The economy of Pakistan is the 25th largest economy in the world in terms ofpurchasing power, and the 45th largest in absolute dollar terms. Pakistan has a semi-industrialized economy,[9][10][11] which mainly encompasses textiles, chemicals, food processing, agriculture and other industries. Growth poles of Pakistan's economy are situated along the Indus River,[11][12] diversified economies of Karachi and Punjab's urban centers, coexist with lesser developed areas in other parts of the country.[11] The economy has suffered in the past from decades of internal political disputes, a fast growing population, mixed levels of foreign investment, and a costly, ongoing confrontation with neighboring India. However, IMF-approved government policies[citation needed], bolstered by foreign investment and renewed access to global markets, have generated solid macroeconomic recovery the last decade. Substantial macroeconomic reforms since 2000, most notably at privatizing the banking sector have helped the economy.
GDP growth, spurred by gains in the industrial and service sectors, remained in the 6-8% range in 2004-06 due to economic reforms in the year 2000 by the Musharrafgovernment.[13] In 2005, the World Bank named Pakistan the top reformer in its region and in the top 10 reformers globally.[14] Islamabad has steadily raised development spending in recent years, including a 52% real increase in the budget allocation for development in FY07, a necessary step toward reversing the broad underdevelopment of its social sector. The fiscal deficit - the result of chronically low tax collection and increased spending, including reconstruction costs from the devastating Kashmir earthquake in 2005 was manageable.
Inflation remains the biggest threat to the economy, jumping to more than 9% in 2005 before easing to 7.9% in 2006. In 2008, following the surge in global petrol prices inflation in Pakistan reached as high as 25.0%. The central bank is pursuing tighter monetary policy while trying to preserve growth. Foreign exchange reserves are bolstered by steady worker remittances, but a growing current account deficit - driven by a widening trade gap as import growth outstrips export expansion - could draw down reserves and dampen GDP growth in the medium term.
