Pakistan's overall economic performance during the outgoing fiscal year 1999-2000 offers grounds for optimism. For the last several years, Pakistan's economy has been facing serious difficulties owing to persistent lapses in implementation of structural reforms and stabilization measures. The imposition of economic sanctions following nuclear tests of May. 1998 exposed Pakistan's underlying vulnerability and precipitated a balance of payments crisis. Following .October 1999, an attempt was made initially to stabilize the situation. There are signs which suggest that the economy has begun to stage a modest turnaround. The recovery in economic growth is fully supported by a strong rebound in agriculture and a pick up in large-scale manufacturing excluding sugar. Also contributing to the current year performance is a fall in rate of inflation,-a "V-shaped" recovery in exports, a much greater degree of exchange. rate stability, stable foreign 'exchange reserves, substantial progress made in restructuring Pakistan's foreign debt, and improvement in credit rating in international bond market. Major challenges, however, include improving fiscal account, restoring investors' confidence .further, and achieving higher' growth on a sustainable basis.

Pakistan's .economic 'performance during the outgoing fiscal year must be evaluated against a backdrop of the developments taken place on the economic scene during the 1990s. The macro-economic performance in the 1990s has been marked by declining growth, stagnant/declining tax-to-GDP ratio causing persistently large fiscal imbalances, stagnant exports causing unsustainable current account deficit, double-digit-inflation, declining public sector investment constraining growth potential, deterioration in physical infrastructure, poor state of social sector, and institutional weaknesses resulting in poor governance.

There is a dear and perceptible evidence that growth performance of Pakistan's economy has deteriorated in the 1990s. As against an average growth rate of 6.0 percent in the 1980s, real GDP growth slowed to an average of 5 percent and further to 4.0 percent during the first and second half of the 1990s, respectively. While agriculture maintained an average growth rate of slightly above 4 percent during the last two decades (1980s, 1990s) it is the large-scale manufacturing' and. services which contributed to the deceleration of growth. in the 1990s. As
against an .average growth of 8.2 percent per annum in the 1980s, large-scale manufacturing slowed to an average of 4.7 percent and further to 2.3 percent in the first and second half of the 1990s, respectively. Services sectors grew at an average rate of 6.6 percent in the 1980s but slowed to an average .of 5.1 percent and 4.1 percent during the first and second half of the 1990s respectively. Fixed investment as percent of GDP declined significantly in the 1990s. As against an average rate of close to 17 percent in the 1980s, fixed investment declined to 15.3 percent in the second half of the 1990s. During (viii) Overview of the Economy this period, public sector investment declined sharply in relation to private sector. As against an average of 9 percent of GDP, it has declined to 6 percent in the second half of the 1990s while private sector investment in fact remained around 8 percent during the same period.

Large fiscal deficit continues to pose a serious threat to macro-economic stability. The trends in fiscal deficit that existed in the 1980s continued to persist in' the first half of the 1990s. However, fiscal deficit was reduced to an average of 6.4 percent in the second haft of the 1990s mainly by cutting development expenditure. In other words, the quality of fiscal 'adjustment. has been poor.

Current account deficit is yet another indicator of macro-economic imbalances. It has deteriorated since the 1980s---rising from .3.9 percent of GDP to 4.5 percent in the first and the second half of the 1990s.

Declining economic growth, persistence of severe macro-economic imbalances, lack of social safety nets, and poor governance in the 1990s have had adverse effects on the country's poor and most vulnerable. All these factors have been the major cause of poverty in many low income countries and Pakistan is no exception. The incidence of caloric-based poverty has increased from 17.3 percent in 1987-88 to 22.4 percent in1992-93 and further to 32.6 percent in 1998-99. In other words, the number of poor people who cannot .meet their daily minimum nutritional requirements and fell below the poverty-line, increased from 17.6 million in 1987-88 to 44 million in 1998-99. it is well-known that entrenched poverty and rising income inequality can themselves be impediments to growth.

When viewed against the developments described above, the current year's overall economic performance appears more than satisfactory. There are some positive developments which have taken place on the economic scene in the outgoing fiscal year, but there are also some weaker elements which will require serious attention of the policy-makers in the short-to-medium term.

A modest recovery in growth is certainly a positive development of the outgoing fiscal year 1999-2000. Real GDP grew by 4.5 percent as against 3.2 percent of last year and an average of 4.0 percent for the second half of the 1990s. The modest recovery in growth is fully supported by an impressive recovery in agriculture on account of bumper cotton and wheat crops, and a good rice crop. Agriculture grew by 5.5 percent as against 1.9 percent of last year [while estimating current year's agriculture growth the size of wheat crop was estimated at 19.3 million tonnes. Recent information suggest that wheat crop may exceed 21 million tonnes. if this is the case, agriculture growth would be 7.1 percent and accordingly, the real GDP growth would be 4.9 percent].

Although. in statistical' term, the performance of manufacturing in general and large-scale manufacturing in particular, appear weak as they grew by 1.6 percent and 0.04 percent respectively. The weak performance is mainly due 'to a 24 percent decline in sugar production. Excluding sugar, the large-scale manufacturing grew by 6.4 percent as against 3.5 percent of last year. in fact, the performance of large-scale manufacturing (excluding sugar,)has been the best over the last five years.

Another positive development of the outgoing fiscal year has been the fall in inflation. Inflation, measured on the basis of Consumer Price index, declined to 3.4 percent during July-April 1999-2000' as against 6.1 percent of the comparable period of last year. This has been the lowest inflation in the last two decades. Food inflation has also been the lowest in the last two decades, hovering around 2.0 percent in the current year as against 6.2 percent last year. The containment of monetary growth to the targeted level is yet another positive development. Money supply grew by 3.2 percent during the first nine months (July-March) of the current 'fiscal year against the whole year target of 9.4 percent. The slower growth in money supply played an important role in reducing inflation in the current year.

