Letter from... Pakistan

The mood across Pakistan's main stock market, the Karachi stock exchange (KSE), remains unusually upbeat and surprisingly so. The KSE's main 100 index has fallen more than 20% since its mid-March historical peak when it edged up to reach more than 10,000 points for the first time ever.

'You shouldn't look at where the stock market reached recently. Instead, it's much more important to examine where it was three or four years ago,' says Adnan Jameel, a recent business graduate who trades on the stock market.

Across Jameel's two-bedroom apartment there are signs of new acquisitions which narrate the story of his affluence. He has travelled to Europe twice in the past 12 months, obtained a mortgage on his apartment and there's a brand new car parked outside. 'Sure, the market went down but the KSE-100 index is still more than six times where it was three years ago.' The peak in March took the index to eight times its level just after the New York terrorist attacks.

The two events - 9/11 and trends across the Karachi market - are closely related. The New York attacks prompted Pakistan to join the so-called US-led war on terror and, in return, received not only generous economic and military assistance from the US, but also other important benefits such as a spectacular rise in remittances from Pakistani expatriates worldwide.

In the financial year to June this year, such remittances are expected to soar to US$4.5bn, up from just between US$1-1.5bn in 2002. The rise is largely due to many more Pakistanis routinely using regular banks to send money back home rather than illicit mechanisms, such as the 'hawala' or 'hundee' underground networks, once more commonly used where funds deposited with money changers in one country within a day were delivered to a recipient through a money changer in another. More Pakistanis prefer to use regular banks for fear of being caught in investigations relating to sending funds for terrorist causes from countries like the US and parts of Europe.

Khalid Umar, a currency dealer, has been at the receiving end. 'I have now gone aggressively into buying and selling second-hand cars. Trading in foreign currencies is no longer that lucrative,' he says.

But Saeed Usman, a Karachi equity investor, believes the sharp fall in share prices is just a temporary trend. He shares the enthusiasm of many in Pakistan who see a substantial increase in share prices for companies like Pak Telecom, the giant state-owned monopoly, expected to be privatised this summer.

Pak Telecom is among the three large public sector companies, along with Pak State Oil - the largest oil marketing company - and National Refinery - the largest petroleum refining complex - due to be offered for privatisation in the next two months. 'As privatisation gets nearer, many shares would be changing hands. There would be interest in the stock of these companies already in the market and, generally, there would be optimism,' adds Usman.

And yet, even the most bullish investors have few answers to long term anxieties. Pakistan's military ruler, General Pervez Musharraf, whose decision it was to lead Pakistan to support the US-led war on terror, has survived three assassination attempts in as many years. He is widely seen by investors as the man who has overseen greater political and economic stability in Pakistan. 'If General Musharraf abruptly gets removed from the scene, I am certain the stock market would crash,' says the President of a Pakistani bank.

Jameel acknowledges the political risk for Pakistani investors, but poses an important counter question: 'Do we sit tight and not become excited simply because there is the fear of the unknown? Even though people acknowledge the risk, nobody wants to be downbeat around the Karachi stock market.'

Farhan Bokari is a business journalist based in Pakistan.