Background:
The separation in 1947 of British India into the Muslim state of Pakistan (with two sections West and East) and largely Hindu India was never satisfactorily resolved, and India and Pakistan have fought two wars - in 1947-48 and 1965 - over the disputed Kashmir territory. A third war between these countries in 1971 - in which India capitalized on Islamabad's marginalization of Bengalis in Pakistani politics - resulted in East Pakistan becoming the separate nation of Bangladesh. In response to Indian nuclear weapons testing, Pakistan conducted its own tests in 1998. The dispute over the state of Kashmir is ongoing, but recent discussions and confidence-building measures may be a start toward lessened tensions.

Economy - overview:
Pakistan, an impoverished and underdeveloped country, has suffered from decades of internal political disputes, low levels of foreign investment, and a costly, ongoing confrontation with neighboring India. However, IMF-approved government policies, bolstered by generous foreign assistance and renewed access to global markets since late 2001, have generated solid macroeconomic recovery the last two years. The government has made substantial inroads in macroeconomic reform since 2000, although progress on more politically sensitive reforms has slowed. For example, in the third and final year of its $1.3 billion IMF Poverty Reduction and Growth Facility, Islamabad has continued to require waivers for energy sector reforms. While long-term prospects remain uncertain, given Pakistan's low level of development, medium-term prospects for job creation and poverty reduction are the best in nearly a decade. Islamabad has raised development spending from about 2% of GDP in the 1990s to 4% in 2003, a necessary step towards reversing the broad underdevelopment of its social sector. GDP growth is heavily dependent on rain-fed crops, and last year's end to a four-year drought should support moderate agricultural growth for the next few years. Foreign exchange reserves continued to reach new levels in 2003, supported by robust export growth and steady worker remittances.

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