Jully 1, 2005

Finally, Some Good News for Pakistan

Eric Ellis, Islamabad

GEN. PERVEZ MUSHARRAF IS A HAPPY man.

The Pakistani President finds himself where no previous leader of his country has been before: running a boom economy. In the past four quarters, according to Pakistan’s Finance Ministry, GDP growth has averaged 8.4%—“the second-biggest economic expansion in Asia after China,” Musharraf crows.

That was June 9, when Musharraf met with FORTUNE at his residence in the garrison city of Rawalpindi. On June 19 he had 2.6 billion more reasons to be pleased. That’s when 26% of state-owned Pakistan Telecommunication (PTCL) was sold to Dubai’s Etisalat Group for $2.6 billion. In a single deal, Pakistan’s biggest ever, the country’s foreign direct-investment inflows —a meager $1 billion last year, but nevertheless a record—nearly tripled. But the ten days between June 9 and the telecom deal also highlighted the challenges Musharraf faces. On June 10, while as many as nine international bids for PTCL were on the table, unions fearing layoffs walked off the job, and other Pakistanis demonstrated against the sale. With the deal imperiled, Musharraf sent army rangers to take over exchanges to keep communications open. Crisis negotiations with the unions followed, arms were twisted, and some union leaders arrested. By June 15, there was only a token military presence outside PTCL offices, and four days later Pakistan’s Privatization Commission announced Etisalat the winner.

The deal was a long time coming. The first bids were invited by Pakistan’s democratically elected Prime Minister Nawaz Sharif in September 1998. He was ousted by army chief Musharraf in a military coup the following year, making Pakistan a near-pariah state and derailing its reform agenda. Then came 9/11, when Pakistan was suddenly Washington’s new best friend in the war on terror being waged next door in Afghanistan. Musharraf went from sinner to saint, but it took him several years to kick-start the reform process. Last year he appointed the urbane former Citibank executive Shaukat Aziz as Prime Minister, and with Musharraf’s blessing, Aziz placed privatization front and center. The telecom deal done, Aziz now has another $10 billion to $20 billion worth of state assets to sell—everything from Pakistan International Airlines to Pakistan State Oil. Even companies from India have been invited to bid. Says J.P.Morgan’s Pakistan country head Reza Rahim, who was involved in the PTCL deal: “I believe it’s a defining moment for Pakistan.”

“A strong economy” and “Pakistan” are words that don’t usually go together. Extremism, yes—Afghanistan’s Taliban fundamentalists were created and nurtured by Pakistan. The country has also been plagued by sectarian violence and corruption. For much of the 1990s, Transparency International ranked Pakistan alongside Nigeria as the world’s most corrupt country. Pakistan has improved its rating in recent years, but, says Musharraf, “corruption is still bad, and it’s affecting Pakistan’s economy, its development, and its governance.”

Still, there’s a lot of upside for foreign investors. Norway’s Telenor and Sweden’s Millicom have captured about 20% of Pakistan’s mobile-phone market, which is growing about 15% a year. “There’s good money to be made here,” says Kevin O’Sullivan, chief financial officer of Millicom, which has invested about $200 million in Pakistan since 1990 and has annual revenues there of $100 million. Australian minerals giant BHP-Billiton cranked up an abandoned well with modern technology and now supplies 15% of Pakistan’s gas.

Pakistan is no Singapore model of economic competence, but it is less of a basket case than it was in the late 1990s, when GDP growth was about 2% and the country’s debt-to-GDP ratio was 101%. The ratio has since been cut to 59%, exports have doubled, and foreign direct investment is increasing. “All the macro indicators are positive,” Musharraf says. “Foreign exchange reserves are equal to one year of imports, our currency exchange rate is stable, and our credit rating has gone up.” That’s all true, says J.P. Morgan’s Rahim,but the billions in Western aid that have flowed into Pakistan since Sept. 11, 2001, and the billions more in debt relief have played no small part in the country’s economic recovery. “Pakistan has been a big winner from 9/11,” he says.

Security remains a prime concern for foreign investors,and Musharraf admits he still has a “huge task” on his hands in combating extremism. Parts of the country are no-go areas, where the government has little control and where Osama bin Laden is believed to be hiding. The tourism sector is almost nonexistent: Local hotel operator Pearl Continental, which owns the Marriott franchises, has an occupancy rate of about 30%, mostly local business traffic. Musharraf sees the huge Indian Ocean port under construction at Gwadar as the hub of a booming central Asian resources industry, but just to the north, in resource-rich Baluchistan province, tribal leaders with scant regard for federal control are threatening civil war.

Musharraf says his country’s elites “abdicated” their responsibility to Pakistan by letting many of their countrymen fall “under the spell” of Islamist extremists. He preaches “enlightened moderation” and the importance of education and employment in limiting the excesses of the mullahs. And he says the West has a vested interest in helping build up the country. “When foreign investors look at Pakistan,” the President says, “this is the strongest argument I make to them: If you invest here, creating jobs, that means poverty alleviation, which is to fight the root cause of extremism and terrorism.” —Eric Ellis