One of most positive development of the outgoing fiscal year has been a strong rebound in exports. At least, three factors are responsible for a "V-Shaped" recovery in exports. Firstly, the bumper cotton crop and its reduced prices made the textile sector buoyant. This coupled with a good rice crop and pick up in manufacturing output (excluding sugar), improved the supply of exportables. Secondly, the policy of maintaining a stable and predictable exchange rate following the sharp depreciation in previous years, helped Pakistan maintain its external competitiveness. Thirdly, the strong recovery in global economy made possible by the continued strong growth in the United Stated, recovery in Europe, and stronger than anticipated recovery in the crisis--hit East Asian economies firmed up the demand for Pakistani export in its major markets. Hence, the improved supply of exportables, stronger demand in international markets and a much greater degree of exchange rate of stability have been mainly responsible for a strong recovery of exports in the outgoing fiscal year. Exports during the first ten months (.July-April) of the current fiscal year grew by almost 10 percent as against a decline of almost 12 percent in the comparable period of last year.

Like exports, imports have also picked up during the first ten months (July-April). of the current fiscal year. Overall imports grew by 10.9 percent as against a decline of 9.4 percent in the comparable period of last year. Although, most of the increase in imports is due mainly to higher import bills of petroleum products, what is
important, however, is the non-food non-oil imports which have registered an increase of 4.3 percent. This is an important development as it suggests that economic revival appears to be taking place. The current account balance has improved by 34 percent during the first nine months (July-March) of the current fiscal year-- declining from $ 1812 million to $ 1195 million. The current fiscal year is going to end with a current account deficit of 2.4 percent of GDP--substantially lower than 4.1 percent of last year.

Yet another positive development in the outgoing fiscal year has been the progress made in restructuring Pakistan's foreign debt. The rescheduling of $ 3 billion debt under Paris Club bilateral agreements were signed/initiated as on May 1, 2000. :In addition, the Government has successfully rescheduled its Euro bonds maturing between December 1999 to February 2002 through a voluntary exchange offer with a single rescheduled bond of extended maturity. The offer received up to 98 percent acceptance against the outstanding amount of $. 608 million. With the completion of Euro bond and commercial debt rescheduling, Pakistan's credit rating in international bond market has improved from "D" to "B" minus on December 8, 1999 by the
"Standard & Poors' International Credit Rating Agency."

In the series of positive developments mentioned must be made about the foreign exchange reserves. Despite being current in all external payment obligations, Pakistan's foreign exchange reserves remained stable at around $1.5 billion. The stable foreign exchange reserves provided much needed stability in the exchange rate.

Along side the positive developments there have been some weak areas which would require serious attention in the short-to-medium term. First and foremost is the issue of fiscal, deficit which has emerged as a major source of macro-economic imbalances Although, Pakistan has succeeded in reducing fiscal deficit from 7.7 percent of GDP in 1997-98 to 5.8 percent in :1999-2000 (as on May 30, 2000)--an adjustment of 2 percentage points in 2 years, the current size of the deficit itself is unsustainable. Further fiscal adjustment is essential for restoring macro-economic .stability. Unlike in the past, any fiscal adjustment will have to rely mostly on revenue raising measures with focus on taxation. Reducing fiscal deficit by cutting development expenditure is no. longer a viable option. Continued weaknesses in the tax effort and substantial debt service payments have constrained policy choices particularly by limiting much-needed outlays for infrastructure and social sectors (health and education). Increasing tax-to-GDP ratio by broadening the tax bases and strengthening the tax administration along with improving the composition and effectiveness of budgetary expenditure, will go a long way in reducing fiscal deficit in orderly and qualitative fashion. The efforts of the present Government to document the economy through the "Tax Survey" is a step in the right direction. This will help in widening the tax bases. Furthermore, elimination of "Whitenet Scheme" and "Tax Amnesty Scheme" will help in reducing tax evasion.

Another area that. would require more attention is restoring investors' confidence. This is vital for achieving higher and sustainable economic growth. Low inflation, low interest rate, policy consistency, better law and order situation, lesser corruption and improved governance will go a long way in restoring investors' confidence.

Yet another area that would require immediate attention is arresting the increasing tends in poverty. The incidence of caloric-based poverty has increased in the 1990s. Sustainable economic growth accompanied by macro-economic stability is ultimately the most powerful means of reducing poverty over the medium term. Sustained pro-poor growth based on private sector activity and investment should be the key element of the poverty reduction strategy. Macro-economic policies should be integrated with social and sectoral objectives to ensure that plans are mutually supportive and consistent with a common set of objectives to spur growth and reduce poverty. It is equally true that focus on growth alone will not be sufficient to reduce poverty. Direct anti-poverty programmes would be required to have greater impact on reducing poverty.

Although economic growth staged a modest recovery the task now is to sustain the growth momentum. Recent developments in the growth literature have emphasized that economic conditions and implementation of appropriate public policies influence the rate of economic growth. The Government can influence growth by creating stable macro-economic environment, which can be created through macro-economic policies that are conducive to growth. The key macro-economic policies are considered to be monetary, fiscal, and exchange rate policies designed to keep inflation low and predictable, a stable and sustainable fiscal balance but not at the cost of development spending, appropriate real interest rates, a competitive and predictable exchange rate, and a viable balance of payments. The signaling effect government management has on the private sector is one of the key mechanisms through which macro-economic policies would influence growth.

