Positive Trend as Growth Returns to Pakistan

By Jay Solomon, Zahid Hussain and Saeed Azhar

One recent afternoon in Islamabad, Pakistan, 2,000 restless men in long beards and white robes descended upon the offices of the state-owned cellular-telephone company. They weren’t screaming anti-Western slogans or protesting this Islamic nation’s support for the US: They were clamoring to get mobile phones on sale for a limited time only.

“They’re waiving the fees!” said 23-year-old banker Shahid Latif. “Everybody’s getting one.” Pakistan is experiencing an economic renaissance, largely obscured by a steady flow of darker news about al Qaeda fugitives, terrorist plots and rogue nuclear proliferators. Driven by fiscal reforms and a big dose of Western aid, the Pakistani economy grew 6.4% during the year ended in June. That’s more than double the rate in the year prior to Islamabad’s 2001 decision to back the Bush administration’s war on al Qaeda.

Pakistan’s exports have nearly doubled over the past six years. Manufacturing output grew nearly 17% last year, and Islamabad is sitting on a record $12 billion in foreign-exchange reserves -- four times the amount it held before the 9/11 attacks. Pakistan has tapped international credit markets and cracked down on a notorious black market that US officials believe has helped fund militant Islamic groups. Falling interest rates boosted automobile sales roughly 45% last year.
To US officials, Pakistan is emerging as a laboratory for how Western economic orthodoxy can contribute to stability in countries fighting Islamic extremism. They hope that economic development and structural reforms will sap the appeal of militant groups in the Islamic world’s third-most-populous country.

Critics point out that Pakistan’s growth has so far benefited few outside the cities, leaving many of the poorest behind. Democratic reforms are lagging, and many Pakistanis are skeptical that Gen. Pervez Musharraf’s military-led government can bring long-term prosperity. A committed minority of extremists may continue to disrupt Washington’s agenda no matter what happens to the economy.

“Support for Jihad has nothing to do with poverty or unemployment,” said mobile-phone salesman Muhammed Zareef, from his stall in the heart of Peshawar’s Sadder market. Although his business is flourishing, he still professes his support for Afghanistan’s ousted Taliban government and its fight against US forces over the border.

Gen. Musharraf inherited a country on the verge of insolvency when he and a group of senior military officers removed Pakistan Prime Minister Nawaz Sharif from office in a bloodless coup in October1999. The government was then channeling more than 60% of its revenues into servicing debt, leaving little for public works or social programs.

Foreign-exchange reserves had plunged below $400million, barely enough to finance two weeks of imports. Pakistan found it near impossible to tap global financial markets after Washington slapped economic sanctions on it for its nuclear tests.

Gen. Musharraf moved quickly to recruit some of his country’s top economic minds back from abroad. In addition to Prime Minister Shaukat Aziz, a top Citicorp Inc. executive, Pakistan’s leader also wooed men who had reached senior positions at the World Bank, Asian Development Bank and the International Monetary Fund.

His new economic team quickly resurrected a dormant IMF program by implementing a string of tough fiscal measures, which included slashing subsidies, devaluing the Pakistani currency, and allowing the market to set interest rates. They also sold off state-owned companies and removed a slew of tariff barriers.
“No democratically elected government could have done this” because it wouldn’t have been able to take the political heat, says Ishrat Husain, Pakistan’s central bank governor.

Despite those efforts, Pakistan’s economy was still lagging in 2001, having grown just 1.8% that fiscal year. After 9/11, the Bush administration presented Islamabad with an ultimatum: Either join its war against al Qaeda and neighboring Afghanistan’s Taliban government -- a regime Pakistan then supported -- or face punitive action.

Gen. Musharraf quickly sided with the US, but only after receiving substantial economic concessions. The US quickly wired Islamabad $600 million in cash in November 2001 and led a group of foreign lenders in rescheduling $12 billion of Pakistan’s foreign debt, including all $3 billion of Washington’s bilateral loans. The Bush administration has also pledged to provide $3 billion of financial aid over the next five years and lifted any remaining sanctions against Pakistan linked to its nuclear tests or Gen. Musharraf’s coup.

