Barring some skeptics, most people would acknowledge good performance of Pakistan's economy during the current year. Not only are numbers looking good , there is little doubt that there has been a basic transformation of Pakistan's economy in the last two and half years after 9/11.

In this paper, I have discussed the impressive economic numbers that appear to be much better than expected, the fundamental reasons underlying the current achievements and what, I believe should be the way forward, if we have to sustain high economic growth over medium to long term period.

Let us first look at the key economic indicators: GDP growth is estimated by the IMF review mission at 5.8 per cent, well ahead of the target of 5.3 per cent.

The finance minister expects that it may even be around 6 per cent, which is not surprising considering the phenomenal growth in large scale manufacturing of around 15 per cent during the last 10 months, almost double of the previous year's growth as well as the budget target.

Also, another important indicator of the level of investment activity is the phenomenal increase in credit to the private sector of Rs254 billion during the last ten months period compared to the target of Rs85 billion for the whole year and previous year's figure of Rs106 billion.

This clearly reflects that owing to cheap money, the appetite for credit by the private sector has gone through the roof. Both, exports and imports have surged by 13 and 16 per cent, based on nine months figures, which are well ahead of the targets for the year.

And, despite a trade deficit of around $1.6 billion, the current account remains surplus of $1.8 billion thanks to sustained inflow of workers remittances of nearly $2.9 billion during the last nine months, which has helped in further augmenting the foreign exchange reserves to over $12.5 billion compared to $10.7 billion at the end of June 03 and in maintaining a stable exchange rate - rupee actually appreciated against dollar by 0.5 per cent.

In fact, given the growth of 15 per cent in the large scale manufacturing, the increase in overall foreign trade of over 14 per cent and record growth of private sector credit by nearly 150 per cent, the GDP growth should logically be higher than 6 per cent, unless we have some major failure in the agriculture sector.

Also, because of the positive balance of payments, one would expect that the increase in Gross National Product would be significantly higher than the growth rate of GDP.

And, as the rupee has slightly appreciated against the US dollar compared to its level on at the beginning of the year, it is likely that there is significant improvement in per capita income reflected in the Economic Survey that is published and released along with budget documents.

Owing to steep increase in imports, the volume of trade and large scale manufacturing, the tax collections are up by 13 per cent compared to the previous year and well ahead of the budget target.

Further, due to very low interest rates on the government bonds as well as reduction of interest rates on National Saving Schemes, the government's borrowing cost has significantly reduced.

Consequently, government is likely to exceed even the budget deficit target of 4 per cent of the GDP as the actual deficit should be lower than this level.

While there is no funding problem to meet the requirements of Public Sector Development Programme that was pitched at Rs160 billion in the budget 2003-04, I would guess that actual spending during the year would still lag behind by around 20 per cent due to flawed systems and processes of planning, approval and execution of the development projects and bad governance in the nation-building departments who execute infrastructure projects. Nevertheless, even an 80 per cent level of spending would be far better than the previous years' public sector spending.

Major failures: While the government would be (and it is) delighted with itself due to the above numbers, there are some major failures that need to be considered in evaluating the government's performance.

First, there is surprisingly low level of foreign direct investment, despite macro-economic stabilization; Second, the economic growth seem to be making rich richer and poor poorer without having any perceptible impact on reducing the unemployment or alleviating poverty.

Low foreign investment: One critical area where the performance is far from satisfactory is the foreign direct investment, which was paltry $587 million in the first nine months, compared to $664 million in the corresponding period.

Considering all around improvements in the economy, including an impressive build-up of forex reserves and stable rupee, this level of foreign direct investment should be a cause for concern.

It should rather be embarrassing for our economic managers, especially in a period when the global growth gained momentum, and private capital flows to the developing countries increased to $200 billion in the year 2003 - their highest level in the last five years.

Flowing from this, the message from international investing community is both loud and clear: i.e., they do not consider Pakistan to be a favourable destination for investment. Why is this so and how can this impression be changed are the questions that need to be addressed on priority basis.

Poverty and unemployment remain deep and are largely unaffected Although, no formal studies have been conducted that provide statistics about the impact and relationship of recent upsurge in the economic activities on the poverty and unemployment, apparently one does not see any noticeable reduction in these for apparent reasons.

Firstly, the key drivers of the current growth, large scale manufacturing and steep rise in consumer credit, while raising the production level have apparently little impact on poverty or unemployment. The reason is that in most of the industries, the increase in production has not resulted in increase in employment.

For instance, in the case of car manufacturing, while the number of cars and motorcycles produced has increased many fold in the last few years, this has not helped in increasing the level of employment, either by the car assemblers or by the vendors despite expansion in their capacities.

Similarly, in the case of textile sector, we have seen that most of the increase in production has been achieved through BMR by the existing manufacturers and no new projects have been set up in the last two years that would increase employment.

Secondly, as most of the population is still connected or closely related to agriculture sector, such population does not get any benefit with enhancing the level of production by the car assemblers or textile mills.

Further, the employment as well as public sector investment in education, health and other social sectors and infrastructure, which could have improved the quality of life of the poor through improvement in the human development index as well as creating employment, have remained low priority over the last several years of this government.

While the economists coming from the World Bank and other IFIs contend that an accelerated growth that is substantially faster than the population growth reduces poverty, this may not be true in all situations, especially in the kind of growth we are experiencing.

A very good example where the rapid economic growth has not pleased the large number of the poor and dispossessed is the dramatic results of current Indian elections, where the BJP, with its slogan of "India Shining" has been defeated despite an all time high GDP growth rate of over 8.5 per cent.

The lesson to be learned from the Indian experience could be that while a sustained high economic growth over medium to long-term will definitely reduce poverty, this may not occur in the initial period, especially when the growth is restricted to a limited few sectors of the economy.

Reasons underlying better growth: There are two major reasons which are discussed below, which have largely contributed in augmenting economic growth in Pakistan besides a myriad of other factors. These are: 1) cheaper money and its availability in abundance 2) significant increase in the world growth.

Cheaper money: The most important reason for enhanced economic activity is obviously the low interest rates phenomenon created by excess liquidity resulting from large capital flows into the country coupled with substantial reduction in debt service cost achieved through rescheduling and re-profiling of external debt.

Not only did this solve the chronic problem of foreign currency shortage but it also reduced significantly the government's fiscal gap, thereby substantially reducing its borrowing needs.

Thus, on the one hand there was substantial reduction in the government borrowing and on the other, due to sluggish demand from the private sector initially, the banks were flushed with excess funds with no idea what to do with them.

As a result, the interest rates tumbled to their lowest ever. Such steep reduction in the interest rates further reduced the government's borrowing cost, and therefore its fiscal deficit thereby further reducing government borrowing.

Consequently, we witnessed a hitherto unknown phenomenon of banks marketing for their loans, even at the lowest level of lending rates, to all kinds of customers including development of consumer finance market.

Of course, one must give the credit to the State Bank, which has implemented the monetary policy in a tactful manner that helped in reduction of interest rates to such low level and development of consumer credit; especially 150 per cent increase in private sector credit this year without significant escalation in inflation.

World growth: Another reason for increase in this year's growth in general and exports in particular, is the strong growth in the world output. As per the IMF's forecast, compared to a meagre 3 per cent growth in the world output in 2002, the growth in 2003 improved to 3.9% and it is projected to further improve to 4.6 per cent.