Growth and Investment
a) Growth Trends
Real GDP is estimated to grow by 4.5 percent as against 3.2 percent of last year and current year's target of 5.0.percent. The modest recovery in growth is supported by an impressive recovery in agriculture and large-scale manufacturing (excluding sugar), and a slight pick-up. in services sector. Agriculture grew by 5.5 percent in 1999-2000 as against 1.9 percent of last year. The growth in agriculture is mainly supported by a strong recovery in major crops. Against a negative 0.04 percent growth of last year, major crops registered a growth of 9.6 percent mainly because of bumper cotton and wheat crops, and a good rice crop [while estimating current year's agricultural growth the. size of the wheat crop was estimated at 19.3 million tonnes. Recent information suggests that wheat crop may exceed 21.0 million tonnes. if this is the case, agriculture growth would be 7.1 percent and accordingly the growth of real GDP would have to be revised upward to around 4.9 percent]. Agriculture contributed :l.4 percentage points in the growth of real GDP.

Although the performance of manufacturing in general and large-scale manufacturing in particular, appears weak as they grew by :t.6 percent and 0.04 percent respectively, their performance is not so bad. The apparent weak performance is mainly due to a 24 percent decline in sugar production. Excluding sugar, the large-scale manufacturing has grown . by 6.4 percent as against 3.5 percent of last year. In fact, the performance of large-scale manufacturing excluding sugar has been by .far, the best in last five years. As a result of a new survey conducted by the Federal Bureau of Statistics, the growth of small-scale manufacturing is also adjustment downward to 5.3 percent as opposed to 8.4 percent, beginning from 199F-98.

The mining and quarrying sector recorded an impressive growth of 7.7 percent as against a modest increase of 3.6 percent last year. The construction sector and electricity & gas distribution also witnessed impressive growth of 6.2 percent and 7.8 percent, respectively, in 1999-2000 as against negative 6.2 percent and3.5 percent, respectively, last year. The commodity-producing sector grew by 4.5 percent in 1999-2000 as against 2.2 percent last year. The commodity-producing sector accounted for 2.3 percentage points of the real GDP growth while services sector shared 2.2 percentage points

The recovery in growth was also supported by services sector, which grew by 4.5 percent as against 4.l percent of last year. The sub-sectors finance and insurance, transport & communication and public administration depicted 6.9 percent, 3.9 percent, and 5.6 percent growth, respectively, in1999-2000 as against 15 percent, 3.1 percent and 2.4 percent growth, respectively, last year. With net factor income from abroad declining by 74.6 percent, primarily because of lower inflow of workers' remittances, the real GNP grew by 3.9 percent in 1999-2000 as against 3.2 percent growth last year

b) Savings and Investment
Total investment outlay in ]999-2000 is estimated at Rs.476.3 billion as against Rs 435.9 billion during the last year, which shows an increase of 9.3 percent in nominal term. Fixed investment increased by 9.5 percent in nominal term from Rs 387.9 billion in t998-99 to Rs 424.6 billion in 1999-2000. The public sector investment grew by 9.6 percent while sector investment increased by 9.4 percent in :t999-.2000. The increase in public sector investment is attributed to 35.9 percent increase in capital formation in agriculture sector and 16,5 percent increase in transport and communication sector. The private sector investment increased by 23.9 percent in manufacturing, 5.6 percent; in agriculture and 17.6 percent in construction sector during :1999-2000.

Total investment and fixed investment rates [as percent of GDP] stagnated around 15 percent and 3.4 percent, respectively in 1999-2000. National savings are estimated to finance 81.3 percent of total investment while the remaining 18.7 percent is financed by foreign savings. National saving rate [as percent of GDP] has increased from 11.l percent to 12.2 percent and foreign savings as percentage of GDP decreased from 3.8 percent to 2.8 percent in 1999-2000. This suggests that the reliance on foreign savings in financing domestic investment has declined considerably in 1999-2000. The domestic saving as percent of GDP has improved from 12.3 percent last year to 14.0 in 1999-2000.

Agriculture
The agriculture sector achieved a growth of 5.5 percent, as against 1.9 percent of last year. The production of rice increased to 5156 thousand tonnes as compared to 4674 thousand tonnes last year, while the production of cotton reached to11240 thousand bales from 8790 thousand bales last year, showing an increase of 10.3 percent and 27.9 percent, respectively. The production of sugarcane is estimated at 46363 thousand tonnes which is lower by about 16 percent as compared with last year due to: i) delay in payments by the sugar mills which discouraged farmers to grow sugarcane, ii) abolition of flat rates of electric tubewells by the WAPDA in Punjab created water constraints, and iii) less rainfall. The production of wheat during the current year is estimated at 19272 thousand tonnes or higher by 7.9 percent over last year's production of . 17856 thousand tonnes (Recent estimates suggest that wheat production may exceed 21.0 million tonnes), This increase is attributed to the enhancement of support price of wheat from Rs.240 to R$,300 per 40 kg or by 25 percent and timely disbursement of agricultural credit to the growers, The production of onion, potatoes, mung and masoor pulses have increased by 43.2, 3.3, 3.1 and 7,4 percent respectively, which greatly helped maintain stable prices of the essential food items.

Agricultural credit amounting to Rs.27912.6 million has been disbursed in 1999-2000 (July-March), as against Rs.30652.0 million during the corresponding period last year, thereby registering a decline of 8.9 percent. This decline is mainly due to lower demand for production loan The fertilizer off-take during the first nine months
(July-March) of the current year is 2123 thousand nutrient tonnes, as compared with 1988 thousand nutrient tonnes for the same period last year, showing an increase of 6.8 percent.

Manufacturing, Mining and Investment
The growth performance of overall manufacturing in general and large-scale manufacturing in particular, has been lackluster at best in the 1990's. After growing at an average rate of 8.2 percent in the 1980's, the growth of large- scale manufacturing slowed to an .average of 4.7 percent in the first half and further to 2.5 percent in the second half of the 1990s. During the first 9 months (July-March) of the current fiscal year, overall manufacturing has grown by 1.6 percent as against 4.7 percent of the corresponding period of the last year. The performance of large-scale manufacturing when viewed in terms of statistics, has been weal( during July-March 1999-2000. As against 2.7 percent growth of comparable period of last year ,the large-scale manufacturing has registered an almost zero growth in this year.

