Pakistan's economic performance and prospects are now more favorable than at any time in at least the past decade. The restoration of fiscal discipline, a cautious monetary policy, trade liberalization, privatization and other structural reforms in the financial and tax areas aimed at improving efficiency and the business environment have created a sound basis for a lasting economic recovery. Led by a strong domestic and external demand, growth should be maintained at around 6.5 percent in 2004/05.

The rising trend of inflation is a concern. In this regard, the mission welcomes the State Bank of Pakistan's effort to tackle inflation by gradually tightening monetary policy.

The mission supports the Pakistani government's fiscal policy stance for 2004/05, which should allow for both a further reduction in the public debt burden and a substantial increase in social and development spending, in line with the government's Poverty Reduction Strategy Paper. While an anticipated stronger overall revenue performance in 2004/05 should offset the expected loss of tax revenue from petroleum products, the mission noted the risks posed by not passing high international oil prices on to the consumer.

Pakistan's external position remains strong, with the State Bank of Pakistan maintaining a comfortable amount of international reserves. Reflecting the strength of the economic recovery and investment activity, the external current account is projected to shift into a deficit this year, but this deficit will be covered easily by the projected financing. The exchange rate policy pursued by the State Bank of Pakistan has contributed to maintaining macroeconomic stability and competitiveness.

The Pakistani government is targeting growth at 8 percent by 2007/08, which is ambitious but appropriate in light of the current strong performance of the economy and the need to reduce poverty. The mission is in full agreement with the authorities on what needs to be done to achieve this objective, namely, further improve the investment climate, continue with trade liberalization and privatization, support productivity growth, including in agriculture, and accelerate the development of the country's infrastructure (especially the water sector). In this context, the mission highlighted the need to strengthen government revenue mobilization by increasing compliance and broadening the tax base. The completion of the power sector reforms will reduce the burden of this sector on the budget.