Murgha of the Day

Pakistan – An Economic Turnaround

I recently wrote this article for an online magazine, so lets see if it gets published. I will keep you guys updated on results. Meanwhile, enjoy the Un-Edited version:


A recent conversation caught me quite off-guard while catching up with an old college friend who had returned to Lahore after finishing his education in Canada. As we were catching up on the latest developments in out personal lives, I inquired about his job in Lahore and a new name emerged from his response: Al-Warid Telecom, the latest player in Pakistan's bustling telecommunication sector. However, when I inquired about the well-being of couple of other common friends, his response more than shocked me. “Oh, Aurangzeb is working for Telenor in Islamabad and Maira has left Citibank and is also working for Telenor as well, but in the Lahore Head-Office."

The emergence of a vibrant Telecommunication and Information Technology sector in Pakistan is buoyant of the promise that the country's economy is exhibiting in the face of even stiffer global competition. The numbers speak for themselves. Pakistan registered an economic growth rate of 8.4% last year, second only to China and highest in over two decades of the country's history. With a steady increase in population of 1.9%, the per capita income also rose by 5.9% during last year. With the impact of high oil prices and 8th October Earthquake, the economy is still expected to keep its momentum and grow at a steady rate of 6.5% during the current year. These positive numbers are quite a contrast from the country's economic performance in the 90s. During that period in Pakistan's history, international opinions had declared Pakistan an economically failed state with a non-existent GDP growth and skyrocketing foreign debt of $ 38 billions. Such were the times that 64% of country's revenues were consumed by debt servicing of foreign and domestic debts - creating a legacy of public debt trap. With only one third of revenues available for defense, administration, social sector and development, it was humanly impossible to make any notable contributions towards infrastructure or industrial development.

Many critics attempt to draw a relationship between Pakistan's impressive economic turn-around with the U.S. aid Pakistan received for its role as "United States' most crucial non-NATO ally" in the aftermath of 9/11 Terrorist attacks on World Trade Center. However, this view is myopic in terms of its failure to recognize and identify the policies and economic measures the government undertook before and after 9/11. A substantive amount of aid flowed into Pakistan, $3 billion dollars to be precise but spread out over a period of 5 years and subjected to annual budget approvals of U.S. Congress. However, if there is a single reason that could be attributed to Pakistan's economic resurgence, it would undoubtedly be the presence of Shaukat Aziz, current Prime Minister of Pakistan and a former Executive Vice President of Citibank. We should keep in our minds that this is not the first time Shaukat Aziz has turned around a bleak financial situation. Previously, he was instrumental in attracting Saudi Prince Al-Waleed Bin Talal's $600 million investment into Citibank at a time when Citibank was reeling under tens of billions of bad loans in Latin America and its stock price had dropped to under $10 a share.

In shape of Pakistan, Shaukat Aziz had to carry out a similar task with an added responsibility of 140 million stakeholders’ future that was tied with the development of Pakistan as a viable and sustainable economy. On his part, General Pervaiz Musharraf did not meddle into any economic affairs and gave Shaukat Aziz a complete free hand in order to accomplish the seemingly impossible task of Pakistan's economic makeover. First as the Finance Minister and later as the Prime Minsiter, Shaukat Aziz induced an atmosphere of deregulation and wise economic policies that attracted local entrepreneurship and foreign investment. As a result, Pakistan's Foreign reserves increased from less than $1 billion in 1999 to $12.5 billion currently. With positive increases in foreign reserves and a stabilized balance-of-payments issue, the government improved its credit rating and managed to reorganize its debt so it could be brought down to $ 34.5 billion. Shaukat Aziz finally brought an end to the legacy of "borrowing for growing" and decisively aimed to take Pakistan out of the debt trap that had been the main cause of the economic crash witnessed by many Latin American and East Asian economies.

Government's more stringent macroeconomic policies and seasoned structural reforms thereby resulted in a stronger external position due to a lower public debt burden and renewed access to international capital markets. Targeting key services sectors, Pakistan witnessed a boom in telecommunications, media and information technology while industrial and manufacturing growth created new records. As the budget deficit dropped from 8% to 4% and tax revenues went up by 20%, the government institutionalized a bold privatization policy that has attracted foreign investors from all over the world. A 26% stake in country's telecom giant, PTCL, netted $2.6 billion for the government while two cellular-phone licenses grossed around $600 million last year. This year the government is aiming to attract $3 billion in foreign direct investment, highest ever for the 58 year old country.

A positive mood swings in the country where, until 2002, domestic businessmen and middle class had little or no access to cheaply-available consumer credit. Cheap Auto-Financing schemes and increase in consumer wealth has resulted in a 44% increase in auto sales since 2002. Personal Computer (PC) market has grown by 19% in 2005 and is expected to surpass Singapore's PC market in terms of its size. With high consumer confidence and effective competition in Pakistan's cellular phone market, Pakistan's 24 million cell-phone users have created Pakistan into the world's fastest growing wireless market after China. These gains in consumer goods directly translate towards high performance in the banking sector and stock exchange. Pakistan's banking sector, once struggling for its survival, has adopted modern banking practices and is continuously posting higher profits. Leading the domestic banks, Muslim Commercial Bank (MCB) posted an increase of 267% in profits for 2005 with $148 million. Similarly, most of the other publicly listed banks also registered more than 100% gains in profits for the fiscal year of 2005.

With a modern telecommunications infrastructure and government's healthy policies in the IT sector, Pakistan has become home to over 123 call centers that cater to the international Business Processing Operations (BPO) market. Another 30 call centers are expected to open up this year, resulting in more inflow of investment and employment opportunities for the skilled labor. Another measure of Pakistan's turnaround is the performance of Karachi Stock Exchange, where its index has risen from a low of 1,276 in November 2000 to a record high of 12,000 in April 2006, a gain of close to 1,100%. The only other countries that have registered such outsized gains over the last five years are Russia and India.

With an economic turnaround to his credit, Shaukat Aziz, faces more challenges ahead of him. Pakistan can be quite content with its macroeconomic performance over the last 5 years but the area of poverty alleviation is still a growing concern among the majority of the population. Sharp growth has also brought a rise in inflation which reached 11% last year, further burdening the poor. Unemployment is still around the same levels and many feel that Pakistan's economic fortunes have not trickled down all the way to the poor, as yet. Continuity and consistency in the economic policies and further improvements in infrastructure can effectively cater to these issues which appear to be much bigger challenges in light of government’s performance so far. The government has positively increased spending in education, health care and social programs in order to meet its long-term objectives in the social sector development areas.

Pakistan has eagerly emerged in very less time in the eyes of foreign investors as a prime location for investment. Still, the nation's will and capacity to sustain the momentum in its growth and maintain its status in the eager eyes of foreign investors is yet to be tested. Perhaps, the country’s estimated growth till 2010 and its performance in next few more years will truly qualify this decade as the era of Pakistan's re-emergence in the new global economy.

posted by Abrar @ 4/18/2006 04:30:00 AM