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)
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