Pakistan is the 26th largest economy in the world in terms of purchasing power, and the 47th largest in absolute dollar terms. Its production is dominated by textiles, chemicals, food processing and agriculture. Most of the recent acceleration in GDP growth has come from the industrial and service sectors. Despite adverse factors such as energy shortfall and rising costs of imported petroleum products, the economy has shown modest signs of recovery during 2010-11. It has been a period during which the government made efforts to stabilise the economy in its quest for sustainable growth. The economic as well as social policies pursued by the government during the current year, manifested its resolve to pursue stabilisation with a human face and achieve growth with social equity. The service sector has performed well and has exceeded most of the targets set for it. The decline in the international commodity prices helped in narrowing the macroeconomic imbalances ultimately resulting in a reduced current account deficit and higher foreign exchange reserves. The reduction in imbalances was mainly a consequence of expenditure rationalising, low level of imports, an overall tight domestic demand management and the global recession. However, the military operations and spending related to the welfare of internally displaced person (IDPs) has put an additional strain on the governments resources forcing a drastic cut in development expenditure. As the government now prepares the outlines of its budget for fiscal year 2011-12 it faces various challenges and underlying risks. The high level of fiscal deficit is still a potential threat to macroeconomic stability. Inflationary expectations are still high in the wake of increasing utility prices, rising petroleum prices and cross-border smuggling of essential goods that are creating a shortage in the domestic market and forcing their prices to rise. There has been a phenomenal increase in meat prices owing to the smuggling of live animals to Afghanistan as well as export of meat to the Gulf markets. The government so far appears helpless in curbing smuggling not only of live animals, but also other essential commodities. The apprehension that the reformed general sales tax will eventually be imposed is creating uncertainties in the market and hardships for the consumers. A comprehensive solution of the circular debt issue is still awaited and delays in resolving it are leading to enormous disruption in industrial and agricultural production. Loadshedding has contributed to unemployment and social unrest. There have been demonstrations in various parts of the country and at least in a couple of cities there has been a great loss of public property. The domestic resource mobilisation is low which can hamper future public sector investment. Finally, the expectation that the government will cut down some of its non-productive expenditure has not been fully realised. With the formation of a national government at the centre, this expenditure is likely to increase further. The expenditure on new Ministers, who perhaps have little or no work to perform, their flashy vehicles, and demand for office and residential accommodation, will threaten budgetary resources. Realising that foreign direct investment has nearly dried up and is badly needed for the countrys economic revival, President Asif Zardari has approved legislation for the protection of foreign investment. Due to the vast potential that exists, the government is encouraging FDI in the oil and gas exploration sector. Telecommunication and chemicals are two other sectors where appropriate government policies would attract foreign investment. In order for this to happen several key questions are being addressed which include: reducing cost of doing business, improving infrastructure, creating a conducive environment for foreign investment, security of assets and profits, ensuring availability of manpower and the financial sector services. The Ministry of Finance is, reportedly, considering various measures for increasing the savings. The current savings rate is the lowest in the region and is expected to improve with the likely fall in the rate of inflation. However, it will likely improve with an increase in the real rate of return on financial instruments, greater financial intermediation, and reforming long-term returns on saving schemes such as the Defence Savings Certificates. It seems that Pakistans economy is expected to grow by 4 percent in the upcoming financial year. Improved prospects for its economy, however, will largely depend on the implementation of measures to address key problems such as inflation, the budget deficit and the ability of the Federal Board of Revenue to meet its revenue targets. It has failed to achieve the target fixed for the current financial year. Even the lowest target has not been achieved. This forces the fiscal deficit to rise. The government appears determined to undertake major structural reforms that include the thorny issue of subsidy to the energy sector. But it is important for Pakistan to demonstrate its seriousness in ensuring implementation of the reform programme to retain the confidence of the international community and to attract foreign investment. It will also help to maintain foreign exchange reserves, which might come under pressure after repayment to the IMF begins in October this year. The commodity boom in international markets has helped Pakistan earn $2 billion per month, while remittances have also risen to $1 billion per month. The formation of a national government at the centre demonstrates that political consensus has already evolved toward the core agenda of strengthening the market economy and implementing reforms. The writer is a member of the former Civil Service of Pakistan. Email: shakeelahmad941@yahoo.com