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Pakistan Economy

Published by Current on 2007-12-24

The fact that Pakistan's ruling regime diverted much of the $5 billion provided by the United States to combat Al Qaeda and the Taliban to weapons systems designed to counter neighboring India - as revealed today by The New York Times - should not come as a surprise.

Much of the country's annual defense budget of $18.7 billion - out of a overall national budget of $40 billion - involves weaponry aimed at combating India, with whom it has fought three wars in the last 60 years over the disputed Himalayan territory of Kashmir, which both countries claim. The allegedly diverted monies were simply a bonus, especially in view of Congressional reluctance to approve new direct military assistance to Pakistan, largely because of its nuclear program.

Indeed, much of India's $22 billion defense budget - out of an overall $154 billion budget - is also geared toward meeting perceived threats from Pakistan - and from China, with whom India has border disputes as well. But India receives no military or development assistance of any consequence from the U.S., although political and military ties between the two countries have improved dramatically under President Bush, who has agreed to provide India with nuclear technology even though, like Pakistan, India refuses to sign the Nuclear Non-Proliferation Agreement.

What is surprising, however, that despite the escalating arms race in the Subcontinent, the economies of both countries have been performing remarkably well. India's abandonment of socialism and its embracing of more market-oriented policies - with increased investment from American companies in the manufacturing sector and the equity markets - have resulted in average annual economic-growth rates of between 7 and 9 percent for the last seven years. But Pakistan hasn't been far behind, with growth rates in recent years of 7 percent annually.

"Pakistan's economy has performed remarkably better than would be expected in a political crisis," said Anwer Sher, a Pakistani banker and real-estate consultant, based in Dubai. "This can partially be explained on grounds that the civil disturbances have not been crippling and, largely, the economic sector does see either way that an election in January and the settling of tensions domestically and with India will eventually happen."

But, like other bankers and economists in South Asia and the Middle East who follow the Subcontinent closely, Sher cautions that higher oil prices, and possibly reduced foreign investments over the next six months or so may dampen economic performance and put additional pressure on the economy.

Even in foreign direct investment, Pakistan has done surprisingly well for a country of barely 170 million people. For the last five years, it has averaged $7 billion annually in FDI - not bad, considering that its GDP of $475 billion is less than half that of India, whose trillion-dollar economy consists of 1.2 billion people. India has averaged some $12 billion in FDI annually, although its minister of commerce and industry, Kamal Nath, contends that the figure may rise to $20 billion this year. (Some Indian economists consider that assertion too optimistic.)

Pakistani officials have been particularly encouraged by the infusion of foreign capital in the domestic telecommunications market, which reportedly has 100 million subscribers. Last June, SingTel, the Singaporean telecom giant, paid $758 million for a 30 percent stake in Pakistan's third-largest operator, Warid Telecom.

Warid's chief executive officer, Hamid Farooq, said that the company - which has an "enterprise value" of nearly $3 billion - now has almost 10 million subscribers and a market share that's expected to grow beyond 16.6 percent in 2008. Warid executives also said that the company had become EBITDA positive in less than two years of operation, after it paid a license fee of $291 million in 2004 raised from a consortium of nine core investors, including The Abu Dhabi Group in the United Arab Emirates. Pakistan has six mobile operators, of which Warid ranks third. Soon after starting operations, Warid laid nearly 3,500 miles of fiber-optic cables across Pakistan to facilitate better service to its customers.

Farooq's enthusiasm about the Pakistani economy is shared by SingTel's CEO, Chua Sock Koong. "SingTel has made substantial investments in markets with high growth potential in South Asia, such as India and Bangladesh. Warid Telecom in Pakistan is a natural fit," she said. "We see strong upside in terms of the company's performance."

The chief executive officer of The Abu Dhabi Group, Bashir Tahir of Pakistan, told reporters that Warid is now set to commence operations in Uganda and the Democratic Republic of Congo. In addition, Tahir said, Warid expansion plans include Cote d'Ivoire, Angola, Ethiopia and Nigeria.

Like the telecommunications industry, the banking and real estate sectors continue to remain healthy in Pakistan. "While the banking industry needs consolidation and higher capital deployments, the telecom and real estate sectors are at their best performance in years," Anwer Sher says.
He adds, "Both new capital formation, either through foreign investments or domestic capital deployment, will the key to continue supporting a demand-led economic cycle. While inflation [currently around 7.9 percent] will need to be curbed, especially if consumer demand is not met, the underlying investments in infrastructure will be the key to sustaining growth."

That's where Pakistan's political stability will continue to be a major factor. The additional investment that Pakistan needs from US and European sources is unlikely to be forthcoming until next month's election provide a clearer picture of the system's capacity for democratic governance and transparency.

The United States - which buys nearly 25 percent of Pakistan's exports of textiles and agricultural products - is especially sensitive to the political impact of the elections on Pakistan's domestic economy, where more than 24 percent of the population is termed by the World Bank to be living under the poverty line - or less than the equivalent of $5 a day. While the overall unemployment rate is around 7 percent, the rate among the country's largest demographic segment - men and women between 18 and 30, who constitute 65 percent of the population - is said to be more than 10 percent.

President Pervez Musharraf is expected to continue as president, but it's uncertain which of his two main political foes and former prime ministers - Benazir Bhutto of the Pakistan People's Party or Nawaz Sharif of the Pakistan Muslim League-N - will dominate the national assembly.

Regardless of the election results, manufacturing and infrastructure development are the key areas that need to be made stronger. The agriculture-based sectors also need more funds for expansion and better productivity.

But the election results will be keenly awaited by traders in the Karachi and Lahore stock exchanges, whose indices had risen 1,000 percent since 1999, when General Musharraf ousted Prime Minister Sharif in a bloodless military coup. But when Musharraf declared a national emergency last month, The Karachi Stock Exchange - which lists 754 companies with a market capitalization of $56 billion - fell 5 percent.

Pranay Gupte,
Senior Writer and Global-Affairs Columnist

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