In 2000, the government made significant macroeconomic reforms. Privatizing Pakistan's state-subsidized utilities, instituting a world-class anti-money laundering law, cracking down on piracy of intellectual property, and quickly resolving investor disputes would aid Pakistan's efforts to improve its investment climate. After September 11, 2001, and Pakistan's proclaimed commitment to fighting terror, many international sanctions, particularly those imposed by the United States, were lifted. Pakistan's economic prospects began to increase significantly due to unprecedented inflows of foreign assistance at the end of 2001. This trend is expected to continue through 2009. Foreign exchange reserves and exports grew to record levels after a sharp decline. The International Monetary Fund recently lauded Pakistan for its commitment in meeting lender requirements for a $1.3 billion IMF Poverty Reduction and Growth Facility loan, which it completed in 2004, forgoing the final permitted tranche. The Government of Pakistan has been successful in issuing sovereign bonds, and has issued $600 million in Islamic bonds, putting Pakistan back on the investment map. Pakistan's search for additional foreign direct investment has been hampered by concerns about the security situation, domestic and regional political uncertainties, and questions about judicial transparency.

U.S. assistance has played a key role in moving Pakistan's economy from the brink of collapse to setting record high levels of foreign reserves and exports, dramatically lowering levels of solid debt. This encouraged a 6.1% GDP growth in fiscal year 2003-2004 and a reported GDP increase of over 8% in fiscal year 2004-2005. In 2002, the United States led Paris Club efforts to reschedule Pakistan's debt on generous terms, and in April 2003 the United States reduced Pakistan's bilateral official debt by $1 billion. In 2004, approximately $500 million more in bilateral debt was granted. In the second half of 2004 and first half of 2005 inflation has been a concern, rising above the historic lows for inflation in 2004.

Low levels of spending in the social services and high population growth have contributed to persistent poverty and unequal income distribution. The trends of resources being devoted to socioeconomic development and infrastructure projects have been improving since 2002, although expenditures remain below global averages. Pakistan's extreme poverty and underdevelopment are key concerns. The government has reined in the fiscal mismanagement that produced massive foreign debt, and officials have committed to using international assistance--including a major part of the $3 billion five-year U.S. assistance package--to address Pakistan's long-term needs in the health and education sectors.

The government started pursuing market-based economic reform policies in the early 1980s. These reforms began to take hold in 1988, when the government launched an ambitious IMF-assisted structural adjustment program in response to chronic and unsustainable fiscal and external account deficits. The government began to remove barriers to foreign trade and investment, reform the financial system, ease foreign exchange controls, and privatize dozens of state-owned enterprises.

Although the economy became more structurally sound, it remained vulnerable to external and internal shocks, such as in 1992-93, when devastating floods and political uncertainty combined to depress economic growth sharply. The Asian financial crisis seriously affected Pakistan's major markets for its textile exports. During the 1980s and early 1990s, the economy averaged a growth rate of 6% per year, but afterwards growth dwindled until 2002. For example, average real GDP growth from 1992 to 1998 dipped to 4.1% annually. Economic reform also was set back by Pakistan's nuclear tests in May 1998, and the subsequent economic sanctions imposed by the G-7. International default was narrowly averted by the partial waiver of sanctions and the subsequent reinstatement of Pakistan's IMF enhanced structural adjustment facility/extended fund facility in early 1999, followed by Paris Club and London Club re-scheduling. After taking power in late 1999, President Musharraf instituted policies to stabilize Pakistan's macroeconomic situation. Pakistan continues to struggle with these reforms, having mixed success, especially in reducing its budget and current account deficits.

The Karachi Stock Exchange (KSE) enjoyed strong growth from 2003 to early 2005, before undergoing a market correction of close to 20% of market capitalization in early 2005. KSEís market capitalization rebounded to all time highs in mid-2005. Regulations have been implemented targeted at the speculative margins-purchasing that was blamed for volatility in early 2005.

The economic importance of agriculture has declined since independence, when its share of GDP was around 53%. Following the poor harvest of 1993, the government introduced agriculture assistance policies, including increased support prices for many agricultural commodities and expanded availability of agricultural credit. From 1993 to 1997, real growth in the agricultural sector averaged 5.7% but has since declined to less than 3%. Agricultural reforms, including increased wheat and oilseed production, play a central role in the government's economic reform package. Heavy rains in 2005 provided the benefit of larger than average cotton, wheat, and rice crops, but also caused damage due to flooding and avalanches.

Pakistan has extensive energy resources, including fairly sizable natural gas reserves, some proven oil reserves, coal, and large hydropower potential. However, exploitation of energy resources has been slow due to a shortage of capital and domestic and international political constraints. For instance, domestic gas and petroleum production totals only about half the country's energy needs, and dependence on imported oil contributes to Pakistan's persistent trade deficits and shortage of foreign exchange. The government announced that privatization in the oil and gas sector is a priority.

Pakistan has received significant loan/grant assistance from international financial institutions (e.g., the IMF, the World Bank, and the Asian Development Bank) and bilateral donors, particularly after it began using its military/financial resources in the war on terror. The United States recently pledged $3 billion for FY 2005 to FY 2009 in economic and military aid to Pakistan. In addition, the IMF and World Bank have pledged $1 billion in loans to Pakistan. In 2004 to 2007 alone, the World Bank has pledged over $500 million in investment projects.