The war provided other benefits for Pakistan’s economy as well. Washington moved to crack down on the traditional “hawala” network of informal fund transfers which US officials believed al Qaeda was using to finance its activities. Millions of migrant Pakistanis living in the Middle East and Europe used the hawala system to transfer money back home, and many grew fearful that their funds could be frozen as part of a larger US crackdown on al Qaeda.

Pakistan’s financial system proved to be a major beneficiary of that crackdown. During the first 18 months after the 9/11 attacks, overseas remittances into Pakistan’s banking system nearly quadrupled to $4.2 billion as overseas Pakistanis sought havens for their funds. The Karachi Stock Exchange, meantime, jumped more than 100% during 2002. And interest rates fell to historic lows, thanks to combination of the large inflows of overseas funds and the improving position of the government’s balance sheet.

Today, in the dusty stalls and dilapidated booths of the financial district of Karachi, Pakistani’s business hub, foreign-exchange agents talk of their clients’ fear of moving money outside of formal channels. The government has made a number of arrests of Pakistanis using hawala, and money changers now need special licenses to trade in foreign exchange.

“Almost $4 billion came into the system last year through official banking channels, which is a major shift from the past,” says Owais Kalia, head of Khanani & Kalia Exchange Co., one of largest money dealers operating on I.I. Chundrigar, Karachi’s Wall Street.

Executives at Pakistan’s largest banks are excited about the new business opportunities. United Bank Ltd. has expanded its overseas presence to serve Pakistanis looking to invest their money. And its new consumer banking business is funding 2,000 auto purchases a month.

Karachi, with a population of 12 million people, today symbolizes the sharply conflicting trends that have emerged inside Pakistan. Terrorism and religious-based violence have seen a marked upswing in recent months, with militants nearly assassinating Karachi’s top General and regularly bombing Western targets. Sectarian violence between the city’s Sunni and Shiite militants has cost hundreds of lives.

But Karachi has also become the epicenter of a consumer boom inside Pakistan that is producing a new commercial and investment class fueling the country’s wider economic growth.

Shuja Rizvi, head of sales at the Karachi-based brokerage firm Capital One Equities, says housewives, students and generals have been crowding into his company’s tiny fifth-floor offices at the Karachi Stock Exchange building to get in on the action. Last year, the Karachi index went up 65% and has already risen about 20% this year.

“We are today dealing with 1,000 retail investors, an increase of 200% over the past two years,” says Mr. Rizvi, 34 years old.

Narjis Fatima, a 42-year-old housewife, says she registered big gains from buying privatized assets. The mother of two says she closely tracks the earnings and other business prospects of companies like Pakistan Petroleum Ltd. Mrs. Fatima, whose husband is a software consultant, says she’s made 25,000 Pakistani rupees, or $416, since the company went public in July.

Pakistan’s economic resurgence is also on display in the car dealerships and malls springing up across Karachi. On a recent weekday morning, 48-year-old Shabbir Dhanji peddled a mix of shiny new Toyotas and Hondas at his Car Deals showroom in the upscale suburb of Clifton. The wait for a new Toyota Corolla can be up to six months, Mr. Dhanji says, even for those paying in cash.

Nearby at the Park Towers Mall, 30-year-old Shahana Jafri spends many of her weekends browsing through Western retail stores like Marks & Spencer and eating at McDonald’s. The mall displays the shifting style trends in today’s Pakistan: teenagers in blue jeans and T-shirts alongside women covered by burqas, the fully enveloping dress worn in South Asia’s strictest Islamic societies.
“The malls are air conditioned and there’s a sense of security,” says Ms. Jafri, wearing green pantaloons and a tunic. “It makes you feel much more secure to shop in a mall rather than roaming around at a roadside market.”

