With US help, money flows in Pakistan

With liberal economic policies and the US as its patron, Pakistan is seeing an investment surge. But rising inflation is taking its toll on the country's poorest.

By , Staff writer of The Christian Science Monitor , Correspondent of The Christian Science Monitor

To Faiz Paracha, manager of corporate sales at Suzuki Motors, the past few years have been astounding.

The national numbers are plain enough: Two consecutive years of 8 percent growth and sales of cars and electronics that are increasing by 50 percent a year.

But here at Suzuki, he has seen the change with his own eyes. His sales have increased sevenfold since 2002: to an estimated 2,800 this year from 400 then.

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In many respects, it is hardly a surprise. Throughout Pakistan's history, its economic booms have coincided with periods of increased American attention – with Pakistan receiving huge infusions of cash for helping the United States fight first the Soviets and now terrorism.

And since Sept. 11, America has come calling. But there has been a twist. Now, other forces are adding to the momentum, and many of them – from investments by Pakistanis abroad to cheap consumer loans at home – might be creating a mirage rather than a miracle, analysts say. A glut of foreign cash pouring into Pakistan is fueling a record trade deficit that many analysts say is unsustainable in the long term.

"We're like a car that is fine when you drive it 50 kph, but when you drive it 90 kph, it heats up," says Kaiser Bengali, an independent economic analyst in Karachi. "Clearly, there is something wrong with the wiring."

For much of the past 60 years, American money has hot-wired the Pakistani economy, says Shahid Javed Burki, an economist and former vice president of the World Bank. In the 1960s, when Pakistan gave the US permission to use it as a base for anti-Soviet spy planes, the economy grew at 6.5 percent annually. During the previous decade, it averaged 2.7 percent growth.

In the 1980s, when Pakistan was America's front-line against the Soviet invasion of Afghanistan, the economy flourished, growing at 6.5 percent annually – in contrast to about 4 percent in preceding years.

This same has been true this time. The government is receiving some $2.5 billion a year from other countries – mostly the US – and, more important, it had much of its debt forgiven in return for its pledge to fight terrorism after Sept. 11.

Before 2001, one-third of the budget went toward paying debts and economic growth was at 2 percent. Because of the debt burden, "throughout the 1990s, Pakistan did not have the fiscal space to carry out any developmental work," says Dr. Bengali.

With this space, President Pervez Musharraf has overseen an array of free-market economic reforms. And for the first time, Pakistan's economic growth cycle has spread well beyond America's billions.

Since 2001, international investors have piled on in anticipation of the world's sixth most populous country finally living up to its economic promise. Investment broker Merrill Lynch has called Pakistan the best market in Asia, and Pakistani expatriates and Arab investors are pumping in some $10 billion each year. Foreign direct investment hit $7 billion during the past 12 months, doubling last year's record. Last Friday, the Karachi stock market finished at 13,985. In 2001, it sat at 1,770 points.

The problem, analysts say, is that Pakistan's economic wiring hasn't changed much in 60 years. With 65 percent of the population dependent on agriculture, it remains a farm economy with very little industry. Yet these days, it is being driven like a Ferrari.

Pakistan has spent its way to prosperity with foreign cash, but has failed to build domestic capacity to maintain such growth on its own. Instead of investing in agriculture or industry in order to build the country, investors are going for higher-yield returns. This has infused banks, real estate developers, and communications companies with billions of dollars.

Flush with this cash, banks are offering historically low consumer loans, which is why Mr. Paracha has been selling so many cars in recent years. About 80 to 85 percent of the cars are leased or financed by banks, he says. Elsewhere, there are plans to build 40 buildings at least 30 stories tall in Lahore alone, says Dr. Burki.

Little of this growth, however, has created jobs or businesses. In 2004 and 2005, for example, only agriculture had significant job growth – and that was due to seasonal harvests. Every other sector had 0.1 percent or negative growth, according to a report by the Social Policy and Development Centre in Karachi.

Such spending "will tide over the country for two to three years," says Burki. "But it is creating long-term problems."

High personal savings rates and a strong agriculture sector would prevent an economic collapse. But the pride of the Pakistan economy – a services sector that accounts for more than half of the country's growth – "is not sustainable," says Qazi Masood Ahmed of the Institute of Business Administration in Karachi.

For example, since Pakistan is now consuming more goods – but not making more itself – the trade deficit is forecast to hit an all-time high of $9 billion this year. The cost of this conflated consumerism has hit average Pakistanis the hardest, with inflation routinely topping 7 percent.

On the streets of Pakistan's largest cities, it is inflation more than judicial crises or the threat of terrorism that angers cobblers and shopkeepers. Muhammad Dullah, a cobbler, doesn't know anything about the current protests to insure an independent judiciary. Here, beside a Karachi thoroughfare teeming with pushcarts and cars, he just knows life is getting harder. Sitting on the sidewalk amid an avalanche of sandals and loafers, he says, "I've experienced a decline in my income and a hike in the prices of essential commodities."

Mr. Sappenfield is the New Delhi correspondent for the Monitor and USA Today.

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