INTRODUCTION

Pakistan economic environment is affected by intensification of war on terror and deepening of the global financial crisis which penetrated into domestic economy through the route of substantial decline in Pakistans exports and a visible slowdown in foreign direct inflows. Pakistan economy continues to remain exposed to the vagaries of international developments as well as internal security environment. The intensity of the global financial crisis has further added to Pakistan predicament. Despite support from the IMF and other bilateral and multilateral donors, Pakistan external account remains exposed to a host of uncertainties .

GROWTH AND INVESTMENT

Despite severe challenges, the economy has shown improvement in the outgoing year, Growth in Gross Domestic Product(GDP) for 2009-10, on an inflation-adjusted basis, has been recorded at a provisional 4.1%. This compares with GDP growth of 1.2% (Revised) in the previous year. For the outgoing year, the Agriculture sector grew and estimated 2%, against a target of 3.8% and previous years growth rate 4%. While the crops sub-sector declined 0.4% over the previous year, Livestock posted a healthy rise of 4.1%. The performance of the Agriculture sector was boosted by weakening of the EI Nino phenomenon, after late winter rains. Industrial output expanded by 4.9%, with Large Scale Manufacturing (LSM) posting a 4.4% rate growth. The Services sector grew 4.6% as compared to 1.6% in 200809. Overall, the commodity producing sectors are estimated to have expanded at a 3.6% pace, which represents a significant turnaround from the anemic growth rates of the previous two fiscal years.

AGRICULTURE The Agriculture sector continues to play a central role of Pakistans economy. It is the second largest sector, accounting for over 21% of GDP, and remains by far the largest employer, absorbing 45% of countrys total labor force. Nearly 62% of the countrys population resides in rural areas, and is directly or indirectly linked with agriculture for their livelihood. The Agriculture sectors strong linkages with the rest of the economy are not fully captured in the statistics. While on the one hand, the sector is a primary supplier of raw materials to downstream industry, contributing substantially to Pakistans exports, on the other, it is a large market for industrial products such as fertilizer, pesticides, tractors and agricultural implements.

MANUFACTURING Pakistans economy faces a critical period. The growth rate of the countrys population is the fastest in the region while the growth of its Gross Domestic Product(GDP) has slowed substantially in the past couple of years. This declining economic performance received another major setback at the hands of the destruction caused by floods in August 2010. How ever in the past two years due to a number of factors, Pakistan experienced a dramatic retardation in economic activity. The growth rate fell from 4% in 2008 to 2 % in the fiscal year 2009. During the same time period the growth rates of other countries in South Asia also fell, owing to global recession, but not to such low levels as that of Pakistan. Indias GDP growth rate fell to 6.7% in 2008 but has risen since then to 7.2% in 2009.

After the high growth in the period 2002-2007, is a testament to the fact that without addressing the structural weaknesses of the economy, GDP growth cant be sustained on the back of capital inflows and consumption spending alone. With expectation of 2003-04 the declining manufacturing production and exports during the period of rapid growth was indicative of the balance of payments crisis that Pakistan faced in 2008. In 2008-09 output in the manufacturing sector shrank by 3.3% in face of both the increasingly binding energy constraint and internal security issue { Asian Development Bank (2010)}. The performance of the last ten year are.

The manufacturing being the second largest sector of the economy bears significant importance 18.4 percent contribution to GDP. Overall manufacturing sector posted a negative growth rate of 3.3 percent during the current fiscal year against the target of 6.1 percent and 4.8 percent of last year. However, production in large scale manufacturing During July-Mar 2008-09 witnessed a broad-based decline of7.7 percent against the revised growth target of negative 5.0 percent.

