The economy of Pakistan is categorized as a developing economy. It ranks as the 24th-largest based on GDP using purchasing power parity (PPP) and the 46th largest in terms of nominal GDP. With a population of 241.5 million people as of 2023, Pakistan’s position at per capita income ranks 161st by GDP (nominal) and 138th by GDP (PPP) according to the International Monetary Fund (IMF).[4]
In its early years, Pakistan’s economy relied heavily on private industries. The nationalization of a significant portion of the sector, including financial services, manufacturing, and transportation, began in the early 1970s under Zulfikar Ali Bhutto. During Zia-ul Haq‘s regime in the 1980s, an “Islamic” economy was adopted, outlawing economic practices forbidden in Sharīʿah and mandating traditional religious practices. The economy started privatizing again in the 1990s.
The economic growth centers in Pakistan are located along the Indus River;[35][36] these include the diversified economies of Karachi and major urban centers in Punjab (such as Faisalabad, Lahore, Sialkot, Rawalpindi, and Gujranwala), alongside less developed areas in other parts of the country.[35] Pakistan was classified as a semi-industrial economy for the first time in the late 1990s, albeit an underdeveloped country[37] with a heavy dependence on agriculture, particularly the textile industry relying on cotton production.[38][35][39] Primary export commodities include textiles, leather goods, sports equipment, chemicals, and carpets/rugs.[40][41]
Pakistan is presently undergoing economic liberalization, including the privatization of all government corporations, aimed at attracting foreign investment and reducing budget deficits.[42] However, the country continues to grapple with challenges such as a rapidly growing population, high illiteracy, political instability, a hostile neighborhood, and heavy foreign debt.
Inception
In the late 1940s, upon its establishment, Pakistan had an agrarian-based economy. Agriculture constituted 53% of the country’s GDP in 1947 and slightly increased to 53.2% in 1949-50. With a population of approximately 30 million, including around 6 million residing in urban areas, about 65% of the labor force was engaged in agriculture. The agricultural sector played a crucial role, contributing to 99.2% of exports and making up nearly 90% of foreign exchange earnings.
Despite possessing significant land and mineral resources in both East and West Pakistan, including natural gas, crude oil, coal, limestone, and marble, Pakistan faced numerous challenges. In 1950, its per capita income was around $360 (in 1985 international dollars), and the literacy rate was only 10%. The nation encountered a lack of economic infrastructure, financial resources, and an industrial foundation, particularly with poverty rates ranging from 55% to 60% in the West Pakistan region.
Due to limited capital in the small private sector, the government opted to focus on the public sector to foster economic and industrial development. In the fiscal year 1949-50, Pakistan recorded a national savings rate of 2%, a foreign savings rate of 2%, and an investment rate of 4%. Manufacturing contributed 7.8% to the GDP, while services, trade, and other sectors accounted for a significant 39%, reflecting a policy centered around import-substituting industrialization. The trade balance of payments indicated a deficit of 66 million Rupees (Rs) during the period spanning 1949/50 to 1950/51.[43]
1950s
The 1950s marked the initiation of planned development in Pakistan, with the introduction of the Colombo Plan in 1951 leading to a series of Five-Year Plans from 1955 to 1998. Concurrently, a Ten-Year Perspective Plan was implemented, complemented by a rolling Three-Year Development Plan.
During the 1950s, Pakistan pursued a policy of import-substituting industrialization. Notably, the Korean War (1950-1953) brought substantial merchant profits to Pakistan’s public and emerging private sectors, fueling industrialization.
In 1952, Pakistan imposed bans on the imports of cotton textiles and luxury goods, followed by comprehensive import regulations in 1953, propelling the country into the ranks of the fastest-growing nations. However, biased policies against agriculture and unfavorable trade terms between agriculture and industry led to a decline in the annual growth rate of agriculture.
By the late 1950s, Pakistan achieved self-sufficiency in cotton textiles, emphasizing export development. The influx of US military and economic aid amounting to US$500 million during 1955-58 contributed to Pakistan’s growth reliant on foreign aid.
In 1959, after a military coup d’état in 1958, the martial law regime introduced export bonus vouchers as import licenses and exempted certain goods from licensing. During this period, Pakistan faced a worsening trade balance, with deficits increasing from -831 million Rupees in 1950/51 to -1043 million Rupees in 1959/60.