The true performance of large-scale manufacturing has been over shadowed by a massive 24 percent decline sugar production. With a relatively large weight of sugar in the overall quantum index of manufacturing the otherwise impressive and broad- based performance of large-scale manufacturing has been overshadowed Excluding sugar, the large-scale manufacturing has registered an impressive growth of 6.4 percent in the first 9 months of the current fiscal year. As soon as the adverse impact of sugar started filtering into the overall statistics, the performance of large scale manufacturing got distorted.

The group-wise break-up of growth indicates that the performance of two out of 11 major groups exhibited substantial decline. These include food, beverages & tobacco group, which depicted a decline of 18.2 percent and automobile group by 19.2 percent. The major items, which depicted a negative growth in the food, beverages and tobacco group include sugar (24.0 percent), cooking oil (6.2 percent), Lea blended (8.4 percent) and cigarettes (11.2 percent); and jeeps & cars (23.5 percent), light commercial vehicles (43.2 percent) and motor cycles/ scooters (3.8 percent) in automobile group.

The six major groups that exhibited tremendous increase in production include textile & apparel group (121 percent); paper & board group (14.1 percent); chemicals, rubber & plastic group (7.0 percent); basic metal industries group (13.1 percent); and metal products, machinery and equipment group (15.7 percent). The major items that depicted positive growth include cotton yarn (9.3 percent), cotton cloth (15.1 percent) and cotton ginned (27.1 percent) in textile & apparel group; footwear (18.0 percent) and sole leather .(16.9 percent) in leather group; liquids/syrup (6.8 percent), caustic soda (17.7 percent), nitrogenous fertilizer (6.8 percent), phosphatic fertilizer (33.4 percent), flakes & detergents (30.7) percent) and Cosmetics (39.5 percent) in chemical, rubber & plastic group; steel products (13.5 percent) in basic metal group, and diesel engine (24.1 percent), tractors (53.9 percent), wheat thrashers (182.6 percent), refrigerators (8.4 percent) and T.V. sets (8.3 percent) in metal product, machinery and equipment group.

The industrial investment or capital formation in the manufacturing sector witnessed an increase of 20.4 percent during 1999-2000. The private sector investment in large-scale manufacturing registered a sharp increase of 30.6 percent during the course of the year while public sector investment recorded a marginal increase of
6 percent growth.

The net foreign private investment (FPI) inflows stood at US $ 449.6 million during July-April 1999-2000 as against US $ 415.0 million in the parable period of last year, thereby, showing n overall increase of 8.3 percent. The portfolio investment was severely affected by the external and internal stocks last year but recovered from
US $ 7.4 million during July-April 1998-99 to US $ 57.1 million in July-April 1999-2000. However, the
foreign direct investment (FDI) inflows declined marginally to US $ 392.5 million during July-April 1999-2000 as against US $ 407.6 million in the same period last year, which implies a decline of 3.7 percent.

The value addition in the mineral sector is concentrated in three principal minerals like coal, natural gas and crude oil. These three minerals account for four-fifth of the weight in the total value addition in the mineral sector. Due to healthy growth in the value addition in these three minerals during the year. 1999-2000, the
overall growth in the mineral sector is estimated at 7.7 percent as against 3.6 percent in tc1998-99

Income Distribution and Poverty.
There is a general consensus that poverty has increased and income distribution has worsened in the 1990s in Pakistan. The increase in poverty is mainly attributed to declining economic growth, persistence of severe macroeconomic imbalances, reduction in the flow of remittances from overseas' Pakistani workers, lack of social safety nets, and poor governance.

According to the calorie-based poverty (headcount ratio), the incidence of poverty has increased significantly in the 1990s_ rising from 17.3% in 1987-88 to 22.4% in 1992-93 and further to 32.6% in 1998-99. The number of poor people that can not meet their daily requirements and fell below the .poverty line, has increased from 17.8 million in 1987-88 to 43.9 million in 1998-99. Similar trends are observed in case of rural and urban poverty. According to the basic needs approach, the poverty has increased from 28.6 percent in 1986-87 to 35.9 percent in 1992-93 and further to 35.7 percent in 1993-94, but at a greater pace in the rural areas than in the urban areas.

Income distribution .has also worsened in the 1990s. The Gini coefficient (a measure of income inequality) increased from 0.369 in 1984-85 to 0.40 in 1996-97. Another indicator of income inequality is the shares of the lowest 20 percent and the highest 20 percent of households in the income. The ratio of highest 20 per. cent to lowest 20 percent increased from 5.5 in 1986-87 to 7.1 in 1996-97, showing the worsening of income distribution. Further analysis suggest that income distribution has worsened in the rural area while it has slightly improved in the urban areas during 1979 to 1996-97.

The government has taken a conscious decision to bring the issue of poverty alleviation at the centre-stage of economic policy making. The fundamental shift in policies would make the poor the focal point of the country's socio-economic development process. A strategy to reduce poverty and improve income distribution has been
'prepared. Sustained pro-poor economic growth, based on robust private sector activity and investment is the key element of the poverty reduction strategy.. Macroeconomic policies are being integrated with social and sectoral objectives to ensure that plans are mutually supportive and consistent with a common set of objectives to spur growth and reduce poverty. The government has also prepared the anti poverty programme consisting of five major elements, namely integrated small public works programme, food supplement programme, revamping the Zakat system, micro credit bank, and improving social indicators. Reduction in poverty is likely to improve the distribution of income as well.