Fiscal Development
The main objective of Pakistan fiscal policy is sustained economic growth in unison with decline debt services, poverty alleviation, the creation of job opportunities and investment in physical and human infrastructure. It is unfortunate that fiscal space available during the last seven years (2000-2007) was not used to provide support to structural reform; instead, painful structural reforms were delayed. The current government decreases the 20 percent governmental expenses.
Fiscal year 2007-08 proved to be a difficult year for Pakistan, with several political and economic events which includes 1- Heightened political tensions. 2- Soaring global oil prices. 3- The international and domestic food inflation phenomena. 4- A slowdown in global economic activity. 5- The troubled law and order situation prevalent in the country. 6- Non-responsive stance on account of political expediency. All the above events have had adverse consequences for fiscal discipline. Because of the instability experienced at the onset of 2007-08, the fiscal deficit is expected to miss the target of 4.0 percent of GDP this year by a wide margin. The hard earned macroeconomic stability underpinned by fiscal discipline appears to have been evaporated. In other words, financial indiscipline during the outgoing fiscal year has already caused severe macroeconomic imbalances, for which, Pakistan is likely to pay a heavy price in terms of deceleration in growth and investment, and the associated rise in the levels of poverty; widening of current account deficit and the attendant rise in public and external debt; a loss of foreign exchange reserves and the associated pressure on the exchange rate; and most importantly, higher inflation and the associated rise in interest rates. A sound fiscal position is vital for achieving macroeconomic stability, which is increasingly recognized as being critical for sustained economic growth and poverty reduction. The sooner Pakistan improves its fiscal position by making sharp fiscal adjustments, the lesser the price it is likely to pay for its fiscal indiscipline.

Money And Credit

Functioning of the financial markets, monetary stability and economic growth are closely related, due to the fact that monetary policy transmission signals work through the channels of financial markets and bank- based intermediation. Therefore an efficient financial system is a pre-requisite for stronger economic growth. For a successful financial system, financial intermediaries play a significant role, since they are critical lenders and borrowers.
The role of the financial system is to intermediate between lenders and borrowers, providing a menu of saving vehicles with differing risk and return characteristics. Financial intermediaries help the investors find the financing they need, taking into account the returns and risks on the project they wish to undertake. In carrying out their functions, financial intermediaries reduce transaction costs for savers and investors and help reduce problems of asymmetric information that are inherent in the relationships between investors and entrepreneurs. For a given level of saving, more efficient intermediation increases the productivity of investment. It seems obvious that the more efficient the financial system is, the stronger would be the economic growth.

Capital Markets

Financial markets perform a key function in the form of intermediation by mobilizing savings from a large pool of small savers and channelizing these funds into productive investments by a generally much smaller number of borrowers. Trading in securities enables a match between the differing maturity preferences of lenders and borrowers. Stock markets also potentially endorse broad-basing of ownership of financial assets and the reallocation of funds among corporations and sectors. Moreover, a developed bond market helps in providing liquidity to domestic growth and credit expansion. (In 30 Jun 2008 the index rate of KSE was 12,289.03and on 15 May 2009 it was 7,177.64).

Inflation
The rate of inflation is an important macroeconomic indicator and one of the key variables most central banks around the world scrutinize when setting their main policy

rate. Pakistan is one of only a handful of countries that is still experiencing double-digit inflation. The surge in food and commodity prices witnessed during the start of fiscal year 2008-09 pushed the Consumer Prices Index (CPI) in Pakistan to a record level of 25.3 percent in August 2008, remaining above the 20 percent level up until February 2009. Now a days its roundabout 11.47 percent.

Trade and Payments

The global economic downturn is affecting the Pakistan economy through three indirect channels the sharp drops in oil prices, has led to sharp easing of import demand pressures; the contraction in global demand, trade, and related activity, is impacting adversely demand for exports and remittances from EU and US in particular; and constricted access to the international credit markets and lower investor appetite for risk is affecting capital inflows, depressing local asset prices, and reducing already low investment level. Pakistan economy needs an integrated policy to deal with external sector vulnerabilities like removing structural rigidities in the exports and imports sectors.

