-04 compared to last year's 5.1 percent rate. This buoyant growth was aided by a 13.1 percent and 5.2 percent growth in the manufacturing and services sectors, respectively. The performance of agriculture fell short of the target by growing at 2.6 percent against a target of 4.2 percent and last year's achievement of 4.1 percent. When compared with other developing countries in general and East and Southeast Asian countries in particular, Pakistan's growth performance has been quite impressive. Developing nations grew, on average, by 6.1 percent while East and Southeast Asian countries like Hong Kong, Singapore, Korea, Indonesia, Malaysia, Philippines, Bangladesh and Sri Lanka registered growth rates ranging from 1.1 percent to 5.5 percent in 2003-04. Few countries in the region, namely China, India and Thailand grew faster than Pakistan during this period. Fiscal stimulus in the shape of large public sector spending and a conducive interest rate environment provided important support to this growth picture in Pakistan.

Agriculture: The slippage in agriculture was mainly attributable to the weak performance of both the major and minor crops. Major crops, accounting for 34 percent of agricultural value added, grew by 2.8 percent against an impressive recovery of 6.9 percent last year. The performance of two major crops, cotton and wheat, was lackluster as the cotton crop suffered from pest problems in Southern Punjab while wheat production was adversely affected by the lack of rain in March when the formation of wheat grain takes place. The size of the cotton crop is estimated at 10.0 million bales - 1.6 percent lower than last year while that of wheat is estimated at 19.767 million tons against a target of 20.0 million tons, a shortfall of 1.2 percent. The performance of rice and sugarcane - the other two major crops - has been modest at best with the rice crop estimated at 4.848 million tons - 8.3 percent higher than last year and sugarcane at 53.419 million tons - 2.6 percent higher than last year. These two crops are highly water intensive and the improved availability of water helped increase their production. Minor crops, accounting for 12 percent in agricultural value added showed a 'weak' performance, growing by only 1.7 percent. Widespread rains during the monsoon season of 2003 (July-September) and increased snow fall in the catchment areas contributed to an improvement in the water situation during the year. The canal head withdrawals in the Kharif 2003 and Rabi 2003-04 seasons were higher by 5.0 percent and 26.2 percent, respectively over the previous year. However, during winter (January-March 2004) the actual rainfall was 40 percent lower than normal and this had a severe impact on the wheat crop.

Manufacturing: One of the most important developments of the year has been the sharp acceleration in manufacturing growth. Overall manufacturing grew by 13.4 percent in 2003-04 against a target of 7.8 percent and last year's 6.9 percent. This impressive growth was underpinned by the highest ever growth recorded in large-scale manufacturing which accounts for 68 percent of overall manufacturing, and exhibited broad-based growth of 17.1 percent against a target of 8.8 percent and last year's 7.2 percent. Improvements in the macroeconomic environment, a decline in the cost of capital, the availability of consumer financing at affordable rates, strong growth in exports and a general feel good mood in the economy have been responsible for this unprecedented growth in large-scale manufacturing. Over the last four years, the large-scale manufacturing sector has grown at an average rate of almost 10 percent per annum thereby increasing its share in GDP from 9.6 percent to 11.8 percent. Major industries that registered double-digit growth include: sugar, cement, cooking oil, jeeps and cars, motorcycles, motor tyres etc.

Construction: Another star performer has been the construction sector registering a growth rate of 7.9 percent against a target of 5.4 percent and last year's growth of 3.1 percent. Housing and construction has been identified as one of the major drivers of growth and the government has taken various budgetary and non-budgetary measures to boost this sector which has responded positively despite higher input prices. Another star performer has been the electricity and gas distribution sector which registered a massive increase of 22.5 percent in 2003-04 against a decline of 2.6 percent last year.

Per Capita Income: The sharp rise in per capita income which was witnessed last year continued during 2003-04, albeit at a relatively slower pace owing to a decline in net factor income from abroad (mainly workers' remittances). The per capita income in dollar terms increased by 12.0 percent from $ 582 last year to $ 652 during the outgoing fiscal year. Last year per capita income in dollars grew by 15.7 percent on the back of a massive increase in net factor income from abroad resulting in a two year per capita income average growth rate of 13.9 percent per annum.

Investment: Total investment rose to 18.1 percent of GDP in 2003-04 against 16.7 percent last year. Most importantly, fixed investment rose sharply to 16.4 percent of GDP against 14.8 percent last year. What is highly encouraging is the significant rise in private sector investment -from 11.2 percent to 11.7 percent of GDP. This year's growth is overwhelmed by massive investment in large-scale manufacturing by the private sector which grew by 25.4 percent during the year. Two inter-related sectors, construction and ownership of dwellings grew by impressive rates of 23.5 percent and 25 percent respectively, implying heavy investment in the housing and construction sector. National savings as a percentage of GDP remained at around 20 percent on account of a significant improvement in the current account balance. It is noteworthy that the national savings rate has increased by 8.3 percentage points since 1998-99.

Inflation: Tame inflation has also been one of the hallmarks of this government's macroeconomic policies. The rate of inflation as measured by changes in the Consumer Price Index (CPI) averaged 3.9 percent during the first ten months of the current fiscal year against 3.3 percent in the same period last year. Food and non-food inflation averaged 4.9 percent and 3.1 percent respectively as against 3.1 percent and 3.4 percent during the same period last year. Much of the surge in food inflation over last year has been due to both demand and supply factors resulting in an increase in the prices of wheat, wheat flour, rice, meat, edible oil and onions. The government has taken various measures to improve the supply situation of wheat including the import of 1.0 million tons of wheat with a concurrent wheat export ban. Central Banks around the world tend to focus on core inflation, which excludes the impact of food and energy prices. Core inflation basically represents policy (fiscal, monetary, exchange rate) induced inflation. Core inflation remained quite subdued owing to prudent macroeconomic policies pursued during the year and averaged 3.3 percent against the headline (overall inflation) number of 3.9 percent for the ten months of the current fiscal year.

Monetary Policy: The State Bank of Pakistan (SBP) continued with an easy monetary policy stance during the current fiscal year with a view to reinforcing the growth momentum that had picked up last year. Accordingly, the interest rate environment not only remained investor-friendly but middle class borrowers also benefited from such environment. The monetary expansion target was set to the tune of Rs.230 billion or 11.1 percent higher than last year. The monetary expansion during the first nine months (July- March) of the current fiscal year amounted to almost Rs.255 billion (higher by 12.3%) compared with an expansion of Rs.211 billion (higher by 12 %) in the same period last year. In other words the monetary expansion target was overtaken in the first nine months of the fiscal year. Unlike the previous two years, when the bulk of the monetary expansion resulted from a strong build up in the net foreign assets of the banking system, this year saw an unprecedented increase in private sector credit amounting to Rs.245 billion against an increase of Rs.107 billion during the same period last year. This also reflects a renewed private sector confidence in the basic macroeconomic fundamentals of the country. Almost 52 percent of the credit to the private sector went to manufacturing (Rs.126.4 billion). The benefits of the low interest rate environment also filtered down to middle class consumers as evidenced by the substantial increase in personnel loans amounting to Rs.50 billion during July-March 2003-04.

Government borrowing for budgetary support amounted to Rs.54 billion against a borrowing target of Rs.15 billion for the whole year. Three factors are responsible for the higher than targeted borrowing for budgetary support by the government. Firstly, the government had to borrow heavily from the banking system to finance the pre-payment of $ 1.17 billion of high cost external debt to the Asian Development Bank (ADB). Secondly, lower than projected external receipts for the budget and finally, lower investment in the national saving schemes. The accumulation of net foreign assets of the banking system remained subdued at Rs.50.4 billion compared to an accumulation of Rs.257 billion in the same period last year. On the whole, broad money supply grew by 12.3 percent against a target of 11.1 percent. It is expected that the current fiscal year may likely end with monetary expansion of around 15 percent. Two successive years of higher than targeted monetary expansion may give rise to inflationary pressure. However, the Central Bank is closely watching the inflationary situation.

As a result of the easy monetary policy stance, the weighted average lending rate declined by 289 basis points - from 7.58 percent in June 2003 to 4.69 percent in March 2004. The weighted average deposit rate also declined, though at a much slower pace, that is, from 1.9 percent to 1.3 percent during the same period - a decline of only 60 basis points. During this period the efficiency of the banking system also improved significantly with the spread between the lending and deposit rates declining from 568 basis points to 339 basis points - an efficiency gain of 229 basis points. The yield on 6 - month treasury bills remained stable at 1.6 percent during the year. It would not be out of place to mention here that the easy monetary policy stance perused by the Central Bank over the last three years has succeeded in lowering the entire term structure of interest rates. The weighted average lending rate declined from 13.74 percent in June 2001 to 4.69 percent in March 2004 - a decline of 905 basis points in less than three years. Similarly the yield of 6 - month Treasury Bills, which was as high as 12.88 percent in June 2001, declined to 1.68 percent in March 2004 - a decline of 1120 basis points during the same period. The export refinance rate, which is linked to the 6 - month Treasury rate, declined from 11.1 percent in July 2001 to 1.5 percent at the end March 2004, a hefty decline of 960 basis points which has helped improve the external competitiveness of the Pakistani exporter.

Stock Market: Another landmark achievement of the outgoing fiscal year has been the impressive growth in the share index of the Karachi Stock Exchange (KSE) - rising from 3403 points on June 30, 2003 to 5430 points on April 30, 2004 - an increase of 2027 points or 59.6 percent during the period. The aggregate market capitalization also increased by 92.4 percent, from Rs.746.4 billion to Rs.1436 billion during the period under review. In terms of US dollars the market capitalization of the KSE surged to $ 25 billion from $ 12.92 billion during the period under review. A number of factors have contributed to the persistence of the bullish trend in the stock market which include: a continuation of pro-growth economic policies; a stable macroeconomic environment; an acceleration in economic growth; a stable exchange rate; a brisk pace of privatization through the capital markets; a visible improvement in the Pakistan - India relationship; the availability of adequate liquidity in the market; good operating and financial results from the majority of blue chip companies and appropriate reforms initiated by the Securities and Exchange Commission of Pakistan (SECP).