Fiscal Development
Sound fiscal policy fosters macro-economic stability. A poor or deteriorating fiscal position limits the options open .to government to support economic recovery, sustainable growth, and poverty alleviation. The importance of a prudent al policy, therefore, cannot be over emphasized. Fiscal deficit has emerged as one 6f the major source of macro-economic imbalances in Pakistan. Persistent slippage on both revenue and expenditure sides has contributed to mounting financial imbalances. The serious macro-economic imbalances that persisted in the 1980s in terms of large fiscal deficit (7.1% of GDP) continued in the first half of the 1990s despite several revenue measures introduced in the successive budgets on the one hand, and cutting development expenditure on the other Fiscal deficit remained, on average, at 7.1 percent of GDP in the first half of the 1990s. It declined slightly to 6.4 percent of GDP in the second half of the 1990s, mainly by further reducing the development expenditure. In other words the quality of little fiscal adjustment has been poor as it was not achieved by enhancing tax efforts (tax-to-GDP ratio), but mainly at the cost of further growth potentials.

Successive governments have made attempts to narrow the revenue-expenditure gap by taking new fiscal measures in federal budgets, but little improvement has taken place in the overall fiscal deficit. Why is it so? Pakistan's tax system is still characterized by a narrow and punctured base over reliance on distortionary import-related taxes high tax rates on the one hand and tax concessions and exemptions on the other, and weak tax administration. The combined effects of these structural weaknesses resulted in low and stagnant tax-to-GDP ratio on the one hand, and tax elasticity and buoyancy on the other.

Pakistan need to push forward with tax reforms to develop and effectively implement a broad-based, buoyant, and equitable tax' system, which will improve incentives and competitiveness in the private sector as well as reduce the fiscal deficit to a sustainable level. It is in this spirit that the present government is accelerating the pace of tax reform with a view to broadening the tax base, minimizing tax evasion, restructuring the tax administration, listening to the grievances of the tax payers, improving the refund process, documenting the economy, and reducing smuggling through anti-smuggling measures. Expenditure reforms are also necessary for ensuring macro-economic stability, promoting growth and enhancing the efficiency of public expenditure. It is in this spirit that the government is pursuing prudent expenditure policy. Public spending would be made more efficient through improvement in budgeting and expenditure management.

In the consolidated budget 1999.2000, the total revenues have been estimated at Rs.520.1 billion. Of these, Rs.420.6 billion are to be. collected from taxes and Rs. 99.5 billion from non-tax sources. The total expenditures have been projected at Rs.703.8 billion, resulting in an overall fiscal deficit of Rs. ~83.7 billion. This budgetary gap is to be financed through external borrowing (Rs 79.3 billion) and domestic borrowing (Rs billion) which includes bank & non-bank borrowing Fiscal deficit was as high as 7.7 percent of GDP in 1997-98 but was reduced to 5.8 percent in the outgoing fiscal year-- an adjustment of about 2.0 percentage percentage points in two years.

Persistence of large fiscal deficit over a extended period has resulted in the rapid growth of public debt since the mid-1980s, which, in turn resulted in exponential growth of debt servicing, threatening the macroeconomic stability of the country. The public debt has grown at a faster rate since 1984-85--both in absolute number and relation to GDP. The domestic debt in relation GDP. averaged at 44 percent during the first seven years (1990-97) of the 19905. It rose to 48.8 percent in 1997-98, 49.9 percent in 1998-99 and further to 51.1 percent in 1999-2000.

The burden of interest payments has emerged as the most serious fiscal problem because it not only consumes large government resources but also reduces the government's ability to spend on key development activities like social and physical infrastructure and alleviation of poverty. The interest payments on domestic debt have increased from Rs.37.0 billion (3.6% of GDP) in 1990-91 to Rs.186.5 billion (6.4 percent of GDP) in 1998-99 and further to 194.0 billion in 1999-2000 but as percent of GDP, these are likely to decline to 6.1 percent. Fiscal vulnerability of Pakistan can also be judged from the fact that more than 81.5 percent of tax revenues or 65.9 percent of total revenues is consumed by debt servicing (both interest and principal), constraining government's ability :to spend .on key development activities. Being a. single largest item, the debt servicing now accounts for 56.8 percent. of current expenditure and 48.7 percent of total expenditure in 1999,2000. Interest payments' were 29.1 percent Of total revenue and 38.6 percent of tax revenue in 1990-91, increased to 47.0 percent and 58.1 percent, respectively in 1999-2000. As percentage of expenditure, the interest payments had also risen from 19.2 percent of' total expenditure and 33.2 percent of current expenditure in 1990-91 to 34.7 percent and 40.6 percent in 1999-2000, respectively. In other words, it has emerged as a single largest item of expenditure.

There is no quick solution to reduce debt burden. Two pronged strategy will be required to reduce debt burden. Macro-economic stability, good governance, and market-friendly policies will be the essential ingredients to further restore investor's confidence, keep real interest rates low and renew growth. On the other hand, concerted efforts will be needed in other areas including maintaining primary surplus of at least 2 percent of GDP in the next several years, containing off-budget losses, speedy privatization to retire public debt and building capacity to manage debt.

Money and Credit
A number of important steps have been taken during 1999-2000 to improve working of the money and banking sector and investment environment, including reduction in lending rates by the leading commercial banks, downward adjustment of repo rate by the SBP and reduction in the deposit rates of national saving schemes. The State Bank of Pakistan lowered its repo rate from 14 percent in May 1999 to 11 percent in January 2000. As a follow up, the five major banks also announced reduction in their lending rates by an average of 1.5 to 2.0 percentage points. Accordingly the monthly weighted average rate of return on advance (overall) declined to 14.4 percent in December, 1999 from 14.8 percent in June, 1999.Steps were also taken to ensure the flow of credit to the private sector at lower cost in line with persistent decline in the inflation rate since1997-98.

