WASHINGTON, Oct 7: The popular perception that the defence expenditure was bleeding the national economy is wrong, says Governor of State Bank of Pakistan, Dr Ishrat Husain.

The argument that an exceptionally high proportion of the national wealth was being spent on defence at the expense of development, is not borne out by an appraisal of hard evidence, he told a seminar here on Wednesday.

Addressing a gathering of US scholars at the School of Advanced International Studies in Washington, Mr Husain acknowledged that Pakistan was located in a tough neighbourhood and that's why it has to maintain a formidable defence. But defence expenditures in real terms have been on a downward path since 1990, he added.

Dr Husain said it was only during the 1980s when Pakistan was engaged in the Afghan war that defence expenditure jumped from 5.4 per cent of GDP in 1979-80 to seven per cent in 1987-88. More recently, after the war against terrorism in Afghanistan, defence expenditure, which was declining, began to inch up again.

He said defence expenditure, which used to account for about seven per cent of the GDP in the early 1990s, declined to 3.8 per cent in 2003-04. As a proposition of government revenues and total expenditure, the slide is even steeper, he said. Thus, the attributed trade-off between defence expenditure and development does not exist.

The State Bank of Pakistan governor said while Pakistan should spend more on social sectors, it's the ever-increasing debt-servicing burden acquired during the 1990s, rather than defence expenditure that prevented the government from doing so.

Dr Husain also rejected the theory that the military is gradually expanding its industrial empire through acquisitions and implementation of new projects by the Fauji Foundation, Army Welfare Trust, Shaheen Foundation and Bahria Foundation.

"Although the end-use of the profits generated by these enterprises were exclusively utilized on the welfare of the retired military personnel and their families, the rhetoric about their dominance in the industrial and financial sectors was just rhetoric, he said.

Mr Husain said the current political setup in the country was strong enough to weather unanticipated shocks and could provide stability to the national economy, argued the SBP governor.

He said democratic institutions worked as safety valves for absorbing unexpected shocks but unfortunately in Pakistan, the tension between democracy and good governance was not satisfactorily resolved. The SBP governor also defended the 1999 military take over.