Pakistan's Economy To Expand As Much As 8%, Aziz Says

Bloomberg

May 29 (Bloomberg) -- Pakistan's economy will probably grow at an annual pace of as much as 8 percent over the next five years, matching neighboring India, on record foreign investment and rising consumer spending, Prime Minister Shaukat Aziz said.

``We are creating gradually a middle class which is driving consumption,'' Aziz, 57, a former global head of private banking and executive vice president at Citibank NA, said in a May 22 interview in the capital Islamabad. ``It's a very viable economy and it is growing.''

The $118 billion economy expanded 8.4 percent in the year ended June 30, 2005, the fastest in two decades, as households increased spending and government support for the U.S.-led war on terrorism helped draw investment from overseas. Aziz, who will complete his first term as prime minister in October 2007, said growth depends on selling state assets, improving regulation and opening up the nation's markets.

``Growing at 7 to 8 percent on a sustainable basis is beyond Pakistan's capacity without real institutional strengthening,'' said Sakib Sherani, chief economist at ABN Amro Bank in Islamabad. ``The government needs to be more realistic.''

The key Karachi Stock Exchange 100 index, which has gained 7.2 percent this year and reached a record on April 17, tumbled 3.9 percent to 10,247.59, a 10-week low, at close. The drop came on speculation of selling by overseas funds, said Faisal Potrik, who helps manage the equivalent of $2.5 million as chief executive officer at First Capital Mutual Fund in Karachi.

Foreign Exchange

Aziz was appointed finance minister by President Pervez Musharraf in 1999, after working three decades in Citibank offices including New York, Singapore, Jordan, Greece and Malaysia, to help turn around an economy that had barely one month of foreign exchange reserves and was in danger of defaulting on foreign debt repayments. He's also had to win back overseas investors, who had avoided the nation after the Sept. 11 attacks made Pakistan's border with Afghanistan a focus of the U.S. fight against the al-Qaeda terrorist group.

Confidence in Pakistan will be tested next month as the government prepares to sell a 51 percent stake in Pakistan State Oil Co., the biggest supplier of fuel, by June 30. It will also sell management rights in National Investment Trust Ltd., the largest mutual fund company, next month, the asset-sale agency said on May 25. In June, it sold a 26 percent stake in Pakistan Telecommunication Co., the biggest phone company, to Emirates Telecommunications Corp. for $2.59 billion.

``There are no sweetheart deals in Pakistan anymore,'' Aziz said. ``Today, Pakistan offers a level-playing field to all investors. We are one of the few countries where no sectors are taboo to invest, whether local or foreign.''

China, Middle East

Pakistan estimates it will get $3 billion of overseas investment annually to sustain the economic growth rate, Aziz said. Companies from China, Singapore and the Middle East are investing in Pakistan, while Japanese companies such as Toyota Motor Corp. make cars in the country, he added.

Temasek Holdings Pte, Singapore's state-owned investment company, this year bought a 72.6 percent stake in Pakistan's NIB Bank Ltd. and it also plans to start an asset-management company in the South Asian country.

``Growth is based on strong macroeconomic fundamentals and a structural reform agenda which has been broad-based and deep,'' said Aziz. ``Reforms are based on a philosophy which is deregulation, liberalization, privatization, transparency and good governance.''

Pakistan's economy is set to grow between 6 percent and 8 percent this year, which will help the nation's annual per- capita income surpass the $800 mark, said Aziz, who became prime minister in August 2004. He said his administration has reduced poverty by about 8 to 10 percentage points since 2001.

`Very Optimistic'

``I am very optimistic about Pakistan's economic potential and prospects,'' central bank Governor Shamshad Akhtar said in a May 24 interview in the southern port city of Karachi. ``With investment coming back, I am quite optimistic we will have growth kicking up at a faster pace than what we had expected.''

The State Bank of Pakistan is forecasting growth this fiscal year of between 6.2 percent and 6.7 percent.

Last year's 8.4 percent economic growth rate compares with an average 4 percent pace in the decade starting 1990, when, according to the government, Pakistan's poverty rate almost doubled to 33 percent.

India's economy is expected to grow at an 8 percent pace this year, matching the rate of expansion of the previous three years, Finance Minister Palaniappan Chidambaram said May 23. The $775 billion economy expanded 7.6 percent in the three months to Dec. 31 from a year earlier.

Credit Rating

Pakistan's long-term foreign currency rating was raised in November 2004 by a level to B+, or the fourth non-investment grade, by Standard's & Poor's after falling to within two levels of default status in October 1998. This followed nuclear weapons tests that led to sanctions, including a ban on aid and loans from countries in Europe and the U.S.

The resumption of aid and loans after the country supported the U.S.-led war on terrorism in 2001 has helped Pakistan's benchmark stock exchange index surge 10-fold.

Improved ties with India will also help reduce poverty in the region, Aziz said. A peace treaty offered by India's Prime Minister Manmohan Singh this year ``must be driven by dispute resolution,'' he said.

``We remain cautiously optimistic'' about peace talks with India, Aziz said. ``We have tied trade and business relations with India with the resolution of the Kashmir dispute. So progress on Kashmir will determine the progress on trade and investment ties with India.''

Peace Process

Aziz was also tasked with taking forward the peace process with India started by his predecessor Zafarullah Khan Jamali in 2003. The South Asian nuclear-armed neighbors have been improving ties since then, including the resumption of sporting and transportation links.

The two countries came close to fighting a fourth war in 2002. Two of the previous three wars between Pakistan and India were fought over control of Kashmir, which is divided between the two nations and claimed by both in full.

Pakistan and the U.S. have a ``common interest'' in fighting terrorism, Aziz said. ``Pakistan has made good progress to reduce the scourge'' of terrorism, he added.

Pakistan became a key U.S. ally after providing intelligence and logistics support to U.S. forces in their attacks on Afghanistan in 2001. In 2004, the U.S. announced Pakistan as a key ally outside the North Atlantic Treaty Organization.

U.S. Ally

Since 2003, Pakistan's security forces have been hunting in the country's tribal regions for Taliban and al-Qaeda fugitives who fled Afghanistan after the attacks by U.S. forces. Afghanistan's President Hamid Karzai said Pakistan's religious schools were inciting people to fight a holy war in his country, Agence France-Presse reported May 19.

Pakistan's security situation, such as the insurgency in southwestern Baluchistan province and the hunt for terrorists in the northwestern tribal region, may hurt foreign investment, said Ather Medina at Atlas Asset Management Ltd. in Karachi.

``The perception problem we have is very severe,'' said Medina, who helps manage the equivalent of $80 million as chief operating officer at the company. ``Foreign investors get influenced by reports of insurgency and bomb blasts. Such reports coming out of Pakistan can keep them away.''

To contact the reporter on this story:
Khalid Qayum in Islamabad, Pakistan at
kqayum@bloomberg.net.