Economically, agriculture grew at an annual rate of 1.6%, while manufacturing expanded impressively at 7.7% per annum during the 1950s. In the fiscal year 1959-60, the Per Capita Gross National Product (GNP) stood at Rs. 355 in West Pakistan and Rs. 269 in East Pakistan, indicating a growing economic disparity between the two regions.[43]
1960s
In the 1960s, amid a substantial influx of American aid, Pakistan enjoyed political stability, fostering robust economic growth. Poverty, measured by the poverty headcount ratio, fluctuated from nearly 50% in the early 1960s to 54% in 1963-64.
During the 1960s, Pakistan achieved an impressive annual agricultural growth rate of 5%, driven by substantial investments in water resources, increased farmer incentives, mechanization, greater use of fertilizers and pesticides, and expanded cultivation of high-yielding rice and wheat varieties in the Green Revolution.
Large-scale manufacturing experienced significant growth, expanding at a remarkable rate of 16% per annum from 1960/61 to 1964/65, fueled by protective measures for domestic industries, including export subsidies.
However, the Pakistan-India War of 1965 led to reduced foreign economic assistance, impacting the growth rate of large-scale manufacturing. From 1965-70, this sector grew at a comparatively lower rate of 10% per annum.
Despite challenges, Pakistan achieved an impressive average annual GDP growth rate of 6.7% throughout the 1960s. In the fiscal year 1969-70, the poverty incidence rate decreased to 46%. Per Capita GNP was Rs. 504 in West Pakistan and Rs. 314 in East Pakistan, indicating a widening regional economic disparity.[43]
1970s
The economic landscape in the early 1970s witnessed growing disparities between East and West Pakistan, leading to East Pakistan’s declaration of independence and the emergence of Bangladesh in 1971. Subsequently, Pakistan underwent notable transformations in both its political and economic spheres.
Under martial law authorities, amidst challenging macroeconomic conditions, the socialist Pakistan People’s Party gained empowerment. This period grappled with numerous economic challenges, including a surge in poverty incidence to 55% during 1971-72. Pakistan also confronted heightened import costs due to the global oil price shock in October 1973, a severe global recession from 1974 to 1977, cotton sector failures in 1974-75, pest infestations affecting crops, and massive floods in 1973, 1974, and 1976-77.
One significant economic issue during this time was high inflation, with prices increasing by an average of 15% per annum between 1972 and 1977. The fiscal deficit/GDP ratio averaged 8.1% during 1973-77, indicating substantial fiscal challenges. Trade imbalances were apparent, with trade deficits rising from US$337 million in 1970-71 to US$1,184 million in 1976-77.
The military coup d’état of 1977, leading to the establishment of a martial law regime that initiated denationalization, deregulation, and privatization policies. Agriculture experienced modest growth at a rate of 2.4% per annum, while large-scale manufacturing expanded at a rate of 5.5% per annum during the 1970s.
Large and medium-scale private manufacturing played a significant role, contributing 75% of the total value-added and investment in manufacturing during the 1970s. The remaining 25% of value-added came from small-scale manufacturing.
Overall, this period was marked by significant political and economic changes, driven by challenges posed by economic disparities, political shifts, and efforts to address issues such as inflation, fiscal deficits, and trade imbalances.[43]
1980s
The 1980s brought substantial changes to Pakistan’s economic landscape, moving away from the nationalization policies of the 1970s and fostering private sector industrial investment, which greatly contributed to robust economic growth. Notable developments in this era included a drop in the poverty headcount ratio to 29.1% in 1986-87, showcasing a decline in poverty incidence. The unemployment rate exhibited a positive trend, decreasing from 3.7% in 1980 to 2.6% in 1990.
Between 1985 and 1988, the government endeavored to implement an Islamic interest-free banking system, introducing business partnerships based on profit and loss sharing. The national savings/GDP ratio reached a notable 16% in 1986-87, largely due to significant worker remittances from the Middle East. Despite this growth, challenges emerged, including negative public savings and a declining public investment/GDP ratio throughout the 1980s.
To address increasing budget deficits in the early 1980s, the government heavily relied on non-bank domestic borrowing, resulting in substantial domestic debt growth. Consequently, the public debt/GDP ratio surged to 77.1% in 1988, 81.9% in 1989, and 82.6% in 1990, leading to significant interest payments and persistent fiscal deficits.