Fiscal Policy: Prudent fiscal management is the foundation of a stable macroeconomic environment. Weak fiscal balance has been the major source of macroeconomic difficulties in the not too distant past. After almost five years of extensive efforts through the reform of the tax system and tax administration Pakistan has succeeded in attaining fiscal stability. The overall fiscal deficit that averaged nearly 7.0 percent of the GDP in the 1990s has declined to 3.3 percent in the outgoing fiscal year. The revenue deficit has been narrowed from 3.0 percent of GDP in the late 1990s to 0.2 percent and the primary balance has remained in surplus for the last many years. Public debt as percentage of GDP has also declined sharply and is now moving towards a sustainable level.

Pakistan has made considerable gain on fiscal side during 2003-04. The overall fiscal deficit declined from 3.7 percent of GDP in 2002-03 to 3.3 percent in 2003-04. The Central Board of Revenue (CBR) is targeted to collect Rs.510 billion - 10.5 percent higher than last year. The overall tax revenue is targeted to increase by 8.1 percent while on the expenditure side, total expenditure is estimated to rise by 6.6 percent but most of the increase is coming from the Public Sector Development Program (PSDP) - up by 17.6 percent. Current expenditure remains at last year's level with almost no growth. Interest payments and defense spending used to be the two largest items of overall expenditure followed by PSDP. As a result of prudent fiscal management, the share of interest payment in total outlay has declined sharply from 29.7 percent in 2001-02 to 21.1 percent in 2003-04. The share of defense in total outlay has remained stagnant at around 18.0 percent but that of PSDP, increased from 15.3 percent to 15.9 percent over the same period. As a percentage of GDP, interest payments have been declining while defense spending remained stagnant at 3.3 percent.

Another development on the fiscal side has been the near elimination of the revenue deficit in 2003-04. Over the last two years the revenue deficit has declined from Rs.76 billion (or 1.3% of GDP) to Rs.13.3 billion (or 0.2% of GDP). As per the Fiscal Responsibility Law the elimination of the revenue deficit was targeted to be achieved by 2007-08. However, Pakistan has almost reached the target four years in advance. Similarly, Pakistan has maintained a surplus in the primary balance over the last several years.

As a result of considerable improvement in fiscal balance, the public debt situation has improved immensely in recent years. Not only has the pace of accumulation been slowed but the burden of public debt has declined as well. During the outgoing fiscal year, public debt grew by only 2.8 percent. As percentage of GDP, public debt has declined from 75.2 percent last year to 69.7 percent in 2003-04 - a sharp decline of 5.0 percentage points in one year is a major achievement. Since public debt is a charge on the budget therefore its burden must be viewed in relation to government revenue. Public debt was 503.7 percent of total revenue last year; it has now declined to 487.7 percent in the current fiscal year.

Pakistan has made considerable gains toward fiscal consolidation. The overall fiscal deficit has been narrowed, the revenue deficit has nearly been eliminated and a primary surplus has been maintained for some time. Resultantly, public debt is fast moving towards a sustainable level. Even in countries with better fiscal management, maintaining and building on progress will be a continuing challenge. What is required is a prolonged commitment to fiscal discipline, which will come through a rule-based fiscal policy. Pakistan has already drafted a rule-based fiscal policy, enshrined in the Fiscal Responsibility and Debt Limitation Law, which has been approved by the Cabinet and has been sent to the Parliament for legislation.

Balance of Payments: Pakistan's external balance of payments gained further strength during the year under review. Both exports and imports registered robust growth; healthy increases in foreign exchange reserves continued despite heavy pre-payment of external debt; and the current account balance continued to remain in surplus for the third year in a row. A strong and broad-based recovery in the global economy also helped firm-up demand for Pakistani exportable goods. The inflow of workers' remittances continued its rising momentum, albeit at a slower pace; the exchange rate remained stable; and a substantial increase in FDI was recorded.

Exports: Exports grew by 13.1 percent during July-April 2003-04 against a hefty increase of 20.8 percent during the same period last year. When viewed against the backdrop of stellar growth (20.8%) last year, a higher double-digit growth rate in exports is one of the major achievements of the outgoing fiscal year. Given the performance of the first 10 months of the current fiscal year exports are likely to cross the target of $ 12.1 billion for the whole year. The higher unit values of exports, deeper penetration into the European and US markets, a sharp decline in the Export Refinance rate, and a competitive exchange rate have contributed to the surge in exports during the year. The surge in exports is underpinned by a strong growth in textile manufacturers and 'others' exports Textile manufacturers, accounting for 65.4 percent of total exports, registered an increase of 14.3 percent while 'other' exports covering 9.2 percent of total exports, grew by a hefty 48.6 percent. Almost 71 percent of the contribution to overall export growth came from textile manufactures and 26 percent came from 'other' exports. Primary commodities exports registered a decline of 1.5 percent mainly on account of very little export of wheat this year. Excluding the exports of wheat, primary commodities exports show an impressive growth of 12.8 percent. It is also encouraging to see the exports of engineering goods picking up at a much sharper pace. This year, exports of engineering goods grew by 33.4 percent - rising from $ 55.1 million to $ 73.5 million.

Imports: Imports grew by 19.0 percent during the first ten months (July - April) of the current fiscal year against a hefty increase of 22.5 percent in the same period last year. Most importantly, non-food non-oil imports are up by almost 32 percent against 23.5 percent last year. The exceptionally strong growth in non-food non-oil imports is one of the leading indicators of a surge in domestic economic activity. The salient features of this year's performance of imports include: impressive growth in the import of the machinery, chemical, metal and textile groups. The petroleum group registered a decline of 7.7 percent on account of 27.4 percent decline in the imports of petroleum products. In quantity terms, the import of petroleum products was down by 42.2 percent on account of a continuing surge in POL output by local refineries, an increased use of gas in industries and electricity generation, and lesser reliance on fuel oil-based thermal electricity owing to higher electricity generation through hydel. The major contributors to this year's rise in imports are the machinery group (27.1 %), followed by the agricultural / chemical group (22%), and metal group (7.0 %). The share of oil bills remained unchanged at 26.6 percent since last year. However, if the unprecedented rise in oil prices persists then given the rising level of economic activity Pakistan's oil bill is likely to cross $ 3.0 billion in 2004-05. If extrapolated for the remaining two months of the year, total imports may likely be in the neighbourhood of $ 14.5 billion for the whole fiscal year. As a result of the developments in exports and imports, the trade gap has widened from $ 1251.5 million to $ 2011.4 million during the first 10 months of the current fiscal year, showing a deterioration of 60.7 percent. Given the stronger than anticipated surge in domestic economic activity, the widening of the trade gap in the short-run is quite normal. The year is expected to close at a trade deficit of around $ 2.5 billion against the yearly target of $ 0.7 billion.

Remittances: The inflow of workers' remittances continued to maintain its momentum, albeit at a slower pace during the current fiscal year. However, when viewed against the yearly target of $3.6 billion, the performance has been impressive. The last fiscal year was an extra-ordinary year for the inflow of workers' remittances at $ 4.23 billion. Realizing the fact that a one-time adjustment has taken place, the current year target was set at $ 3.6 billion or $ 300 million per month. During the first ten months (July-April) of the current fiscal year, the flow of remittances was $ 3.21 billion or $ 321 million per month against $ 3.53 billion in the same period last year. Two points need to be noted as far as the inflow of remittances is concerned. First, as stated above, a one-time adjustment took place last year which is not expected to be repeated this year. Accordingly, against the actual receipt of $ 4.23 billion last year the target for the current year was set at $ 3.6 billion. Given the average monthly trend of inflows, the year is going to end with remittances of $ 3.8 billion. Second, last year's remittances also included $ 126 million which came through the Hajj Sponsorship Scheme. With the continuing build up in foreign exchange reserves the government decided not to launch the said Scheme this year. To that extent, the flow of remittances was expected to be less compared with last year. The United States remained the single largest source of cash remittances accounting for 31.5 percent, followed by the UAE with 15.8 percent and Saudi Arabia with a 14.8 percent share.

Current Account Balance: Sustaining a current account surplus for the third year in a row has been another major achievement for the outgoing fiscal year. The current account balance, excluding official transfers, remained in surplus at $ 1369 million (1.4% of GDP) during July-March 2003-04. However, the surplus was $ 2706 million during the same period last year. The contraction in the magnitude of the surplus was the outcome of higher deficits in the trade and services accounts as well as lower inflow of workers' remittances. Given the rising levels of domestic economic activity and the persistence of higher oil prices in international markets, imports are likely to grow at a higher pace, leading to a further widening of the trade balance. As a consequence, Pakistan may face difficulties in sustaining the surplus in the current account in the next fiscal year.

FDI: Pakistan has succeeded in attracting $ 760 million in foreign direct investment (FDI) during July-April 2003-04 against $ 696 million in the same period last year, thereby registering an increase of 9.3 percent. By the end of the current fiscal year, FDI is expected to cross $ 1.0 billion on account of the issuance of two cellular licenses amounting to $ 291 million each, the half proceeds of which are expected to be received before the end of the fiscal year. The bulk of the FDI has come in the oil and gas, transport and communication, and banking sectors. These three areas have accounted for 71 percent of the FDI this year. Almost 85 percent of the FDI has come from Switzerland, the United States, the United Kingdom, the UAE and Saudi Arabia.

