KARACHI, Dec 31: For Pakistan, May 1998 and January 2003 are the two worlds apart: Then the country blew the bomb in response to India’s initiative and was cast out as a pariah by the international community. With the Central Bank’s kitty almost empty and country unable to finance more than a couple of week’s imports, Pakistan was on the brink of bankruptcy. The nagging worry on the minds of country’s economic managers then was not “if”, but “when” the country would default on foreign debt repayments.

Four years later. And it is a different scene altogether: The economy is growing; debts are down and the State Bank’s coffers are spilling over with $10 million in reserves. While interest rates are at their life-time lows, the stock markets have shot up to their life-time highs.

It is difficult to quantify how much of the change is attributable to the Musharraf government’s three-year economic structural programme and how much to the events post 9/11 2001. No one argues against the fact that the government has benefited from the benevolence of IFIs, that readily rescheduled debts and offered aids and grants for Pakistan’s unavoidable decision of taking up the position as front-line state in the war on terrorism. The masterful management of the changed monetary system by the central bank has helped it to cut down on domestic debt, stabilize the rupee and lower interest rates. The return of expatriates dollars following the ban on ‘hundi’ and fear of its safety abroad has induced a liquidity-driven rally at the stock markets.

On December 23, the World Bank released a favourable country update on Pakistan that identified all the achievements of the government, like improvement in governance of the public sector entities, improved creditworthiness of the country, declining import tariffs, stability of the exchange rate, declining interest rates, improving revenue collections, gradually recovering trade activity, increased foreign direct investment and improving public perception about the ongoing reforms. Arshad Arif, head of research at KASB says: “The World Bank is of the opinion that these achievements will help Pakistan in achieving its long term goals of improving sustainable income for its nationals, higher employment levels, sustained poverty reduction and building of better quality human resource capital in the long run”.

Iffat Zehra Mankani, economist at brokerage IP Securities says: “Political stability, improvement of the country’s status on international front, coupled with the progress towards economic sanctity are good enough reasons to cheer about”. She observes that even the agri-base of the country has been in favour this year and after a year of serious drought the improvement in water situation is expected to result in an overall growth in agricultural commodities, thereby providing a further boost to the economic growth.

The slash in discount rates and excess liquidity has attracted investors to the lure of stocks for higher yields. But as too much liquidity continues to chase too few stocks, prices would soar and the yield story would eventually come to an end. Other safe financial sector avenues would be tapped: government bonds; real estate, commodities and gold.

Arshad Arif at KASB says that the best solution to most of the country’s problems is the higher level of sustainable economic growth in future. “And this”, he says, “requires an attractive investment climate to attract both local as well as foreign direct investment”.

For the moment, most of the money seems to be flowing in financial assets, such as stocks, bonds, corporate debts, bank deposits and NSS. Barring some investment in BMR of textile plants, there appears to be little that investors have put in new industrial ventures. One indication of that is the low level of credit demand and absence of companies that may want to raise money from the stock market through new listings and IPOs. But economists such as Mohammed Sohail, at InvestCap are optimistic that once the yield and return from financial assets is exhausted, money would eventually find its way into the industrial sector. Some of it may already be trickling down. Sakib Sherani, economist at ABN AMRO says: “While (latest) data on large-scale manufacturing (LSM) is not available, proxies such as sales tax collection by CBR, non-oil imports, import of non- textile capital goods, cement dispatches, all indicate an ongoing turnaround in manufacturing/industry”.

If that be so, than perhaps beyond 2003, the country would be able to realize its ultimate goals of banishing poverty and reducing unemployment. But the first quarter 2003 report released by the State Bank of Pakistan on Monday, indicated somewhat ‘puzzling’ performance of the Large Scale Manufacturing (LSM) and inconsistent with the behaviour of other aligned indicators. The report noted improvement in corporate earnings growth, exports expansion, domestic sales tax collection, cement production and imports of machinery and raw materials. But in spite of lower lending rates, seasonal fall in banks’ credit was significantly higher. The State Bank, however hoped that with more water available in Kharif, agriculture sector would achieve growth target of 2.3 per cent for financial year 2003.