In 1985, democracy was restored in Pakistan, marking a pivotal political development. The country experienced a commendable average annual GDP growth rate of 6.3% between 1980 and 1990. The 1980s saw a surge in manufacturing exports, with an annual large-scale manufacturing growth rate of 8.8%, and solid growth in agriculture, with an annual agricultural growth rate of 5.4%.
These highlights underscore a transformative and recovering economic period in the 1980s, characterized by a shift in economic policies, improved fiscal performance, and substantial progress in poverty reduction and employment. The era also witnessed efforts to align financial practices with Islamic principles and significant economic growth in the manufacturing and agricultural sectors.[43]
1990s
The 1990s posed a formidable economic landscape for Pakistan, marked by a series of challenges and developments. Declining worker remittances and escalating external deficits set the tone for economic strains. Simultaneously, the decade witnessed the second-worst inflation in Pakistan’s history, driven by diminishing GDP growth rates. Unemployment surged, reaching 5.9% in 1991 and escalating further to 7.2% in 2000.
Pakistan’s external debt tripled, soaring to US$30 billion by 1995. The external debt/GDP ratio rose from 42% to 50%, accompanied by increases in the external debt/exports ratio (from 209% to 258%) and the debt service ratio (from 18% to 27%). A deteriorating external debt profile led to a rise in domestic debt, reaching Rs. 909 billion, and a domestic debt/GDP ratio of 42%.
The late 1990s witnessed a severe debt crisis, with the public debt/GDP ratio skyrocketing from 57.5% in 1975-77 to 102% in 1998-99. The public debt/revenues ratio surged to 624%, and the interest payments/revenues ratio reached 42.6%, rendering Pakistan’s public debt unsustainable. Concerns over external debt default emerged in 1996 and 1998, triggered by Western economic sanctions in response to Pakistan’s nuclear tests in May 1998, causing massive capital flight.
Despite these challenges, Pakistan managed to sustain an agricultural growth rate of 4.4% per annum and a large-scale manufacturing growth rate of 4.8% per annum throughout the 1990s. However, the era witnessed a significant increase in poverty incidence, reaching 30.6% in 1998-99. The decade encapsulated a complex economic narrative, as Pakistan navigated external debt burdens, fiscal imbalances, inflation, and rising unemployment. Amid these difficulties, there were positive aspects, including growth in key sectors like agriculture and manufacturing. Nonetheless, the 1990s also brought forth a looming threat of debt default, magnified by economic sanctions in response to nuclear tests.[43]
2000s
The 2000s witnessed a period of substantial economic challenges and transformations for Pakistan. The impact of high public debt gained prominence, identified by the official Debt Reduction and Management Committee in 2001, contributing to a decline in the growth rate to less than 4% per annum. Despite an initial upturn in the growth rate, the decade unfolded with persistent macroeconomic crises. Although achieving a noteworthy growth rate of 8.6% in 2004-05, subsequent years were marred by a series of setbacks, including a growth slowdown, low growth, high inflation, an energy crisis, and worsening fiscal and balance of payments positions.
The economic landscape reflected the complexities faced by the population, illustrated by a rise in poverty incidence to 34.5% in 2000-01. However, a subsequent decrease to 22.3% in 2005-06 offered a nuanced perspective on the decade’s economic trajectory. The unemployment rate saw fluctuations, rising to 7.8% in 2002 but later declining to 5% by 2008.
Efforts to enhance education and literacy rates were evident as adult literacy stood at 55% in 2007-08. Nevertheless, challenges persisted, and economic crises hit Pakistan in 2008, primarily influenced by the global financial crisis. Despite these adversities, economic growth in 2009-2010 reached a respectable 4.1%, with positive contributions from various sectors, including a 2% growth in agriculture, 4.9% growth in industrial output, 4.4% growth in large-scale manufacturing, and a 4.6% expansion in the services sector.
By March 2010, public debt had accumulated to Rs. 8,160 billion, with a total public debt/GDP ratio of 56% and a foreign-currency denominated debt/GDP ratio of 25%. Amid these economic dynamics, Pakistan underwent a structural transition. The GDP share of agriculture declined from 53% in 1947 to 21.2% in 2010, while the GDP share of industry rose from 9.6% in 1949-50 to 25.4% in 2010. Additionally, the GDP share of the services sector increased from 37.2% in 1950 to 53.4% in 2010. The 2000s encapsulated a multifaceted economic narrative for Pakistan, marked by challenges, crises, and significant structural shifts, reflecting the nation’s resilience and adaptability.