Privatization: The privatization program has progressed at a much faster pace this year. By end-March 2004, Pakistan had completed or approved 139 transactions with gross proceeds of Rs.134 billion. Of this, a sum of Rs.33.1 billion was received during the first nine months (July-March) of the current fiscal year. A new feature of the privatization program has been the offering of shares to the general public through the stock market, which was well received. For example, in the case of OGDCL, 97,000 applicants purchased shares whose subsequent value increased by over Rs.8 billion. The response in the SSGC offering has been even greater with over a quarter million small applicants receiving shares through a transparent balloting process.

Foreign Exchange Reserves: Pakistan's foreign exchange reserves continued to rise despite the pre-payment of $ 1.17 billion of high cost external debt. By end-April 2004, foreign exchange reserves stood at $ 12.5 billion, sufficient to provide cover for almost one year of imports. In other words, Pakistan added $ 1.8 billion to its reserves during July-April 2003-04. The continued build up in foreign exchange reserves has provided strength to the Pakistani rupee viz, the US dollar. The inter-bank exchange rate per US dollar averaged Rs.57.46 in April 2004 as against Rs.57.74 in July 2003, showing a nominal appreciation of 0.5 percent. In general, Pakistan's exchange rate viz the US dollar has remained stable during the period under review.

External Debt: Until a few years ago Pakistan was facing serious difficulties in meeting its external debt obligations. Not only was the stock of external debt and foreign exchange liabilities growing at a breakneck pace but the debt carrying capacity remained stagnant. Consequently, the debt burden (external debt and foreign exchange liabilities as a percentage of foreign exchange earnings) reached an unsustainable level of 335.4 percent by 1998-99. Following a credible strategy of debt reduction, Pakistan has not only succeeded in reducing the stock of external debt and liabilities but at the same time built-up a substantial stock of foreign exchange reserves. The stock of external debt and liabilities were as high as $ 37.9 billion at the end of the 1990s but had been brought down to $35.8 billion by end March 2004 - a decline of over $ 2 billion. The surplus in the current account coupled with a continued build-up in foreign exchange reserves and higher foreign exchange earnings and the prepayment of expensive debt are the major factors responsible for the reduction in the total stock of debt and liabilities. As a percentage of GDP, external debt and liabilities stood at 51.7 percent in end June 2000, declined to 43 percent in end June 2003 and further to 37.8 percent by end March 2004. Similarly, external debt and liabilities as a percentage of foreign exchange earnings declined from 297.3 percent in 1999-2000 to 181.1 percent in 2002-03 and further to 168.7 percent by end March 2004. These statistics suggest that Pakistan's external debt burden has declined substantially over the last four years and is now fast approaching sustainable levels.

Pre-Payment: Pre-payment of expensive debt has been one of the major events of the outgoing fiscal year. In the backdrop of a strong build-up in foreign exchange reserves associated with rising foreign exchange earnings, Pakistan considered it appropriate to pre-pay some of its expensive debt to improve the country's debt profile. Accordingly Pakistan pre-paid $ 1.17 billion worth of expensive loans to the ADB on January 29, 2004. These loans carried interest rates ranging from 6.3% to 11% with maturities between FY 2005 and FY 2019. The prepayment exercise clearly indicates the exceptionally strong external liquidity position of the country.

Euro Bond: The second major event of the outgoing fiscal year has been a successful return to the international capital markets after a gap of over half a decade. Pakistan issued $ 500 million five year tenor regulation-S Euro Bonds due 2009, lead managed by JP Morgan, Deutsche Bank and ABN Amro Bank. The transaction has attracted strong demand from high quality and diversified international investors and was four times oversubscribe resulting in the tightest possible pricing. The success of this transaction reflects a vote of confidence by the international investor community in Pakistan's economic policies and reform agenda. The Pakistani Bond was priced at 370 bps above US Treasury (3.046) to yield 6.75 percent was considered very tight compared with emerging market peers. The Pakistani bond was priced some 50 bps inside the Philippines, despite the fact that it is rated 3-notches lower. It also looked tight against Turkey which is rated one notch above Pakistan. Furthermore, Pakistan's paper was also tighter when compared with the weighted average spread of 435 bps for emerging market bonds at the time of the Pakistan's deal. It is encouraging to note that Pakistan's Paper since February 12, 2004 has been trading in the secondary market at a premium and as of April 23, 2004 the spread further tightened to 276 bps - an improvement of 94 bps and a yield to maturity of 6.26 percent from 6.75 percent. As part of a dynamic debt management process, Pakistan transacted an interest rate swap to lower the interest cost of its bonds. The deal was done with Standard Chartered Bank @ 3.2275 percent over 6-month LIBOR with protection against a sharp unexpected rise in interest rates. For the first time in the country's history, the government undertook such an exercise to reduce the country's debt burden and as such is building in-house capacity to monitor the global markets. It would not be out of place to mention here that out of 37 PRGF countries, Pakistan is the first to demonstrate its ability to raise funds from the international capital markets. No PRGF country barring Pakistan has ever been successful in transitioning from IMF resources to funding through the capital markets.

Re-basing of National Accounts: The third major event of the outgoing fiscal year has been the re-basing of Pakistan's national accounts from 1980-81 to 1999-2000. It is well-known that structural changes do take place in production as well as in the relative prices of various products in an economy over a period of time. Besides, on account of continuous developments and innovations a lot of new products appear in the market and at the same time due to obsolescence many old products disappear. Larger quality changes also result in the non-comparability of goods and services between far apart periods. On the demand side, consumption and investment patterns also experience structural changes. All these factors demand that the national accounts series be re-based periodically to capture the structural changes in the economy and depict the true picture of the level of economic activity.

How often should the base be changed? The international practice of re-basing national accounts vary considerably across countries with some re-basing after five years, others after ten years and even others every year. In the Asian region, the majority of the countries, namely Bangladesh, Hong Kong, China, India, Nepal, Philippines, Sri Lanka and Thailand undertake their re-basing exercise every ten years while Macau, Malaysia, Republic of Korea and Singapore undertake this exercise at a gap of five years. As opposed to international practices, as well as practices followed in the Asian region, Pakistan delayed the re-basing of the national accounts for two decades. As such, many structural changes which took place since 1980-81 until 1999-2000 on the production and consumption structure of the economy were not captured in the country's national accounts. The national accounts estimates based on a benchmark of 1980-81 became antiquated and could not capture the structural changes that occurred during the last twenty years. As such, a number of economic areas remained either uncovered or under-reported and accordingly under-estimated the size of the national income.

Taking cognizance of facts narrated above, the Annual Plan Coordination Committee (APCC) in its meeting in 1997 recommended to re-base the national accounts of Pakistan to make the GDP and investment figures more realistic. The journey of the re-basing exercise that began in 1997 culminated in July 2003. During the period various technical committees were set up, a number of studies were undertaken and reviewed by the experts inside and outside the country. The National Accounts Committee in its meeting held in December, 2003 finally approved the re-basing exercise and accordingly the national accounts were re-based from 1980-81 to 1999-2000. As a result of re-basing, coverage of data has engulfed a new range of products, enterprises and economic activities such as, courier services, travel agencies, mobile phones, etc. The coverage of manufacturing items has been increased from 91 to 128. Accordingly, the size of the overall GDP in 1999-2000 increased by 19.5 percent, agriculture by 18.5 percent, industries by 18.0 percent and services by 20.8 percent over the old base. Per capita income in US dollar term was estimated at $526 for the year 1999-2000 compared to $441 according to the old base. Similarly fixed investment showed an improvement of 34.3 percent in 1999-2000 mainly due to improved coverage.

Notwithstanding these improvements there are many activities which are still to be covered in these accounts (especially IT related). Newly emerging activities taking place at a breathtaking pace pose challenges to the national accounts. The National Accounts Committee accordingly has decided to regularly re-base national accounts every five years with the next re-basing exercise beginning in 2004-05. Timely re-basing will make national accounts more representative and will depict the true picture of the economy.

Poverty: The discussion so far points to the fact that Pakistan's economy has gained more strength during the outgoing fiscal year. All its macroeconomic indicators show marked improvements over last year. The macroeconomic policies and reform programs pursued over the last five years have not only made the economy healthier but also set the stage for taking the economy on a higher growth path. Have such policies and programs improved the living conditions of the people? Have they reduced poverty and improved social indicators? These are valid and frequently asked questions. The government believes that the efforts to strengthen the economy will not be completed unless macroeconomic gains trickle-down to masses in terms of improved living conditions.

Encouraged by two years of strong growth (5.1% in 2002-03 and 6.4% in 2003-04) and over Rs. 860 billion of cumulative spending on the social sector and poverty related programs over the last five years, the government asked the Federal Bureau of Statistics (FBS) to conduct a sample Survey of Household Consumption Expenditure (HCES) with a view to gauging the impact of the macroeconomic and social sectors on the living conditions of the people of Pakistan. The Survey, covering 5046 rural and urban households (One-third of the sample covered in PIHS 2000-01) from all the four provinces of Pakistan, was conducted during April 19, 2004 to May 06,2004. The findings of the Survey are highly encouraging. Not only has the incidence of poverty shown a significant decline but other social indicators as well as indicators that represent the living conditions of the people have shown marked improvements over 2000-01. The Center for Research on Poverty Reduction and Income Distribution (CRPRID), Planning Commission, estimated the incidence of poverty using the primary data from the Survey. The results show that the incidence of the poverty at the national level has declined by 4.2 percentage points with both urban and rural poverty showing significant decline in 2004 compared with 2000-01. These results are not surprising as the Survey shows that there has been a 35 percent increase in the average monthly consumption expenditure of households. Notwithstanding a decline in the incidence of poverty, these results should be taken as indicative, as they do not cover the entire period of 2004. The purpose of this exercise was to gauge the impact of the government's macroeconomic and social sector policies on the living conditions of the people. The results simply suggest that the rising trends in poverty have been arrested and that a reversal has begun to take shape.