Credit Plan for the fiscal year 1999-2000 envisaged monetary expansion at 9.4 percent (Rs 121.0 billion) with net domestic assets and net foreign assets of the banking system to increase by Rs 109 billion and Rs 12 billion respectively. Government sector was projected to realize a retirement of Rs 15.0 billion on account of net budgetary borrowings. Credit to the private sector and public .sector commercial enterprises (PSCEs) was targeted to increase by Rs 104.5 billion after anticipated placement of Rupee equivalent of PSCEs' rescheduled foreign debt of Rs 14.5 billion.

Monetary expansion during July-March 1999-2000 was recorded at 3:2 percent, compared with 3.5 percent in the same period last year. Net domestic credit of the banking system expanded by 2.2 percent, compared with an increase of 0.9 percent recorded last year. The Government net budgetary borrowing showed a rise of Rs 24.1 billion, against a retirement of Rs 45.3 billion in the same period last year. Bank credit to private sector including PSCEs increased by Rs 36.9 billion during the first nine months of the current fiscal year, as against a credit expansion of Rs 70.6 billion in the comparable period of last year.

Total non-performing loans (NPL) of all commercial banks amounted to Rs 173.4 billion, as on 31st December, 1999, compared to Rs 151.8 billion in December, 1998 indicating an increase of1 4.2 percent during the year. The share of nationalized/privatized banks in total NPL of the banking industry was 59.4 percent as on December 31, 1999 compared to 74.6 percent as on December 31, 1998. Cash recovery to NPL of the banking industry improved from 11.1 percent in 1988 to 16.5 percent in 1999. Out of total loan defaults of all commercial banks amounting to Rs 185.2 billion as of 12th October, 1999, total cash recovery upto 15th March, 2000 amounted t Rs 12.1 billion. The profitability of banks showed significant improvement during 1999. In absolute term, the profit (after tax) increased from Rs 1.5 billion in 1988 to Rs 9.3 billion in 1999.

Capital Market
After touching-the lowest ebb in the preceding years, the leading market indicators display modest recovery in the very beginning of the current financial year. The KSE index increased from 1055 points in June 1999 to 1252 points in July 1999. Aggregate market capitalization of ordinary shares also recorded a gain of Rs 41.2 billion within one month. From July 1999 to November 1999, the market indicators however, remained almost unchanged.

By the end of March 2000, the main business barometers further consolidated and the KSE index increased to 1999.7 points on March 31, 2000 from 1054.7 points on June 30, 1999, market capitalization increased to a record level of Rs 500.1 billion on March 31, 2000 from Rs 289.2 billion in June 1999. During the first nine months of the current year, the KSE price index, SBP general index, and aggregate market capitalization have increased by 89.6 percent, 46.8 percent and 72.9 percent restively, as against their growth of 20.1 percent 4.3 percent and 11.7 percent in the same period last year. Total turnover of shares on KSE more than doubled to 34.7 billion, from 17.1 billion in the same period last year. Funds mobilized by KSE amounted to Rs 7.7 billion. Upward business trends were also witnessed at other two stock exchanges namely, the Lahore and Islamabad Stock Exchanges.

The present Government has taken several measures to rehabilitate the ailing economy which included: initiation of steps for speedy privatization process, positive movement towards early resolution of the IPP issue, establishment of National Gas Regulatory Authorised and autonomy granted to oil and gas Companies, allowing foreign investors to repatriate their funds without any restriction from the SBP, reduction in the interest rates, recover outstanding/over due loans, termination of various lottery scheme (Crore Pati Scheme etc.), reduction in interest rates by banks and national savings organization, rescheduling of foreign debts and considerable improvement in economic fundamentals such as higher revenue collection, lower inflation, rising export earnings and higher industrial growth excepting sugar. All these measures have greatly contributed to the bullish sentiment of the market.

Inflation
The inflation pressure which persisted in the early 90s due to excessive monetary overhand combined with shortage of essential commodities continued until 1996-97. Inflation rate during the first seven years (1990-97) of the 1990s averaged at 11.4 percent but continued its declining trend thereafter. Inflation, as measured on the basis of Consumer Price Index (CPI), declined to 7.8 percent in 1997-98 and further to 5.7 percent in 1998-99. During the first ten months of the current fiscal year (July-April) inflation rate is further reduced to 3.4 percent - lowest during the last two decades. Food and non-food inflation also remained subdued and followed the overall inflationary trends. However, the rate of deceleration was more pronounced in the case of food inflation which was as low as 2.0 percent as compared with non-food inflation of 5.0 percent. Similarly, the pace of increase in WPI and SPI is also considerably low at 1.6 percent each during the referred period. The main contributory factors towards deceleration in inflation in the last two years as well as in the current year have been the containment of the growth of money supply higher agricultural production, easing supply bottlenecks and depressed international market prices of essential items.

Trade and Payments
Pakistan's external trade has staged a 'V-Shaped' recovery during the outgoing fiscal year1999-2000. Both exports and imports have exhibited a strong rebound from a significant downturn of last year. The exports during July-April, 1999-2000 registered an increase of 9.8 percent, as against a decline of 1:1.7 percent in the comparable period of last year -increasing from $. 6307.9 million to $ 6927.2 million. Likewise, imports in this period registered an increase 10.9 percent to $ 8337.1 million, as against . a decline of 11.2 percent in the corresponding months of last year. The impressive recovery in exports is mainly attributed to the improved supply of exportables, stronger demand in international markets and stable and predictable exchange rate. However, the higher POL imports ($ 2174.4 million)have caused trade balance to deteriorate by 16.7 percent to $ 1409.9 million over the level of $ 1208.0 million in the same period last year.

The various policy measures introduced during tile year have favourably impacted the balance of payments in the current fiscal year. The current account deficit during July-March, 1999-2000 narrowed sharply by 34.0 percent to $ 1195 million as against $ 1812 million of the comparable period of last year, implying a net reduction of $ 617 million. The trade deficit (f.o.b) showed a reduction of 3.0 percent while deficit in services (net) widened by $ 224 million. The private transfers in this period rose substantially by 48.6 percent to $ 2430 million, depicting a net increase of $ 795 million. Workers remittances, however, declined by almost 9 percent and flow under long term capital (net) was limited to $ 274 million.

