Online Extra: Making Pakistan Secure -- and Inviting (extended)

Prime Minister Shaukat Aziz talks about the fast-growing economy and the investment climate

Shaukat Aziz, Pakistan's Prime Minister, doesn't exactly fit the profile of a head of state. He graduated with an MBA from Karachi's Institute of Business Administration in 1969, then began a career with Citibank (C ) and spent the next three decades working his way up through the bank's operations across the globe.

In November, 1999, a month after General Pervez Musharraf seized power in a coup, Aziz was appointed Finance & Economic Affairs Minister by Musharraf. His task: resurrect an economy that hovered on the brink of default because of slack growth, depleted foreign-exchange reserves, and zero business confidence. The economy has turned around in the last five years, and Aziz is largely credited for that. Even the stock market crash last month hasn't hurt his reputation -- or Pakistan's economy overall.

In August, 2004, Musharraf chose Aziz to be Prime Minister, and now he faces challenges even greater than bringing Pakistan's economy back to life. Aziz must battle an insurgency in the county's western province of Baluchistan, strive to improve security and the country's image, and carefully follow Musharraf's lead in building peace with India -- all while keeping his fragile coalition in Parliament intact. BusinessWeek Special Correspondent Naween A. Mangi recently spoke with Aziz about his accomplishments and challenges. Edited excerpts of their conversation follow:

Q: How are talks with India progressing?


Pakistan clearly wants to have peaceful relations with all its neighbors, including India. If we can live in peace, we can benefit from each other's growth, markets, and talent.

Q: How rapidly can we expect concrete progress on core issues?


Of course, issues like Kashmir, which have caused tension in the region, need to be addressed. We have said that the solution of the Kashmir issue will require leadership, magnanimity, flexibility, and courage from all stakeholders in this issue: Pakistan, India, and the Kashmiri people. Eventually, the solution has to reflect the aspirations of the Kashmiri people since they are really in the center of it.

Q: When peace talks first began, the hope was that trade between India and Pakistan would benefit, but we haven't seen much progress on this front.


Pakistan is a very open country when it comes to trade. Our private sector tells me that exporting goods to India is tough even when we are competitive because of nontariff barriers [that mean a lot of red tape and permits]. We have set up a working group between the two private sectors and both governments. We're now trying to assess whether it's lack of marketing skills by our people or there are really nontariff barriers.

Q: The government plans to market Pakistan's softer side to the world. What specifically has been achieved in this regard?


It's actually the true -- not the softer -- side of Pakistan. We've identified 12 key countries that we will focus on and engage with the intelligentsia, various parts of civil society, the press, the decisionmakers. We have a good story to tell on the economy, on security, on the political process, on governance. There is also tourist heritage here: Buddhist heritage, trekking and mountaineering, Mughal history in Lahore.

Q: There is a view outside Pakistan that the country might fall apart, especially with insurgency problems in Baluchistan. How would you respond to that?


Baluchistan is a remote province with a population of a few million people. You have many sardars [tribal leaders]. A few of them have issues, but this can happen anywhere and has happened before. An issue like that does not impact the attractiveness of the country as a destination for visitors. These are remote areas where there are local problems -- and even these are being addressed.

Q: Sustainable economic growth and security are inextricably linked. Is Pakistan secure enough?


Security has improved substantially in Pakistan. Ask the hotels about the inflow of foreigners. Average hotel occupancy is 90%, and many new hotel projects are coming in. As for security, compared to many other cities in the world, Karachi is very safe. You can have the odd incident in any part of the world.

Q: You'd be hard-pressed to find a citizen of Karachi who would agree with that assessment.


The Overseas Investors Chamber of Commerce tells me that now they feel safe. It would be unfair to interpret that to say there is no crime. There is always crime in every big city.

Q: Pakistan is a latecomer to outsourcing, which you're targeting as a growth industry. How do you see things shaping up on that front?


A lot of this industry depends on high-speed data lines. We are deregulating the telecom sector because we cannot rely on the government to lower tariffs. Second, Pakistan does have a reasonable availability of English-speaking people who can provide skills in either processing or call centers.

Even Indian companies have approached us to open software houses and call centers in Pakistan so they must see an advantage in coming here. As the overall image of the country improves, this business will grow.

Q: You've said gross domestic product growth will be 7%-8% this year. Where is that growth coming from?


I see growth in housing and construction, hotels and tourism, IT and business processing, engineering, the agro-based industry, mining, and energy, including electricity, oil, and gas. Manufacturing will grow 15%; agriculture, 5%; and services will grow rapidly, too. I also see the emergence of a larger and larger middle class in Pakistan.

Three years ago, we produced 150,000 motorcycles in Pakistan. This year we will produce 500,000. We will produce over 100,000 cars, while three years ago we produced 30,000. Three years ago, we had 2.5 million cellular subscribers, and now we are at 9 million. So you're seeing rapid growth in a lot of the indicators for a larger middle class.

Q: But that growth has pushed the consumer price index to almost 8%, its highest level in seven years. Your original target was 5%.


We are taking steps to keep [inflation] within limits. Oil prices don't help. We have had a stable exchange rate and strong reserves that have helped us cushion the impact of oil prices of $50 a barrel. Oil affects everything.

Q: The rise of the stock market to record levels didn't seem to attract foreign investors, and the crash in March, 2005, hasn't done much for investor confidence.


I think the market went into a very accelerated bullish run, and frankly, I see a lot of potential in this market. Governance has improved, and we have lots of regulatory plans to further improve this. But corporate-profit levels are very high. So the fundamentals are strong.

Q: To what extent can homegrown investment make up for any shortfalls in foreign investment?


Domestic investment is doing very well. But no developing country can progress without tapping external sources. We're creating a better environment every day to attract top-notch investors. We're now getting more investors from the Far and Middle East in addition to the more traditional North American investors.

And it's a very open environment. You can invest in anything, you don't need government approvals, you can remit your profits out, and there are no equity restrictions. Our average [foreign investment] has been about $1 billion a year. Pakistan should be able to double this in three to five years.

Q: As growth has strengthened, regulation of key industries continues to be a problem. How will you fix these issues?


These are really reflections of a free-market system being introduced fully in what was historically a controlled environment. In this transition, you will have hitches, but let me say that we believe in free-market enterprise. And that doesn't mean abdication by the government. We have strong regulatory bodies coming into place.

The Monopoly Control Authority is being revised and expanded, which will ensure cartels are not formed because they are illegal. In most cases they will die away because demand has picked up and competition is much higher. In a high-growth situation, these things tend not to have the same impact as when there is low growth. We are committed to a free-market system, and we will stay on that course.

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