Other social indicators and the indicators representing the living conditions of the people have exhibited significant improvements over 2000-01 as well as over 1998 Census results. For example, the number of Households living in one room homes shows a significant decline while that of households living in 2 to 4 rooms houses have increased significantly in 2004 compared with 1998. The other indicators of living conditions such as major source of drinking water, the type of toilet used, sanitation, the use of electricity as a source of lighting and the use of gas as cooking fuel, show a significant improvements over the last 3 to 6 years. Furthermore, all education related statistics show significant improvements with the gross enrolment at the primary level increasing from 72 percent to 87 percent - a 15 percentage points increase. These results are highly encouraging as they show that strong economic growth along with massive spending on social sector and poverty related programs are now beginning to yield dividends in terms of declining poverty and improvements in living conditions as well as in social indicators.

Going Forward

Pakistan has lived through a difficult and testing period. After five years of hard work the complexion of economy has changed altogether. It is no longer fragile and its balance of payments is no more vulnerable to external shocks. Wide-ranging structural reforms, prudent macroeconomic policies, financial discipline and a consistency and continuity in policies, not seen before, have transformed Pakistan into a stable and resurgent economy in 2003-04. The stage is now set for economic growth to accelerate with the private sector expected to play the leading role in taking the economy on a higher growth trajectory.

Notwithstanding the major successes on the socio-economic front, the progress made so far is not commensurate with the country's considerable potential. Although stronger, the economy of Pakistan has many challenges lying ahead. Maintaining and building on the macroeconomic stability; and sustaining and further accelerating the growth momentum will be the continuing challenges. Linked with these are the challenges of job creation, poverty alleviation, minimizing social inequality and strengthening the country's physical infrastructure.

The stage is now set for growth to accelerate from 6.4 percent this year to 8.0 percent over the next three to four years. An essential foundation for sustaining this higher growth is the pursuance of sound macroeconomic policies, the key elements of which include fiscal discipline, appropriate monetary and exchange rate policies, and prudent debt management. The centrality of economic growth in addressing the challenges listed above is beyond doubt. Economic growth reduces poverty because average incomes of the poor typically tend to rise proportionately with the average income of the population. This result is robust overtime and across countries and regions. At the macro level, growth implies greater availability of government resources to improve the quantity and quality of education, health, water supply, sanitation, and other services. At the micro level, growth creates employment opportunities, increases income and reduces poverty. To achieve 7-8 percent growth in the next three to four years sectors like agriculture, small and medium enterprises (SMEs), housing and construction, oil and gas, and information technology and telecommunications will have to play the central role. Of these, agriculture, SMEs and housing and construction are expected to generate pro-poor growth - essential in addressing the income distribution issue. With the country's population growing at less than 2.0 percent per annum over the next three to four years, real per capita income is projected to rise by 5.5 - 6.0 percent per annum. This is the growth in per capita income which will be required to substantially reduce poverty and unemployment in the country.

Structural change is the essence of development while reform is a dynamic concept. The country must continue to adjust itself with the changing domestic and external environment. Over the last five years Pakistan has introduced wide-ranging reforms in various sectors of the economy. These reforms have started yielding dividends in terms of higher growth and macroeconomic stability. To achieve 7-8 percent growth on a sustained basis Pakistan needs to introduce a second-generation of reforms over the next 4 -5 years. This reform agenda must concentrate on strengthening institutions, improving the competitiveness of industries, building a robust financial system and further strengthening of the tax administration. The current upturn in the economy offers the ideal opportunity to implement reforms needed to deliver faster growth that is sustainable in the long run. It is reassuring to see the government's unwavering commitment to pursue the reform program in the coming years.

Few policies have promoted socio-economic development as successfully as effective investment in human resources. No nation can progress without a strong human capital base and investment in this area will be as essential as sound macroeconomic policies in achieving the desired economic boom. Education is central to overall human resource development. While basic education develops basic skills related to literacy and numeracy, higher education especially at the tertiary level involves specialization in fields of study and occupation relevant to developing technological capability. Better access of the poor to education and health care, and a better quality of these services, expand opportunities for them to improve their own well-being. This calls for allocating adequate government resources to spending on human capital development. It is reassuring to see that the government has allocated substantial resources to the social sector in the PSDP for 2004-05. Most importantly, the allocation for higher education has increased by 84 percent in 2004-05. This is an important step in the right direction. Cutting across this agenda is the empowerment of women by removing barriers to their fuller participation in the development process. Promoting gender equality is not only an important social goal but is also essential for the achievement of the broader development goals. Studies find that gender equality contributes to better education and health outcomes. More recent cross-country research has found that gender inequalities in education impede economic growth.

Good quality infrastructure is essential for promoting and sustaining strong growth, necessary to reduce poverty. Pakistan has already moved to a higher growth trajectory and has targeted a 7-8 percent rate in the next three to four years. To achieve and sustain this Pakistan needs to invest heavily in infrastructure -water, power, roads, highways, ports, transport and communications. Heavy investment in infrastructure is also needed to take advantage of Pakistan's strategic location in the region for expanding regional cooperation in trade and commerce. In particular, Pakistan can serve as a bridge between East and West Asia, as well as the entry port for Afghanistan and the Central Asian Republics. It is in this perspective that the main theme of this year's Pakistan Development Forum (PDF) was infrastructure development. Realizing the importance of infrastructure the government has allocated Rs.87 billion for the fiscal year 2004-05 - 28 percent higher than last year. Allocation to infrastructure amounts to 59 percent of the total Federal Government PSDP (Rs.148 billion). This is a step in right direction. Increased investment in infrastructure alone, however, is not the answer as it must be underpinned by improvements in governance to ensure effectiveness and sustainability.

Pakistan's economy has gained more strength during the outgoing fiscal year. All its macro economic indicators show marked improvement over last year. The macro-economic policies and reforms programmes pursued over the last five years have not only made the economy healthier but also set the stage for taking the economy on a higher growth path. The fruits of macro economic gains have also started trickling down to the poor. A strong economic growth along with massive spending on social sector and poverty related programmes are now beginning to yield dividends in terms of declining poverty and improvements in living conditions as well as in social indicators. Much progress has been made but much remains to be done. Maintaining the momentum and building on the gains will be both vital and challenging. Sound macro economic policies, financial discipline, continuity of policies, political and regional stability will be the key to sustain the momentum.

EXECUTIVE SUMMARY

Growth and Investment

The resurgent Pakistani economy has shown an impressive growth trajectory for the second year in a row with real GDP growing by 6.4 percent during the current fiscal year against 5.1 percent last year. This higher growth is underpinned by a buoyant industrial sector, which grew by a record 13.1 percent, and a services sector which grew by 5.2 percent. The agriculture sector has marginally under-paced real GDP growth by growing at 2.6 percent against 4.1 percent last year. However, this growth does not truly reflect the contribution of agriculture towards real GDP growth as higher prices of agricultural produce during the current year have fueled economic activity. The growth performance was quite impressive and mainly emanated from the industrial sector reflecting an enhanced productive, as well as, job creating capacity of the economy. The distinct feature of the growth patterns had more to do with the relative strength of domestic factors in different areas rather than the impact of global developments. On the internal front, fiscal stimulus and monetary easing have supported the growth of domestic demand. The driving force behind the initial phase of the recovery was the strong domestic demand for industrial goods and services.
The real GDP at factor cost was originally targeted at 5.3 percent in 2003-04, with agriculture and manufacturing growing by 4.2 percent and 6.8 percent, respectively. The real GDP at factor cost grew by 6.4 percent which is supported by 2.6 percent, 13.4 percent and 5.2 percent growth rates in agriculture, manufacturing and services, respectively. GNP at factor cost exhibited a deceleration in growth from 7.9 percent in 2002-03 to 5.2 percent in 2003-04 mainly due to a decline of 30.5 percent in net factor income from abroad.

The agriculture sector grew by 2.6 percent in 2003-04 which is lower than actual growth of 4.1 percent last year and a target of 4.2 percent. Major crops, accounting for 34 percent of agricultural value added, grew by 2.8 percent against a 6.9 percent rise in value addition for last year and a target of 5.5 percent for 2003-04. Minor crops, which contribute 12 percent of value addition in agriculture, grew by 1.7 percent in 2003-04 against a growth target of 3.5 percent and a slight increase of 0.4 percent last year. The Livestock sub-sector, which accounts for almost one half of overall value addition in the agricultural sector (49 percent), has witnessed a modest growth of 2.6 percent in 2003-04 against a target of 3.0 percent and an actual achievement of 2.8 percent last year.

The growth performance of the overall manufacturing sector was spearheaded by unprecedented growth in the large-scale manufacturing sector which grew by 17.1 percent against the target of 8.8 percent and last year's actual rate of 7.2 percent. The large-scale manufacturing sector, accounting for 68 percent of overall manufacturing, recorded an impressive and broad based growth and helped overall manufacturing grow by 13.4 percent, against a target of 7.8 percent and last year's growth of 6.9 percent. Small-scale manufacturing continued to grow at an estimated 7.5 percent rate in 2003-04. The Construction sector grew by 7.9 percent against 3.1 percent last year and a yearly target of 5.4 percent. The Electricity and gas distribution sector registered a massive increase of 22.5 percent against a decline of 2.6 percent last year and a yearly target of 5.3 percent. The services sector grew by 5.2 percent against 5.3 percent last year. The wholesale & retail trade and transport, storage & communication sub-sectors grew by 8.0 percent and 3.9 percent, respectively against 5.9 percent and 4.0 percent last year.