Growth is also filtering into Pakistan’s leading industries, from textiles to telecommunications. Many of Pakistan’s major textile companies say they’ve been registering triple-digit growth over the past three years, thanks in part to greater market access provided by the European Union. After 9/11, the EU dropped tariffs on Pakistan textiles and removed laws blocking Pakistani exports, as it too sought to bolster Islamabad in its war against al Qaeda.

One of the major beneficiaries of this boom has been Farooq Textile Mills, a medium-sized firm that sits in the heart of Karachi’s Korangi industrial district. Exports have jumped 30% over the past two years and profits have doubled to 45 million Pakistani rupees, or about $750,000. The company is planning to increase its production by more than 40% by early next year with the installation of new state-of-the-art machinery.

“Things have never been this good,” says Farooq Soomar, chief executive officer of Farooq Textile, whose office sits on the second floor of the company’s aging mill. New offices are being built next door.

Farooq Mills’ workers have also reaped the benefit. Their wages have increased more than 40% over the past three years, according to workers, and many technicians and midlevel managers now have their own cars. “The workers are getting a good deal,” says Rizawan Ahmed, a midlevel manager and seven-year veteran of the company.

Meantime, Pakistan’s telecommunications sector has grown so rapidly that it’s starting to attract major foreign investment. In May, Norway’s Telenor ASA signed a license to invest $300 million in a nationwide cellular network, and company executives say they’re planning to invest another $700 million over the next four years. Hundreds of Pakistanis will be hired as Telenor expands, the company says.

“The business environment is much better here that people realize,” says Christopher Laska, who heads Telenor’s Pakistan office. The downside of Pakistan’s economic story is difficult to ignore. About a third of the population lives below the poverty line, according to the World Bank. In provinces like Baluchistan, Sindh and the Northwest Frontier Province, tribal and feudal land structures keep most of the rural population landless. Senior Pakistani officials say it’s difficult to even pursue development projects in these provinces, due to decade-old hostilities and ongoing military operations against al Qaeda and other militant groups.

“The biggest question we now face is delivering these social services,” says Mr. Husain, the central bank governor.

The economic situation can be dire even in the Punjab, Pakistan’s most prosperous province. Growing unemployment has resulted in rising crime and increasing numbers of suicides. About 90 miles from Islamabad, in the village of Utta Klan, at least 23 people have attempted suicide this year due to their declining economic fortunes, according to local officials.

Meanwhile, there is growing concern nside Islamabad’s government circles that its war against al Qaeda could be radicalizing the very elements of Pakistan’s middle class that should be benefiting from the economic boom. In recent months, a Karachi-based terrorist cell called Jundullah, or “Army of God,” has launched a series of attacks on Pakistani government and military targets. Pakistani police say the cell is comprised of engineers, statisticians, and doctors who were recently trained by al Qaeda operatives.

“Economic progress will help reduce extremism ... because economics isn’t everything,” says Ashfaque Hason Khan, a senior economic adviser to Gen. Musharraf. “There are other injustices taking place [against Muslims throughout the world] that create anger, and they must be addressed as well.”

Mr. Husain, the central-bank governor, has himself come face-to-face with these extremists’ rage. In June, al Qaeda-linked militants detonated a car bomb at the US-Pakistan Cultural Center, which borders his estate. While Mr. Husain was out of town, the windows of his home were blown out and his prized peacock killed.

Still, there are reasons for optimism, even in Pakistan’s most restless areas. The Northwest Frontier Province has traditionally been the base for militant Islamist groups who have fought both the Soviet Red Army in Afghanistan and the central government in Islamabad. But today its capital of Peshawar is experiencing its own mini-economic boom, fueled by the major reconstruction work going on in neighboring Afghanistan.

More than 40,000 Pakistanis from the city and its surrounding areas are now working as plumbers, electricians and carpenters in Afghanistan, local officials say. And their rising income can be seen in the climbing property prices in Peshawar and a slew of new malls. (Courtesy THE WALL STREET JOURNAL)


Editor: Akhtar M. Faruqui
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