The challenge of an economic turnaround

Farhan Bokhari reports on Pakistan’s efforts to become a major Asian hub of business

General Pervez Musharraf, Pakistan’s military ruler, is keen to build on the south Asian country’s two-year-long economic recovery, urging businessmen to invest generously.

Musharraf’s message, delivered frequently at gatherings of businesspeople as part of a high-profile pitch from Pakistan’s leaders, seeks to woo investors. Pakistani leaders not only have an eye on the country’s recent economic trends such as sharply rising imports, large liquid foreign-currency reserves and a robust rate of economic growth, but the country’s geographical proximity to the oil-rich central Asian states and the wealthy Arab world is often cited as an additional incentive for investors.

“Any trade or energy link between all these regions (central Asia, the Persian Gulf, western China and south Asia) has to take place through Pakistan, and we are fully focused on utilising the country’s geo-strategic location for high growth and sustained development,” was how General Musharraf presented his case at a recent gathering of businesspeople in Pakistan.

Musharraf’s six-year rule is widely seen as central to the country’s economic turnaround from the 1990s, when it remained close to the danger of facing its first ever default on its foreign debt payments. In 1998, Pakistan’s decision to carry out its first nuclear tests was followed by punitive economic sanctions by the US-led Western world. Pakistan’s decision then to freeze up to US$10bn deposited in onshore foreign currency accounts, and pay depositors an equivalent amount in Pakistani rupees, only won it widespread condemnation from the community of Western investors.

In contrast, the fallout from the 1998 foreign currency episode has been overshadowed by the turnaround, one important angle of which has been Pakistan’s successful privatisation programme. Since July last year, two important companies - Pakistan Telecommunications Company and Pakistan Steel Mills - have been privatised, raising hope for the future of Pakistan’s reform efforts.

The UAE-based telecoms company Etisalaat bought a 26% stake in Pakistan’s telecoms company, along with taking charge of its management in a deal worth US$2.6bn. A Russian-Saudi consortium with Arif Habib, a large Pakistani brokerage house, bought a 75% stake in the Pakistan Steel Mill as well as management rights, in a deal worth US$362m.

These two latest privatisations have once again provoked a debate on the merits of selling off some of the country’s most lucrative public sector companies. The controversy surrounding the telecoms company erupted when Etisalaat failed to meet a deadline last October to pay US$2.34bn after it deposited an initial down-payment of US$260m.

New terms

Eventually, the Pakistani Government agreed to new terms under which Etisalaat would pay US$1.4bn to June this year, while the remaining US$1.2bn would be paid over the next four years. The steel mill privatisation has been criticised by some of its union members as a deal which offers just modest returns. “Here you have a company which has a dominant position in Pakistan. The price at which it has been privatised is far too below its real worth - it’s a throwaway price,” says Mumraiz Khan, a union leader.

Critics, however, warn that the main fallout from the privatisation remains the apparent failure to spur interest from leading international players in sectors which Pakistan is seeking to promote. Unlike investors from regions such as the Middle East, who largely appear eager to invest in Pakistan, others from the mainstream Western world have shown far less interest.

This flows directly from concerns among some of the world’s most prominent businesses over the conditions of insecurity in Pakistan. Karachi, the southern port city, remains central to anxieties that it may be a city which has become home to a cell unleashed by Al Qaeda and its associates, seeking to stage attacks periodically, which causes increasing uncertainty.

Additionally, many Western investors remain concerned over Pakistan’s failure to democratise, while Musharraf gives no indication of any intention to change his role as head of the powerful military and head of state. His continued charge of Pakistan, more than six years after he seized power in a bloodless military coup, has prompted worry over the continued weakness of key political institutions such as the parliament. “As long as you have political power surrounding one figure, you are bound to have uncertainty and the danger of eventual chaos,” said the Karachi-based country head of a foreign company. “This is an issue for many businesses. You see comparisons being made between Pakistan and Indonesia under former President Suharto,” he added. For many businesses, the lack of a view on a transition from Musharraf to a more representative political government underlines what many describe as a democratic deficit, with implications for the economy and business interests.

Rising deficit

In the short-term, however, one key point of discussion remains Pakistan’s fast-swelling trade and current account deficits, driven up mainly by the rising cost of imports. While exports have risen over the past three years, their pace of growth trails behind import growth. Consequently, many economists believe, Pakistan’s trade deficit for the current financial year could rise to US$10bn, up from approximately US$6.2bn last year and US$3.2bn the year before.

According to Sakib Sherani, the Pakistan-based chief economist for ABN-Amro, the Dutch bank: “Pakistan is still in a position to meet the liabilities on its international trade account, but this is something which is a concern for the future, given the size of this economy.” Sherani says that Pakistan must consider ways to reduce the import of luxury goods wherever possible “to take the deficit back to manageable levels”.

Other analysts warn that the rising current account deficit, which this financial year may edge to more than US$6bn, poses a challenge for the Pakistani economy. For now, ministers such as Omar Ayub Khan, the Junior Finance Minister, argue that the trade and current account deficits are “financeable and of no potential concern to Pakistan’s overall economy”. His view is driven by the belief in official circles over Pakistan’s improving economic profile helping to lift the country’s ability to borrow in international financial markets.

While Pakistan’s ability to borrow and its profile in financial markets may have improved, many analysts note that the most difficult challenges facing the country include issues such as the widespread incidence of poverty, which undermines Pakistan’s efforts to become economically stable. “There is a continuing gap between the rich and the poor. As long as you don’t have the ability to oversee high economic growth trickling down to the poor, you will not have stability,” says a senior economist at a Western embassy in Islamabad.

At least a quarter of Pakistan’s population of about 160m live below the poverty line. For many prospective investors, a high incidence of poverty essentially means that the country lives with the danger of a rising incidence of crimes. While his sceptics may stand in disagreement, Musharraf’s hope is to see the fulfilment of his ambition of turning Pakistan into a hub of regional trade and energy flows. This will offer a stepping-stone towards overseeing an unprecedented turnaround in Pakistan’s economic fortunes. “By increasing exports, the business community not only alleviates poverty through jobs, but also helps in curbing extremism in society and terrorism from the country,” he says.

Farhan Bokhari is a business journalist based in Pakistan.