Foreign Economic Assistance
The disbursed and outstanding external debt (medium & long term) by end June, 2000 is estimated to have risen to $ 25.5 billion or by 39.4 percent of GDP and about 306 percent of export earnings. Similarly the annual external debt service payments have risen substantially over time and squeezed the net inflow of foreign resources. However, due to rescheduling of debt, the service payments during 1999-2000 are expected to decline by .8.5 percent to $ 1400 million, that is, 2.2 percent of GDP. There is also a declining trend in the commitments and disbursements of aid and are likely to aggregate at $ 1659 million and $ 1966 million respectively during the current fiscal year, 1999-2000.

Education
National Education Policy envisaged to achieve 55 percent literacy rate by 2003 and 70 percent by 2010. :It is hoped that target would be achieved. The number. of primary and middle/elementary schools has increased substantially to 170524 and 24902 respectively in 1999-2000. Primary Education has been the top priority area within education sector. Half of the education budget/allocation had been earmarked for the promotion of primary education. Participation rate of secondary level will be raised from 35 1998 to 45.8 percent by 2003 and 70 percent by 2010. The overall participation rate at primary stage is 89 percent, at middle stage 47.5 percent, and at high stage 29.5 percent. During the current fiscal year, total public sector expenditure on education is estimated at Rs.71.1 billion, showing an increase of 1.7 percent as compared to last year. Public sector expenditure on education as percentage of GDP for the last three years remained, on average, at around 2.2 percent. During implementation of SAP-II (1997-2002), it is planned to spend 66 percent of the total SAP-II outlay of Rs.498.8 billion on the elementary education (primary & middle).

Health & Nutrition
Health facilities are still inadequate. However, over the years general health facilities have improved greatly. Today health services are provided to the general public through a vast infrastructure of health facilities. The existing national network of health facilities consists of 877 hospital 4.625 dispensaries, 5,152 Basic Health Units, 530 Rural Health Centres and 855 Maternity Child Health Centres. The output of doctors, dentists and nurses have been estimated at 87,105, 3,867, 35,979 respectively. To increase the efficiency of health sector, 12 new BHUs, 22 RHCs and UHCs were constructed and 35 existing facilities of BHUs and 22 RHCs were upgraded during 1999-2000. Moreover 3,388 new doctors, 308 dentist, 2,460 nurses and 5,304 paramedics have been trained. Under the preventive programme, 23 million packet of oral rehydration have been distributed and 4 million children have been immunized against six killer diseases of childhood. The total outlay on health sector during1999-2000 is Rs 14.6 billions (Rs 9.1 billion current expenditure and Rs 5.5 billion development expenditure) which is 0.5 percent of GNP. The priority health programmes gave special focus to the major health problem of the country. Cancer treatment, anti AIDs programme and malaria control programme were carried out in 1999-2000. Per capita caloric intake per day is 2,715 calories and per capita protein availability is 71.03 grams in1999-2000.

Population, Labour Force and Employment
Population of Pakistan has increased in absolute terms by about 55 percent over the last census held in 1981 but its growth rate has decelerated to 2.4 percent by mid-1998 and further to 2.2 percent by March, 2000. The growth rate is projected to further slowdown to 2.0 percent by the year 2003. The crude birth rate is 33.8 per thousand population and Crude death rate per thousand population is estimated at 8.9 (9.7 rural area and 7.3 urban area).

Labour force has grown at an annual average rate of 2.7 percent as against the population growth of 2.4 percent during the last 8 years. Estimated on the basis of population of 137.5 million for mid-year 2000, the total labour force comes to 39.4 million. Of this, 26.9 million or 68.2 percent is in the rural areas and 12.5 million or 31.8 percent is in the urban areas.

The Government has launched an economic revival plan whereby the economy will be revitalized. As a result of which, economic activities will generate more job opportunities in the country. The plan focuses on higher investment and. promotion of labour intensive sectors. Government has established a micro credit bank for provision of credit facilities for self-employment. Various Vocational Institutes and Bureau of Immigration & Overseas Employment have been geared up to improve skills both for domestic and overseas employment opportunities.

Social Action Programme, Social Welfare and Rural Development
Pakistan's social indicators need improvement. The Social Action Programme (SAP-I) was launched with a view to improving access to basic social services like primary education, primary health care, population welfare services, and potable water & sanitation. The first phase of the SAP had been completed during 1993-96 at an aggregated investment autlay of Rs. 106.4 billion, indicating utilization of 83.4 percent of the planned outlay. 'The objectives of SAP-I have been to increase the level of allocations and expenditures on SAP sectors with focus on access and quality; institutional strengthening; involvement of the NGOs; private sector and community based organisations and building of political will and bureaucratic support

After the successful implementations of SAP-I, the Government has initiated another five and a half year SAP Phase-II (January 1997 to June, 2002) with an outlay of Rs. 498.8 billion with almost the same aims and objectives but with additional focus on middle schooling and-also on the water supply & sanitation in the less previlaged localities of the urban areas. Out of total expenditure, the donor assistance is envisaged to be Rs. 101.0 billion (20.2 percent) and Government of Pakistan's financing is Rs. 397.8 billion (79.8 percent).

In order to mitigate the miseries of the disabled and socially marginalized groups and to reduce poverty, the government has designed social welfare programme throughout the country. During the current, fiscal year, Rs. 136.8 million have been provided to the Social Welfare Sector under the Annual Development Programme which is 25.1 percent higher than last year's utilization of Rs. 109.4 million. The Pakistan Bait-ul-Mal has also launched 'many projects for the welfare of the needy and deserving persons.

