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Pakistan's Reforms, End of Sanctions, Bring Economic Gains

  • Benjamin Sand

Pakistan's Prime Minister Shaukat Aziz, third left, looks at the country's assembled new car during its launching ceremony in Karachi (April 2005)
Pakistan struggles with a host of daunting problems, including a potent mix of Islamic militants, grinding poverty and a history of political instability. All of which raises the question, why is its economy doing so well? The answer stems in part from the September 11 terrorist attacks in the United States, which allowed earlier economic reforms to take hold.

Waseem Khan is a very happy man. The real estate agent has seen his business in Islamabad increase nearly tenfold in the past few years. "Yes, it's good, it's really good. We are making money," he says.

He says the boom started just after the September 11, 2001, attacks in the United States, when Pakistani families in America and Europe worried they might face increasing anti-Muslim prejudice.

Many rushed to invest savings back in Pakistan and Mr. Khan says new houses were an attractive buy.

"They are not coming back completely but they are thinking at least to own some property in Pakistan so at least in case of emergency they can come and stay," he said.

In the years since, financial analysts say Pakistan has become one of Asia's fastest growing economies.

The country expects annual gross domestic product growth to top eight percent next year and its foreign reserves have ballooned from $1 billion in 2001 to more than $12 billion today.

International economists say the changes were set in motion in 1999 when President Pervez Musharraf instituted a series of structural reforms.

The president, who had just taken power in a coup, vowed to tackle corruption while privatizing state businesses and overhauling the country's banking and tax systems.

But the economy remained weak, thanks in large part to international sanctions imposed after Pakistan tested a nuclear bomb in 1998.

The sanctions remained until just after September 11, when Pakistan became a key battleground in the U.S.-led war on terrorism.

Marshuk Ali Shah, the director of the Asian Development Bank in Pakistan, says President Musharraf's support for the United States transformed Pakistan's reputation and helped resurrect its economy.

"As a result of 9-11, Pakistan, working with the world community, has been able to demonstrate that it is serious about assisting the world in tackling terrorism," he said. "There has been a lot of confidence generated and as a result, a lot of assistance has come to the country."

Europe joined the United States in granting debt relief for Pakistan and sending billions of dollars in aid.

The government cut its fiscal deficit by more than half and falling interest rates made it easier for business to borrow.

That has helped Pakistan's manufacturers enjoy double-digit growth. Bumper wheat and cotton crops also helped boost the agricultural and textile sectors.

Today, the economy is so strong Mr. Musharraf says Pakistan no longer needs international charity.

"Our economy can now stand on its own two feet," he said. "Therefore I go around the world not begging and borrowing, asking for aid, asking for money. I go for trade and I say we don't want aid, give us trade, not aid."

Some leaders predict explosive growth in Pakistan's fledging telecommunications industry as well as its textile and energy exports.

But challenges remain. The Asian Development Bank says Pakistan faces three critical tests.

First, Mr. Shah says, from roads and highways to ports and power supply, improving Pakistan's infrastructure is a condition for growth.

Second, he says, Mr. Musharraf has to show that Pakistan is a safe environment for foreign direct investment.

If he really hopes to replace aid with trade, Mr. Shah says the president has to ensure investments will be protected from political instability, whether from terrorist attacks or coup attempts.

"In many ways the FDI (foreign direct investment) is not to a level that it should be in Pakistan because this negative perception has to be cleared," he said.

Finally, and most critically, Mr. Shah says economic growth must be more evenly distributed.

One-third of the population still lives below the poverty line. According to the United Nations, nearly 60 percent of Pakistan's 150 million people are illiterate.

President Musharraf says improving living standards is his top priority.

"In a capitalist market, in a free market economy, distribution is the issue, and therefore we have to focus on the issue of human resource development and poverty alleviation," he said.

Better education, he says, is one route out of poverty.

Mr. Musharraf has sharply increased funding for public schools. And in a controversial move, he has asked Pakistan's conservative religious schools to focus on basic skills and not just Islamic teachings.

Islamabad real estate agent Waseem Kahn says he hopes the president is successful. He says more jobs mean more money. And more money means bigger houses and, of course, wealthier clients.

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