The largest contribution to the real GDP growth rate of 6.4 percent came from the commodity producing sector (3.6 percentage points). Within this sector, the industrial sector alone contributed 3.0 percentage points with a major share coming from the manufacturing sector (2.2). The services sector contributed 2.8 percentage points or 43 percent to real GDP growth. As far as the composition of GDP is concerned, the industrial sector improved its share from 22.6 percent to 24.5 percent whereas; agriculture declined from 26.2 percent to 23.3 percent between 1999-2000 and 2003-04. Due to tremendous growth in the recent past the share of the manufacturing sector has increased from 14.8 percent in 1999-2000 to 17.5 percent in 2003-04.

A sharp acceleration in per capita income was witnessed during the last two years in dollar terms mainly because of a stable exchange rate and higher real GDP growth. Against an annual average rate of 1.4 percent in the 1990s, per capita income grew at an average rate of 13.9 percent per annum during the last two years (2002-04) and 12.0 percent during 2003-04. The per capita income in dollar terms increased from $ 526 in 1999-2000 to $652 in 2003-04 - an increase of 24.0 percent in the last four years.
Total investment picked up sharply to 18.1 percent of GDP in 2003-04 against 16.7 percent last year. Fixed investment also rose sharply to 16.4 percent of GDP against 14.8 percent last year. Private sector investment also increased from 11.2 percent to 11.7 percent of GDP. Public sector investment improved significantly by moving from 3.6 percent of GDP last year to 4.6 percent of GDP this year. Private sector real fixed investment grew by 7.9 percent as against an increase of 5.2 percent last year. Public sector investment also accelerated by growing 40.8 percent in 2003-04. Most importantly, private sector real investment in large-scale manufacturing registered an extra-ordinary growth of 25.4 percent in 2003-04 - indicating a sharp rise in private sector confidence on the economy. Three other sectors registered stellar increases in overall investment including construction (15%), transport and communication (32.7%) and ownership of dwellings (25%). National savings as a percentage of GDP remained flat at around 20.0 percent over the last two years mainly on account of a significant improvement in the current account balance. The national savings rate has increased by 8.3 percentage points of GDP since 1998-99. Domestic savings stood at 17.8 percent of GDP in 2003-04 against 16.8 percent last year.

Agriculture

Pakistan's economy has undergone considerable diversification over the years, yet the agricultural sector is still the largest sector. With its present contribution to GDP at 23.3 percent it accounts for 42.1 percent of the total employed labour force and is the largest source of foreign exchange earnings by serving as the base sector for the country's major industries like textile and sugar. It also contributes to growth by providing raw materials as well as being a market for industrial products. What happens, therefore, to agriculture is bound to have a substantial impact on the growth of overall GDP. Over the last one decade i.e. 1990s(Table 2.1) agriculture grew at an annual average rate of 4.5 percent per annum but was quite volatile, rising as high as 11.7 percent and declining by as much as 5.3 percent. The overall performance of agriculture during (2000-01 and 2001-02) was depressed as it was adversely affected by the unprecedented drought situation. Agricultural growth showed a negative trend for these two years (See Table 2.1). However during 2002-03, the extent of water shortage was relatively less and Agriculture grew by 4.1 percent (See Table 2.1). During 2003-04, the wide spread rains and increased snowfall in the catchment areas contributed to an improvement in the water situation as agriculture grew by 2.6 percent. Slower growth in agricultural during 2003-04 is mainly attributed to a decline in production of cotton followed by the slower growth in livestock, the largest contributor to agricultural growth. Furthermore, the shifting of slaughtering from livestock to manufacturing also slowed livestock growth and hence agricultural growth. Likewise, a 2 percent growth of fisheries against the 3.4 percent growth and last year was due to the oil spill of the Tasman Spirit at the Karachi Port which killed millions of fish and contributed to the slower growth of agriculture.

As stated earlier, the shortage of water is receding. The canal head withdrawal in the Kharif 2003 and Rabi 2003-04 seasons increased by 4.96 percent and 26.16 percent, respectively over the Kharif 2002 and Rabi 2002-03. Moreover, the heavy snowfall on the mountains during Winter 2003 will help fill the country's water reservoirs and alleviate water shortages to a greater extent for the Kharif Crops 2004. On the whole, the water situation in the current fiscal year appears better than last year but still lesser than normal supplies.

The agricultural growth is estimated at 2.6 percent during 2003-04. Major crops, accounting for 34.2 percent of agriculture value added, grew by 2.8 percent against 6.9 percent last year. Minor crops, contributing 12.4 percent to agricultural value added, registered a weaker growth of 1.7 percent against 0.4 percent last year. Livestock, the largest contributor to overall agriculture value added (contributing 49.1 percent), grew by 2.6 percent in 2003-04 as against 2.8 percent in 2002-03. Fisheries accounting for 1.4 percent of agriculture value added has shown a growth of 2 percent against a growth of 3.4 percent last year. On the other hand, forestry contributing 2.9 percent to agricultural value added, grew by 2.9 percent as against growth of 11.1 percent last year.

Amongst the major crops, Wheat production is estimated at 19.767 million tonnes in 2003-04, as against 19.183 million tonnes last year, showing an increase of 3 percent. Rice production is estimated at 4.848 million tonnes in 2003-04, against 4.478 million tonnes last year, an increase of 8.3 percent. Sugarcane production has increased by 2.6 percent in 2003-04, from 52.056 million tonnes last year to 53.419 million tonnes in 2003-04. Cotton production has however, decreased from 10.211 million bales in 2002-03 to 10.048 million bales in 2003-04, showing a decrease of 1.6 percent. As regards the minor crops, the production of two major pulses, namely, masoor and mung have increased this year. Production of masoor has increased by 2.7 percent, followed by Mung (1.7 percent) during 2003-04. The production of mash declined by 13.7 percent. The production of onion is estimated to increase by 16.1 percent. The production of chillies and potato decreased by 29.5 percent and 4.7 percent respectively in 2003-04 over the last year. Agriculture credit disbursement of Rs.47.925 billion during July-March 2003-04, is higher by 27.3 percent, as compared to Rs.37.632 billion over the corresponding period last year. The fertilizer off-take stood at 2508 thousand nutrient tonnes in July-March 2003-04 or higher by 9.5 percent, as compared to 2291 thousand nutrient tonnes for the corresponding period last year.

Manufacturing, Mining and Investment Policies

The overall manufacturing sector continued to maintain its growth momentum during the current fiscal year. Overall manufacturing recorded an impressive and broad based growth of 13.4 percent, against a target of 7.8 percent and last year's growth of 6.9 percent. Large-scale manufacturing, accounting for 67.5 percent of overall manufacturing, registered an impressive growth of 17.1 percent in the current fiscal year (2003-04) against a target of 8.8 percent and last year's achievement of 7.2 percent. This is the highest growth in large-scale manufacturing ever achieved in the country's history.

The main contributors to this impressive growth of 17.1 percent in July- March, 2003-04 over last year are the automobile group (52.7 percent), the food, beverage & tobacco group (13.7 percent), the textiles & apparel group (7.0 percent), paper & board (7.9 percent), pharmaceuticals, (21.1 percent), and electricals (45.8 percent). The items that registered positive growth were cotton cloth (15.6 percent), and cotton yarn (1.9 percent) in the textiles group; vegetable ghee (13.6 percent); cooking oil (22.9 percent) and sugar (14.8 percent) in the food, beverages and tobacco groups; nitrogenous fertilizer (3.3 percent) and soda ash ( 3.1 percent) in the chemical group, cement (13.7 percent) in the non-metallic mineral products group and Jeeps & Cars (63.5 percent) and LCV's ( 5.6 percent) in the automobile group. The individual items exhibiting negative growth include; motor tubes (10.0 percent), buses (2.0 percent), wheat thresher (21.1 percent), electric motors (10.6 percent) and H. sheets (3.7 percent).

The output of the mining and quarrying sector has remained flat against 16.1 percent growth last year. The value added in crude oil decreased by 1.0 percent while in the case of natural gas it rose by 16.2 percent. However, the value addition in coal decreased by 2.0 percent. The principal minerals which have shown positive growth include; barite (3.5 percent), limestone (1.4 percent), fire clay (21.0 percent), rock salt (14.9 percent), sulpher (7.5 percent) and silica sand (34.7 percent). Negative growth was exhibited by soap stone (-3.9 percent), dolomite (-1.0 percent), and china clay (-20.0 percent).

Foreign direct investment has witnessed an increase of 9.3 percent in the first ten months (July-April, 2003-04), whereas, net foreign investment stood at US $ 629.1 million against US $ 694.5 million last year, showing a decline of 9.4 percent. The decline in foreign private investment is because of the outflow of $131.3 million in portfolio investment during this period against an outflow of $1.4 million in the comparable period last year. The rise of 9.3 percent in Foreign Direct Investment (FDI) is attributed to inflows in three sectors, namely, mining, quarrying and oil & gas; transport & communication and finance. The group-wise break-up shows that the financial business has accounted for the largest slice of FDI at 31.3 percent followed by 22.3 percent in Mining & Oil and gas exploration. The power sector accounted for a mere 2.0 percent in FDI. The trade, transport, storage and communication group received 17.7 percent while the chemical, pharmaceutical & fertilizer group accounted for a 3.1 percent share. Petro-chemicals and refining accounted for 8.0 percent while construction improved from 1.9 percent to 3.2 percent in total FDI. The textile industry received 3.5 percent. As far as a country-wise break-up is concerned, the inflows from Switzerland accounted for 31.9 percent followed by the United States (27.2 percent), the U.K (12.0 percent), the U.A.E (8.6 percent) and Saudi Arabia (5.0 percent).

