Islamabad has received considerable economic assistance for its role in the 'anti-terror' frontline, but the debt trap is deep and production is in the doldrums. Temporary external gains can only buy time for structural change.
In the last five months, Pakistan's economy has been portrayed in the international media as a star performer among the world's emerging economies. Propped up by debt relief and enhanced foreign aid flows in return for its role as a frontline state in America's war in Afghanistan, Islamabad's financial performance has shot to the forefront of South Asia's economic achievements since 11 September. Moody's Investors Service has upgraded Pakistan's credit rating and foreign investors have come back to Pakistani shores. Beneath the surface, however, the country's endemic economic troubles continue to run deep. Agricultural output is faltering on account of a persistent water crisis, industrial growth remains negligible, and domestic investors keep away, wary of political uncertainties and inconsistency in government policy.
The pluses
Still, it cannot be ignored that the economy has returned from the brink of bankruptcy and possible default on sovereign debt to a position of stability and liquidity. Indeed, in the last three months, the Karachi Stock Exchange benchmark index of 100 shares has climbed almost 30 percent to a two-year high on the back of both local and foreign demand. As cash has begun to flow into the real estate market, property prices have shot up. And foreign investors — both direct and portfolio — who have long shunned a country plagued with political strife, law and order problems and bureaucratic hurdles, have taken renewed interest in Pakistan. Foreign portfolio investors have poured USD 20 million into the Karachi stock market in the last two months, compared to a net outflow of foreign funds last year. And foreign direct investment between July and December 2001 amounted to USD 205 million, 39 percent higher than in the corresponding period the previous year.