External And Domestic Debt

The government embarked upon a plan of Economic Stabilization to regain macroeconomic stability. The measures taken under this program by the government have placed the economy on the path to recovery. The support from the international Monetary Fund is a key impetus to this stabilization process. The effect of stabilization started accruing as the current account has recovered substantially and hemorrhage to foreign exchange reserves not only arrested but around $3.4 billion have been added to the reserves.

Education

Education is extensively regarded as a route to economic prosperity being the key to scientific and technological advancement. Hence, it plays a pivotal role in human capital formation and a necessary tool for sustainable socio-economic growth. Education also combats unemployment, confirms sound foundation of social equity, awareness, tolerance, self esteem, and spread of political socialization and culture vitality. It raises the productivity and efficiency of individuals and thus produces skilled manpower capable for leading the economy towards the path of economic development. Education also originates confidence which empowers people to defend their rights, improve health status and good governance in implementation of socio-economic policies.
According to the latest Pakistan Labor Force Survey 2009-10, the overall literacy rate (age 10 years and above) is 57.7 percent (69.5 percent for male and 45.2 percent for female) compared to 57.4 percent (69.3 percent for male and 44.7 percent for female) for 2008-09.

Health and Nutrition

Pakistan requires progress in economic and policy sector to reduce the burden of diseases not simply in health care but much have to be done in agriculture, education, transportation, environment, public health sector and other relevant areas in order improve the nations overall health. The most immediate health problem of the country are: inadequate sanitation facilities, unsafe water, poor living conditions, poverty and low literacy rate with women being the worse affected whose lack of knowledge often render them and their children vulnerable to various diseases.

Population, Labor Force and Employment

Pakistan is facing a formidable challenge of tackling the issues of economic development and poverty reduction. In the wake of growing population, the need for food security and the provision of employment opportunities and housing are becoming a burden on the economy. Without population stabilization, addressing the critical issues, such a global warming, biodiversity, the environment, energy, food/water supplies, migration and security is extremely difficult. Total population in Pakistan is 163.76 million in 2008-09.

Poverty
The inadequacy of income to meet basic needs, low quality of life, denial of opportunities and choices basic to human development are different facets of poverty. The main objectives of government policies are to raise the standard of living and improve the socio-economic conditions of the people and thus reduce the incidence of poverty in the country.

Transport And Communication

Transportation network of any country is of vital importance to its development and affects all sectors through economic linkages. It ensures safe and timely travel encourages business activities and cuts down transportation costs while granting produces access to markets for their goods. A reliable transportation network also provides swift

access to labor force and hence generates employment opportunities. It has been widely recognized that economies with better road and communication networks are positioned more advantageously in terms of overall competitiveness as compared to economies having poor networks. Enhancements in transportation and telecommunication benefit industry, agriculture, and other services sectors as well as improving the standard of living of the general public, it is therefore, crucial that investments be made to develop and maintain an efficient network of transportation and telecommunication to ensure cost efficient integration of markets both domestically and internationally.

Energy
The world energy scenario during 2008-09 has been very eventful, same as Pakistan. International oil prices fluctuated widely, leaving all vulnerable oil import countries like Pakistan under great stress. The volatile energy picture not only made major dents in the macroeconomic variables such as budget deficit, current account

balance, inflation, exchange rates and foreign exchange reserves, but also eroded the purchasing power of poor on the back of rising prices of petroleum products. So the major impact has been experienced in the industrial and agriculture sector, because of energy shortfall. Energy consumption being an integral part of all the economic activities has also declined as a result of the economic slow down.

INTEREST RATE IN PAKISTAN:

To reduce the cost of borrowing State Bank of Pakistan has taken decision to trim down the discount rate to 12 percent form 13.5 per cent. The decision is mainly base on two assumptions: the inflation rate would not exceed 12 per cent. The effect of an interest rate cut is the psychological effect it has on investors and consumers; they see it as a benefit to personal and corporate borrowing, which in turn leads to greater profits and an expanding economy.