The privatization program maintained its pace during 2003-04 and succeeded in privatizing some high ticket items despite an inhospitable global environment. By end March 2004, Pakistan had completed or approved 139 transactions with gross proceeds of Rs 134.4 billion. Of this, an amount of Rs. 33.1 billion was received during the period July-March, 2003-04 from the sale of the Government's shareholding in OGDCL, NBP, POL, ARL, DG Khan Cement, SSGC, Thatta Cement, 51% GOP stake in HBL, Associated Cement, Rohri and 10% shares of Kurram Chemicals

Poverty

Poverty has many dimensions in Pakistan. The poor in Pakistan have not only low incomes but they also lack access to basic needs such as education, health, clean drinking water and proper sanitation. Pakistan did not have an official poverty line until recently. In the absence of any official poverty line various researchers used their own methods to arrive at different poverty lines to measure the incidence of poverty. Accordingly, a large number of estimates were available which made the analysis difficult. The Planning Commission, adopted an official poverty line based on a caloric norm of 2350 calories per adult equivalence per day and minimum food requirements. This poverty line approximates to Rs 748.56 per adult per month in 2000-01.

The Federal Bureau of Statistics (FBS) conducted a sample Survey of Household Consumption Expenditure (HCES) from April 19, to May 6, 2004 with a view to gauging the impact of socio-economic and macroeconomic policies on the living conditions of the people of Pakistan. The Survey covered 5046 rural and urban households from all the four provinces of Pakistan. The findings of the Survey show that not only the incidence of poverty has significantly declined but other social indicators also showed a marked improvement since 2000-01. The incidence of poverty at the national level has declined by 4.2 percentage points with both urban and rural poverty showing significant decline in 2004 compared with 2001. These results should be taking as indicative as they do not cover the entire period of 2004. A marked improvement in living conditions has also taken place. Indicators like the major source of drinking water, the type of toilet used, and sanitation --- all representing living conditions, show a significant improvements over the last three years. All education-related statistics also show significant improvements.

Fiscal Development

Pakistan has made considerable gain on the fiscal side. The overall budget deficit has been narrowed, the revenue deficit has almost been eliminated and a primary surplus has been maintained. Resultantly, Public debt is fast moving towards a sustainable level. Much progress has been made towards fiscal consolidation. The wide-ranging tax and tariff reforms as well as reforms in the tax administration have started paying dividends. Tax collection by the Central Board of Revenue (CBR) has picked up. As a result of prudent fiscal management over the last 5 years, the burden of interest payments on domestic budget has declined sharply, thereby, releasing resources for development and social sector program.
Total consolidated revenue is estimated at Rs.780.3 billion in 2003-04 as against Rs.720.8 billion last year, thereby, registering an increase of 8.3 percent. Total consolidated expenditure is estimated at Rs.957.7 billion which is 6.6 percent higher than last year. Out of the consolidated expenditure, the current expenditure is estimated at Rs.793.6 billion (82.9 percent of total expenditure) while public sector development expenditure excluding net lending (Rs.12.1 billion) (PSDP) amounts to Rs.152.0 billion (15.9 percent of total expenditure). Interest payments are the single largest item of total as well as current expenditures. Their share in total expenditure has declined from 29.7 percent in 2001-02 to 23.3 percent in 2002-03 and further to 21.1 per cent in 2003-04. The revenue deficit, a measure of government dis-saving, has nearly been eliminated from 3.0 percent of GDP in the 1990s. It was 1.7 percent of GDP in 2001-02 and was reduced to 1.4 percent of GDP in 2002-03 and further to 0.2 percent of GDP in 2003-04. During the last four years, the CBR has collected Rs. 202 billion more revenue and tax collection has increased by 65.3 percent. Net tax collection during the first ten months (July-April) of the current fiscal year (2003-04) stood at Rs 397.2 billion against the target of Rs 388.8 billion, thus surpassing the target by a fair margin. Against the annual target growth of 10.7 percent, tax revenue has grown by 12.8 percent in the first ten months of the current fiscal year.

The public debt to GDP ratio, after reaching 89 percent in 2000-01 mainly on account of an 18 percent depreciation in exchange rate vis-a-viz the US dollar has declined substantially to 70 percent as of end March 2004 - a decline of 19 percentage points of GDP in five years. In absolute terms, public debt grew by 2.8 percent during the first nine months (July-March) of the current fiscal year. The rupee component of the debt grew by 3.6 percent while the foreign exchange component rose by 1.9 percent. Public Debt was 317 percent of total revenue in 1979-80, increased to 505 percent by the end of 1980s and further to 627 percent by the end of the 1990s. Following the debt reduction strategy in which raising revenue was one of the key elements, the public debt burden in relation to total revenue has declined substantially to 488 percent by end March 2004. Domestic debt is estimated at Rs 2028.4 billion by the end of 2003-04, against Rs 1879.2 billion in 2002-03 (an increase of Rs 149.2 billion or 7.9%). However, during the first nine months (July-March) of the current fiscal year, domestic debt grew by 3.4 percent or Rs.64 billion in absolute terms. There are indications that domestic debt may remain below the budget estimates. As percent of GDP, domestic debt is expected to decline from 39 percent to 37 percent this year. By the end of 2003-04 the share of unfunded debt in domestic debt is likely to decline to 44.1 percent from 48 percent last year, mainly because of the rationalization of interest rates in various instruments of the national savings schemes. The share of floating debt comprised of short-term instruments has declined sharply from 39 percent to 27 percent over the last five years. The share of permanent debt (mostly medium to long-run), increased by almost 10 percentage points - rising from 20 percent to 29 percent in the last five years. The share of short-term debt has declined by almost 11 percentage points - from 45 percent to 34 percent. Accordingly, the share of long-term debt has increased by the same margins.
During the last five years, the debt servicing liabilities have declined sharply from 64 percent of revenue to 35.4 percent of revenue and 54.4 percent to 34.8 percent of current expenditure. Interest payments as a percentage of revenue have been reduced to one-half (41 percent to 20 percent) over the last five years. Similarly, their share in total expenditure declined from 30 percent to 17 percent during the same period. Most importantly as a spercentage of GDP interest payments declined from 6 percent to 3.0 percent in the last six years.

Money and Credit

Pakistan's banking and financial sector is much stronger today compared to the recent past and also in comparison to other countries in the Asian Region. The State Bank of Pakistan now conducts monetary policy through market-based monetary and credit management, strong corporate governance has been introduced, the foreign exchange regime has been liberalized and the SBP's capacity for supervision and prudential regulations has been strengthened. The major challenge for the country's monetary authority is to build a robust financial system in an environment of global financial restructuring. Further reforms in the banking and financial sector over the medium term must include: promoting transparency and accountability, observance of international standards, strengthening the financial system through better financial supervision, further privatization of public sector banks as well as divesting their shares through stock exchanges to retail investors.

The State Bank of Pakistan continued with its easy monetary policy stance during the current fiscal year with a view to reinforcing the strong growth momentum. As a result, the interest rate environment remained investment-friendly not only for businesses but also for the middle class borrowers. Accordingly, the SBP set the target for monetary expansion to the tune of Rs 230 billion or 11.1 percent higher than last year. The net foreign assets (NFA) of the banking system were targeted to increase by Rs 130 billion and net domestic assets (NDA) were set to increase by Rs 100 billion. Within the NDA, credit to the private sector was projected to expand by Rs 85 billion while Rs 6 billion was earmarked for public sector enterprises (PSEs). The government sector was expected to remain fiscally prudent and therefore a meager amount of Rs 15 billion was earmarked for net budgetary borrowings and a retirement of Rs 6 billion was projected for commodity operations. The overall monetary expansion target was consistent with a real GDP growth of 5.3 percent, inflation of 4 percent, and an export target of $ 12.1 billion for 2003-04.

The monetary expansion during July-March 2003-04 amounted to Rs 254.8 billion (12.26 percent) compared to an expansion of Rs 211.2 billion (11.99 percent) in the same period of last year. During July-March 2003-04, the NDA of the banking system increased by Rs 204.4 billion (13.28 percent) against a decline of Rs 45.7 billion (-2.98 percent) in the corresponding period of last year. The increase in NDA has resulted mainly due to a massive expansion of private sector credit which had an unprecedented increase of Rs 244.6 billion in the first nine months of the current fiscal year against Rs 106.6 billion in the corresponding period of last year. This upward growth reflects renewed private sector confidence in the basic macroeconomic fundamentals and is thus a source of accelerating economic growth in the country. However, the accumulation in NFA was relatively subdued at Rs 50.4 billion compared to an accumulation of Rs 256.9 billion in the corresponding period of last year.

Capital Market

The capital markets in Pakistan have witnessed a substantial improvement since 1999-2000 with the spectacular performance of the KSE 100 index, which crossed 5600 points in April 2004, (doubling the January 2003 level) and market capitalization increasing from Rs 555 billion ($ 9.5 billion) in January 2003 to Rs 1436.0 billion ($ 25.0 billion) in April 2004, (an increase of 159 percent). The KSE 100 index touched an all time high of 5620.7 points on April 19, 2004. A record turnover of over a billion shares was also seen twice in the year, first on August 8, 2003 and then on April 15, 2004. The fiscal year 2003-04 has been a record year for the stock market in Pakistan, with un-precedented growth in market activity.
The land-mark performance of the stock market during the current fiscal year can be attributed to a number of positive factors including; a continuation of pro-growth macro-economic policies; a stable macroeconomic environment; strong economic growth; a stable exchange rate; a positive privatization process through the capital markets; a visible improvement in the Pakistan-India relationship; appropriate reforms initiated by the Securities and Exchange Commission of Pakistan (SEC); the availability of adequate liquidity in the market; good operating and financial results from the majority of blue chip companies and the enhancement of investor confidence, etc.

