MEDIUM-TERM OUTLOOK

29. While the economy has started to stabilize, the macroeconomic situation remains fragile and the

medium-term outlook uncertain. As mentioned above, progress with the implementation of reforms has

been uneven, with inadequate measures taken to boost revenue mobilization and control spending. Also,

while the acute phase of the global financial crisis seems to be ending, global recovery will be gradual

and take time. Thus the downside risks remain significant, and the fiscal year 2009/10 looks difficult.

30. Pakistan’s real GDP growth is projected to start slowly recovering in 2009/10, and increase

gradually from 3.0 percent in 2009/10 to 5.0 percent by 2012/13. Aided by increasing public

investment—planned among other things in power and transport—gross capital formation is projected to

rise and contribute to growth recovery and facilitate private sector activity gradually over time.

Agriculture and services are showing good growth prospects, while manufacturing is still contracting and

expected to recover only slowly over time as the domestic aggregate demand picks up and the availability

of power improves as a result of planned investments in power generation. Exports are projected to

continue contracting in 2009/10. Thereafter, with the global recovery, exports are projected very

gradually improve and reduce Pakistan’s external vulnerability over time. However, longer-term

projections are particularly uncertain in view of the volatile global and domestic economic environment.

Also, the short-term growth target seems optimistic and will likely be revised downwards during the

fiscal year.

31. The external current account deficit is projected to narrow only slightly to 4.7 percent of GDP in

2009/10, but thereafter to widen again to above 5 percent of GDP before declining. The sharp decline in

international commodity prices, reduced private sector credit growth, and the economic recession are

expected to lead to further contraction in imports in 2009/10, which is expected to continue exceeding the

contraction in exports. Remittances are also projected to contract by 13.6 percent in 2009/10, but pick-up

thereafter again.

32. In the medium term, in particular in light of uncertainties about the recovery of global demand,

increased productivity and export competitiveness are necessary to generate growth and reduce external

vulnerability consistent with these projections. Pakistan’s exports are poorly diversified both in terms of

products and destination. Almost two thirds of them are textiles and their primary destination is the USA

and EU. To this aim, structural reforms to strengthen the investment climate and competitive

environment are required and urgent. These will include measures to ease firm entry and exit, reduce

barriers to competition and trade, and enhance labor market flexibility. In addition, efforts to improve the

financial sustainability and efficiency of the power sector will be essential to attract investment in new

power generation.