Terrorism and extremism have posed a complex problem for the country. These have on the one hand seriously impacted the socio-economic fabric of Pakistan and on the other they have nurtured a sustained militancy.

There are nearly three million displaced tribal people thanks to fighting that has killed or injured over 30,000 people in recent years. About 3,000 soldiers have laid down their lives in terrorism-related incidents across the country. Militants have blown up public schools, health clinics and other government targets. Agricultural lands have laid fallow due to the fighting, depriving people of their livelihoods and sustenance.

More than 150,000 troops are occupied in counter-militancy operations in several areas of the North West Frontier Province, including the Federally Administered Tribal Areas (FATA). These troops cannot be prematurely withdrawn from these unstable places.

Even Swat, Buner, Lower Dir and other districts in Malakand division where military actions have been most effective require the presence of security forces until these areas are fully secured.

More than three million Afghan refugees, who are still in Pakistan, pose an additional security risk. They are providing nurseries and sanctuaries to the militants. They are also an additional burden on  Pakistan’s economy.

The government was able to send back 2.5 million internally displaced people from Malakand and Swat within three months, which has been hailed as a success story. The government had already earmarked 50 billion Pakistani rupees for reconstruction in Swat and Malakand while another 25 billion rupees has been budgeted for two years’ worth of capacity building for law-enforcement. Pakistan’s three-year plan for reconstruction and rehabilitation in Swat, Malakand and other areas affected by violence is costing as much as $300 million while the country’s five-year development plan for the same areas carries a $1.2 billion price tag.

The official circles feel that the pursuit of military objectives have not proved rewarding. The power of persuasion must find primacy over the dictates of coercion. This persuasion must be supplemented with dialogue and reconciliation. Success is only possible through political initiatives and economic development.

The economy has been facing mounting pressures from ever-rising inflation, acute power shortages, a slowdown in manufacturing and services, a sharp increase in interest rates and widening deficits.

Factors such as deteriorating internal security, political tensions, flood devastation, rising global commodity prices and intensified energy shortages are putting high pressure on the country’s fiscal framework. Meanwhile, the government has accorded highest priority to economic and social development.

Strenuous efforts are under way to promote and affect fiscal discipline in order to revive and stabilize the economy. Concrete steps are being taken to restrict inflation. Inflation for the fiscal year 2009 was 20.8 percent and at is expected to remain in the range of 11 to 12 percent in the current fiscal year. A slippage of 80 billion rupees is expected from the revenue collection against the target of 1,396 billion rupees. This financing gap — largely due to the resources needed toward defense and security and the inability of the Friends of Democratic Pakistan (FoDP) to release $2 billion promised at the Tokyo meeting — has rendered slashing of the Public Sector Development Program (PSDP) an imperative.

Pakistan is the lowest in the region in terms of tax-to-GDP ratio, which has been hovering at an average of between 9 and 10 percent of the GDP over the past decade. Pakistan’s tax ratio to GDP stands at 8.8 percent for 2009-10. As a result, finance managers in the country are devoid of resilience to work out development priorities, apart from constantly facing the fiscal deficit.  Even after mid-year adjustments, the budget deficit is likely to touch 5.3 percent of the GDP instead of the target of 3.9 percent or 722 billion rupees for 2009-10. However, the government is making all possible attempts to contain it.

Pakistan’s currency has lost almost one-third of its value since 2008. Its continuous depreciation has hurt the economy, as it fails to increase exports while tremendously increasing the cost of living due to industries’ heavy reliance on imported raw materials.

Debt is also increasing substantially due to a large trade deficit, a gap in savings-to-investment, slow revenue growth and a rapid increase in public expenditures, especially owing to security-related constraints. The weakening currency has also aggravated the debt crunch.

There has been rising trend in the debt-to-DGP ratio, now touching 58.1 percent. The total stock of Pakistan’s outstanding external debt and liabilities has gone from $46.2 billion in 2007-08 to $52.8 billion in 2008-09.

Despite relentless fallout from the war on terror, the national economy is steadily showing signs of recovery.

During the current year, the economy is expected to grow around 4.5 percent. Exports are projected at $19.38 billion against original target of $19.07 billion and imports at $33.9 billion against $36.56 billion. The current account deficit is expected to be lower than the previous year.