Over the past few years, the Securities & Exchange Commission of Pakistan (SEC) has taken measures to restore confidence of both foreign and domestic investors by endeavoring to ensure that the market functions in a smooth and transparent manner. The SEC has actively pursued a capital market reform program geared towards the development of a modern and efficient corporate sector and capital market, based on sound regulatory principles that provide the impetus for high economic growth.
During the first ten months of the current fiscal year the KSE share index has increased by 59.6 percent (from 3402.5 points on June 30, 2003 to 5430.4 points on April 30, 2004). Similarly market capitalization has increased by 92.4 percent or from Rs 746.4 billion on June 30, 2003 to Rs 1436.0 billion on April 30, 2004. In terms of US dollars the market capitalization of the Karachi Stock Exchange was about $ 25.0 billion on April 30, 2004 increasing from $ 6.78 billion in the end of June 2002 and $ 12.92 billion in the end of June 2003. Out of the 15 leading stock markets in the world, the KSE share index increased by 61 percent in terms of US dollar during July-April 2003-04, surpassed only by India. The other 13 leading world stock markets recorded growths ranging from 7.0 percent (China) to 48 percent (Thailand) . It is pertinent to mention here that unlike the previous year, all the leading stock markets of the world posted positive growth in the current fiscal year, which may be an encouraging indication of the world economic recovery.

Inflation

Price stability has always remained high on the policy agenda of the government because of the cost of inflation and its socio-economic consequences. The Inflation rate as measured by the change in the Consumer Price Index (CPI), averaged 3.9 percent during the first ten months (July-April) 2003-04 against 3.3 percent in the same period last year. Food and non-food inflation have been estimated at 4.9 percent and 3.3 percent against 3.1 percent and 3.4 percent in the same period of last year. The increase in headline inflation during 2003 -04 is largely attributable to a significant rise in food price inflation in consumable items such as wheat, wheat flour, rice irri-6, meat, edible oil and fresh vegetables due to a supply shortage. However, the core inflation (non-food non-energy) remained quite subdued owing to the pursuance of prudent fiscal, monetary and exchange rate policies. The shortage of wheat was the result of below targeted production, a delay in import and the effect of a 16.7% increase in its support price .The demand-supply gap in the case of meat occurred on account of the bird flu virus. The extreme shortage of onion in the market was a consequence of damage by heavy rains in Sindh. Based on the trend in the prices of these items, the contribution of food inflation to the overall inflation has increased to 50% against 38% in the same period last year while a slower increase in non-food inflation over the last year has been due to a moderate variation in energy prices.

To contain inflation within limits, the government has taken various measures such as curtailing government expenditure through stringent fiscal discipline, supply arrangements through imports and a smooth distribution network for essential commodities. Throughout the year, the Committee on Kitchen Items now called the Sensitive Items Price Committee (SIPC) kept a constant watch over prices and the supply of essential commodities in its weekly meetings.

Trade And Payments

The growth in the external sector of Pakistan gained further momentum during the outgoing fiscal year 2003-04. This buoyant trend was broad based and can be attributed to an improved macroeconomic environment within the country on the one hand and an acceleration in world economic growth on the other. During July-April 2003-04, exports showed a double digit growth of 13.1 percent to $ 10,001.0 million against $ 8846.3 million over the same period last year, thereby achieving 82.7 percent of the export target set for the current fiscal year. Imports during this period grew by 19.0 percent - rising to $ 12,012.4 million from $ 10,097.8 million for the comparable period last year, causing the trade balance to expand by $ 759.9 million. The increase in imports was attributed to higher machinery imports of 22.5 percent, as well as, non-food non-oil imports which witnessed an exceptionally strong growth rate of 31.7 percent and can be considered a leading indicator of a surge in economic activity.

Notwithstanding a slow-down in the flow of remittances, the current account balance (excluding official transfers) during July - March 2003-04, remained in surplus for the 3rd year in a row at $ 1369 million against $ 2706 million for the same period last year. The surplus with official transfers was higher at $ 1859 million but lower compared to $ 3507 million over the same period last year. The net out-flow under the services account surged to $ 2260 million and private transfers in this period were up by $ 62 million. The foreign exchange reserves crossed $ 12.5 billion and were sufficient to finance about one year of imports giving much needed stability to the exchange rate. Thus, the Pak-rupee versus the US dollar appreciated nominally by 0.5 percent from the beginning of the current fiscal year until April, 2004.

External Debt And Liabilities

Over the last four years and in particular with the establishment of the Debt Office in the Ministry of Finance, a concerted effort has been made to achieve debt sustainability in the country. As a result Pakistan's external debt and liabilities have declined by $ 2.072 billion - down from $ 37.918 billion in 1999-2000 to $ 35.846 billion as of end March, 2004. The debt and liabilities, when adjusted for SBP liquid reserves, have been reduced from $ 36.929 billion (end June, 2000) to $ 24.845 billion as of end March, 2004 - a reduction of $ 12.084 billion. However, external debt and liabilities during July - March, 2003-04 increased by about one percent over the level of end June, 2003 mainly on account of currency revaluation. Likewise the amount paid on account of debt servicing of external debt and liabilities has declined to $ 4059 million (end March, 2004) from $ 4349 million in end June, 2003. Similarly the rollover amount of debt servicing also declined from $ 1908 million to $ 1100 million.

Pakistan has witnessed two extraordinary events during the current year. First, on January 29, 2004 Pakistan pre-paid $ 1.17 billion of high cost external debt to the Asian Development Bank. The second major event was the strategic re-entry of Pakistan into the international capital markets through the floatation of $ 500 million Eurobond on February 12, 2004 at a fixed rate coupon of 6.75 percent. The order book swelled to $ 2.0 billion (a four times over-subscription) and hence the tightest possible pricing was achieved for the bond. This reflects a vote of confidence by the international investor community on Pakistan's economic policies and reform agenda. The re-entry into the international capital markets will help prepare Pakistan for a smooth graduation from the IMF program and thus reduce its dependence on multilateral institutions. As part of a dynamic debt management process, Pakistan transacted an interest rate swap to lower the interest cost of its Eurobond with Standard Chartered Bank at a rate of 3.2275 percent over 6-month LIBOR. This transaction should thus lower the cost of borrowing of the Eurobond issue by as much as two percentage points given a tame rate outlook.

Education

The education is becoming one of the defining enterprises of the 21st century with the emergence of globalization and increasing global competition. In this fast changing and competitive world, education and technology are the master keys for respectable survival and progress of Pakistan. Pakistan needs to respond positively to emerging opportunities and challenges of globalization. Education is a key to change and progress.

Total number of Public and Private Institutions at primary level is 156,100, middle level is 28716 and at high school level is 16059 in the financial year 2003-04. Over the last five years, primary, middle and high school institutions increased by 5.7 percent, 12.7 percent and 8.6 percent respectively. Similarly, total enrolment at public and private institutions, as documented in table 11.2, registered an increase of 4.7 percent, 7.3 percent, and 6.0 percent in primary, middle and high school levels, respectively. It is encouraging to note that enrolment of girls child increased by 6.4 percent while boys enrolment increased by 3.5 percent over the last four years.

Literacy rate for both sexes is estimated at 54.0 percent in the current year. Literacy rate for male and female are estimated at 66.25 percent and 41.75 percent in the current year respectively and up from 56.48 percent and 32.59 percent in 1998. Under the Education Sector Reforms, the National Literacy Campaign envisages making 13.5 million people literate to enhance the literacy rate to 60% by 2006.
The Higher Education Commission (HEC) was established in September 2002 with a view to guiding higher education policy and assisting universities and degree awarding institutes in the pursuit of quality education at the seat of higher learning, both public and private. Its objective is to work with the academic community for qualitative and quantitative improvement of higher education and to aid in the socio-economic development of Pakistan.

We should stand committed to quality improvement in public service delivery at all levels in which civil society and private sector are our valuable partners so that we can move towards becoming a knowledge-based society spurring human development and economic growth. Private and public sector hand in hand can make great difference.

Health & Nutrition

The government attaches a very high priority to the improvement of health facilities so as to translate the economic success into social benefits. In Pakistan, the coverage of health facilities has improved over the years. The existing network of medical services consists of 906 hospitals, 4554 dispensaries, 5290 basic health units (BHUs), 552 rural health centres (RHCs) and the availability of 98684 hospital beds. Besides, there are 108062 doctors, 5530 dentists and 46331 nurses in the country. During the calendar year 2003, the population medical facilities ratio in terms of doctors works out to be 1404 persons per doctor, 27414 persons per dentist, 3296 persons per nurse and the availability of one hospital bed for 1536 persons.
The total outlay on health during 2003-04 is estimated at Rs.32.8 billion which shows an increase of 13.8 percent over last year and works out to 0.8 percent of GNP. The new health facilities added to the overall health services system during 2003-04, include the construction of 30 new facilities (25 BHUs and 5 RHCs), up-gradation of 35 existing facilities (25 BHUs and 10 RHCs), addition of 1600 hospital beds and training of 3500 doctors, 200 dentists, 2000 nurses and 4500 paramedics besides the recruitment of 17000 LHVs. To control the common diseases and to alleviate their pain and suffering, various health programmes like TB, Malaria and AIDS Control Programmes were also carried out.

The caloric intake per person has been estimated as 2529 per day in 2003-04 showing an increase of 2.6 percent over the previous year and per capita protein availability has increased from 64.3 grams last year to 65.8 grams in the 2003-04.

Population & Labour Force And Employment

Pakistan's population in mid-2004 is estimated at 148.72 million - 1.9 percent higher than last year. Pakistan's population has been growing at a decelerating pace. On the basis of the estimated population of 148.72 million and the participation rate of 29.61 percent, as per the Labour Force Survey 2001-02, the total labour force is estimated at 45.05 million. Of this, 30.19 million or 67.03 percent is in the rural areas and 14.85 million or 32.97 percent is in the urban areas.