The National Zakat Foundation also provides grant-in-aid to the NGOs registered under voluntary Social Welfare Agencies for sharing the capital cost of their projects for helping the poor, orphans, ,widows and disabled persons. The foundation has sanctioned Rs. 19.68 million, as grant-in-aid for 72 projects during July-March 1999-2000.

The present Government gives top priority to the empowerment of women and bring a positive change in their lives. For this purpose, special efforts have been made for the protection of women's rights. A package of facilities has been announced by the present Government for the Welfare of Women to enable them to participate in the policy and decision making process at various levels.

Rural development is a multi-sectoral approach for the development of physical and social infrastructure. During 1999-2000, an amount of Rs. 3370.0 million including foreign aid of Rs. 3348.6 million has been provided for rural development. During July-March 1999-2000, 863 villages have been provided electricity bringing the total number of electrified villages in Pakistan to 67351.

Transport and Communications
Considerable progress has been made in the transport and communication sector during the current fiscal year. During July-March 1999-2000, the total length of roads in the country was249,959 km, including 138,726 Km of high type. and 111,233 km of low type. Total number of motor vehicles on roads stood at 4.085 million during the same period. The construction work on Islamabad-Peshawar Motorway which started in1998, is expected to be completed with the cost of Rs.26 billion by December 200:1. Pakistan Railways network consists of 7,791 route km during July-March, 1999-2000. Its major assets include 582 locomotives, 2,029 passenger coaches and 22,247 freight wagons.. During 1999-2000 (July-March). it carried 49.2 million passengers and 3.8 million tonnes freight and its gross earnings stood at Rs.7,208 million. The network of Pakistan International Airlines covers. 37 international destinations and 35 domestic stations covering almost all parts of the country.

Its fleet consists' of 48 aircrafts of varied types. Presently, three .private airlines i.e. Shaheen Air International, Bhoja Air Line and Aero Asia are operating on local and international routes, while the fourth private sector airline--Safe Air International is operating on domestic routes only. The country has two major sea ports namely, Karachi Sea Port and Port Qasim. Beside, two Fish Harbour-Cum-Mini Ports are being developed at Gawadur and Keti Bunder. The Karachi Port has handled 18.0 million tons of cargo during July-March, 1999-2000, compared with 1.7.6 million tons of cargo during the corresponding period of last year.


Pakistan is now connected with most of the countries of the world through international gateway exchanges. Value added services such as internet, E-mail, cellular mobile telephone, optical fiber system, card' pay phone, paging services etc. are now available in the country which are providing innovative and modern services to the consumers. At present, about 21,000 customers are connected through internet, whereas the total number of internet users in Pakistan upto March, 2000 are 120,000. There are more than 3.8 million telephone lines, out of which about 3.03 million lines are connected to the customers, 2,663 telephone exchanges, 1,362 NWD exchanges, 10,256 VHF PCOs, 393 telegraph offices and 112 customers service centres are working in the country. The estimated number of TV and VCR sets in the country as on June 30, 1999 were 3.035 million and 0.136 million respectively. As on March 31, 2000, the TV and VCR sets are estimated to be 3.150 million and 0.136 million respectively.

Energy
During July-March, 1999-2000, the production of crude oil per day increased to 56,141 barrels from 55,703 barrels per day during the same period last year, showing an increase of 0.8 percent. The total production of crude oil declined to 15,158 million barrels during July-March, 1999-2000, from15,263 million barrels during the comparable period of last year. The production of crude oil declined due to depletion of oil fields. The production of gas per day stood at 2,217 million cubic feet during July-March, 1999-2000 as compared with 2,012 million cubic feet over the same period of last year, showing an increase of 10.2 percent. The total production of gas increased to 598,590 million cubic feet during July-March 1999-2000, from 551,392 million cubic feet of the comparable period of last year.

The installed capacity of electricity (hydel and thermal) increased by 6.6 percent during the first nine months of the current fiscal year and stood at 1.6,764 mega watt. During July-March, 1999-2000 47,577 Gwh of electricity was produced against 43,468 Gwh during the same period of last year. The number of villages electrified increased to 68,047 during July-March 1999-2000, from 67,183 during 1998-99.

Housing and Environment
As a result of rapid urban and higher population growth, the housing situation in Pakistan has remained under tremendous pressure. According to the 1998 Population & Housing Census of Pakistan, there were over 19.3 million housing units in the country (67.7 percent rural and 32.3 percent urban). Of the total housing units, 81 percent were owned, 9 percent rented, and 10 percent rent-free. The level of congestion in terms of persons per housing unit reflects the housing conditions as well as living standard of the society. The average household size (persons/rooms per housing units) is 6.6 person against 6.7 persons, in 1980. Increasing population especially in urban areas is generating greater demand for civic amenities. On the basis of population increase, the current backlog of housing units is 4.3 million and about 0.3 million housing units are .added to the housing stock annually by public land private sectors.

During 1999-2000, one lakh residential plots will be developed. The government has also initiated a housing programme under which it is planned to construct approximately 20 to 30 thousand housing units. This will meet only a small component of the requirement of housing sector. In this regard, a pilot project of 10,000 housing units has been launched. Besides, one thousand government servants housing units are likely to be constructed. Under the water supply schemes, 2.0 million of the urban and 3.0 million of the rural population will be served. Under the sewerage and drainage, an additional 1.5 million people in the urban, 3.5 million in the rural and 0.050 million people of the katchi abadies are likely to be. served. Overall size of the PSDP, 1999-2000 of PP & H Sector is Rs.9807.3 million i.e. 33.3 percent higher than the last year's actual utilization.

The protection of the environment and agriculture growth is an essential component of development and without adequate environmental protection, economic development is undermined. The most pressing environmental challenge in Pakistan in the next few decades will come from lack of agriculture planning, environment degradation and poverty. In the PSDP 1999-2000, an allocation of Rs.14:[6.6 million has been made for the projects pertaining to environment and forestry.