A comparison of rural and urban participation rates reveals that the labour force participation rates are higher in rural areas as Pakistan's economy is mainly agrarian and agriculture is a family occupation there. The female labour force participation rate is far less compared to the male participation rate and as such their participation in economic activities is also low. The total number of the employed labour force in 2004 is estimated at 41.32 million compared to 40.48 million in 2003. The total number of employed persons in urban areas has increased from 13.12 million in 2003 to 13.4 million in 2004. Similarly, rural employment increased from 27.36 million in 2003 to 27.91 million in 2004.

The agriculture sector absorbs 17.4 million or 42.1 percent of the total workforce in 2004. This sector employed 18.09 million people in 2000 with a relative share of 48.4 percent. The share of the employed labour force in the community and social services sector, which was 14.2 percent in 2000, has increased in 15.5 percent in 2004. The share of the trade sector has also increased from 13.5 percent in 2000 to 14.8 percent while that of the manufacturing sector has increased from 11.6 percent to 13.8 percent in the same period. The construction and transport sectors accounted for 6.1 percent and 5.9 percent workforce respectively in 2004. About 3.72 million people in the labour force were estimated to be unemployed in 2004 compared to 3.65 million in 2003. The unemployment has increased from 7.82 percent in 2000 to 8.27 percent in 2004.

Transport And Communications

A good quality transport and communication system is an integral part of a strong infrastructure. Infrastructure contributes to promoting growth, creating employment opportunities, and hence reducing poverty. There are large gaps in the availability and quality of the key infrastructure services in developing countries, particularly in low income developing countries. Within countries, coverage rates are lower in rural areas, where the majority of the population lives. But coverage in other areas is also under pressure from rapid rural-to-urban migration in many countries. Narrowing gaps in access and quality will require sizeable increases in investment and associated spending on operation and maintenance.
As of March 2004, the total length of roads in the country was 255,856 km, including 157,975 of high type (62 percent) and 97,881 km of low type roads (38 percent). During the outgoing fiscal year, the length of high type roads has increased by 3.1 percent over the last year but the length of low type roads has declined by 1.1 percent. The total number of motor vehicles on road stood at 5 million. Pakistan Railways major assets include 592 locomotives, 1882 passenger coaches and 22,052 freight wagons. During the first nine months of the current fiscal year, it carried 52.9 million passengers and 4.6 million tons freight with gross earnings of Rs. 10.5 billion.

The Pakistan International Airlines covers 38 international destinations and 24 domestic stations, servicing almost all parts of the country. Its fleet consists of 47 aircrafts of various types. Beside this, two private airlines are also operating on local and international routes. As a part of the fleet replacement plan, PIA received three wide body aircrafts 777-200ER upto March 2004. The country has two major seaports namely, Karachi Sea Port and Port Qasim. The country's biggest seaport of Karachi has handled 20,500 thousand tons of cargo during July-March 2003-04, compared with 20,011 thousand tons of cargo during the corresponding period last year, which is higher by 2.4 percent. Port Qasim has handled 11.2 million tones of cargo during July-March 2003-04. The Gwadar Port is being built with Chinese assistance and its first phase will be completed by March 2005.

The government is also according higher priority to the Information Technology (IT) sector. For promotion of Information Technology, 1812 cities/towns/villages have been provided Internet facilities, as of March 2004 compared to 1350 cities/towns/ villages in June 2003 showing an increase of 34 percent. Total telephone lines installed by March 2004 were 5.0 million against 4.9 million up to June 2003 last year, showing an increase of 2.0 percent. Similarly with the launching of the prepaid connection of
U-Fone, mobile phones have reached 3.7 million in number as of March 2004 against 2.4 million up to June, 2003 showing a growth of 54.2 percent. There are 0.191 million PCOs and 288 telegraph offices working in the country.

Energy

In Pakistan, primary commercial energy supplies increased by 4.0 percent during 2002-03 compared to 1.8 percent in the pervious year reaching 47.1 million tonnes of oil equivalent mainly due to an increase in natural gas, hydel power and coal at rates of 1.4, 0.8 and 0.3 million tonnes respectively. However, the supply of oil decreased by 0.4 million tonnes of oil equivalent in 2002-03 due to a decline in the import of furnace and high speed diesel oil. The cement industry has started using coal, both local, as well as, imported to replace natural gas and furnace oil. There is a need to create an environment for the improvement of the energy sector in Pakistan in order to introduce competition, so that energy can be made accessible, affordable, and reliable to the people.

During July-March 2003-04 the production of crude oil per day has decreased to 62,139 barrels, from 64,905 barrels per day during the same period of last year, showing decline of 4 percent. The overall production of crude oil has also decreased to 17.1 million barrels during July-March, 2003-04, from 17.8 million barrels during the same period last year. Sector-wise consumption of petroleum products reveals that on average, the transport sector consumed 47.6 percent of the petroleum products followed by the power sector (31.9 %), industry (12.2 %), households (3.9 %), other government (2.5 %), and agriculture (1.8 %) over the last thirteen years i.e. 1990-91 to 2002-03.

The production of natural gas during July-March, 2003-04 was 3,173 million cubic feet per day against 2,648 mmcfd during the same period last year, showing an increase of 525 mmcfd or almost 20 percent. However, the overall production of gas has increased to 882,684 million cubic feet during July-March 2003-04 compared to 724,602 million cubic feet during the same period last year. On average the power sector consumed 34.8 percent of the gas, followed by fertilizer (23.9 %), industrial (18.9 %), household (17.7%), commercial sector (2.9 %), and cement (1.6 %) over the last thirteen years, i.e. 1990-91 to 2002-03.
The total installed capacity of electricity (hydel and thermal) has shown a significant increase of 9.6 percent over the first nine months of the current fiscal year and 19,478 MW. During July-March, 2003-04, 56,641 Gwh electricity has been generated against 54,426 Gwh in the same period last year, showing an increase of 4.1 percent. The total installed capacity of WAPDA stood at 11,436 MW during July-March 2003-04. Of which, hydel accounts for 58.6 percent or 6,696 MW, thermal accounts for 41.4 percent or 4,740 MW. The number of villages electrified has increased to 78,820 during July-March, 2003-04 from 73,807 in 2002-03 showing an increase of 6.8 percent.

More than 1,300 licences for the installation of CNG stations have been issued of which 500 CNG (38.5 %) stations have been actually established in different parts of the country compared to 362 in 2002-03, an increase of 38 percent upto March 2004. 450,000 vehicles have also been converted to CNG, compared to 300,000 vehicles last year (an increase of 50 percent)

Environment And Housing

I. Environment

The environmental crisis in the world has been caused by the over exploitation of its renewable as well as non-renewable resources. Developing nations are especially affected due to institutional failures as well as a paucity of resources. Of these, the former is particularly critical because with an adequate institutional network and its synergistic functioning, it is possible to make optimum use of whatever resources are available. Even where communities are aware of the dire consequences of environmental pollution and resource degradation, they may be unable to take adequate remedial action due to lack of options, knowledge, social mobilization and institutional support.

During the last decade, Pakistan has made diligent progress in the institutional strengthening and capacity building of policy and planning institutions, environmental awareness, and the promulgation of environmental legislation, National Environment Quality Standards (NEQS), and the establishment of environmental tribunals. The energy sector introduced lead-free petrol and since July 2002, all refineries in the country are supplying lead-free petrol and promoting clean fuels including CNG.

Air pollution levels in Pakistan's most populated cities are among the highest in the world and climbing, causing serious health issues. The levels of ambient particulates - smoke particles and dust, which cause respiratory disease - are generally twice the world average and more than five times as high as in industrial countries and Latin America. The Government offered numerous incentives to private investors to invest in CNG over the last decade with the result that today Pakistan is the largest user of CNG in Asia. Currently, 500 CNG stations are providing CNG to more than 450,000 vehicles all over the country. This has helped a lot in lowering the pollution load in many urban centers. After the successful CNG programme for petrol replacement, the government is now embarking upon a programme to replace the more polluting diesel fuel in the road transport sector. The government has planned to offer incentives to investors to introduce CNG buses in the major cities of the country.

The combustion of coal is another main contributor to air pollution. The three main uses of coal are power, brick-kilns and for domestic purposes. However, since 1998-99, coal use has been decreasing gradually in all the three sectors and is being replaced by natural gas. During July - March 2003-04, 3173 million cubic feet of natural gas was supplied per day as against 2648 million cubic feet per day during the same period last year, showing an increase of almost 20 percent.

During the fiscal year 2003-04, major projects under implementation with the environmental sector were Institutional Strengthening, Capacity Building, Mass Awareness, Forestry and Watershed Management, Fuel Efficiency in Road Transport and Industrial Efficiency and Environmental Management Sector Development Program.

II. Housing Sector

Globally, the construction and housing industry account for 10-12% of GDP and 7% of employment. The housing and construction industry has enormous forward and backward linkages and according to a modest estimate, 35-40 industries move in tandem with this sector. Therefore, the industry has the greatest employment generation potential (Employment Elasticity is 0.8). It can also create low-paid jobs of Chowkidars and ordinary construction workers to medium-paid jobs of Masons, Carpenters, Electricians, Painters, Plumber etc; and highly paid jobs for architects, engineers, designers, decorators, contractors etc. It is for this reason that the government has identified this sector as one of the five major drivers of growth. As is reflected in the National Housing Policy-2001 and the Prime Minister's Initiatives under the "Housing for All" program.

Pakistan has over 19.3 million Housing units in the country. About 24.8 million Housing units for a population of 148.7 million people are required. Hence, a shortfall of 5.5 million homes is estimated as of end June 20