Pakistan Regained

Published in Foreign Affairs Magazine
By Scherzando Karasu

When in 2008 the Pakistan People’s Party (PPP) swept to power in the Pakistani general elections, it restored one of the world’s most populous nations to democracy and civilian rule, fulfilling the legacy of its late party leader, Benazir Bhutto, who was assassinated in the run-up to elections. Her husband, Asif Ali Zardari, went on to win the presidency with the promise of change for a country in distress. Faced with the insurgency, economic failure, and a prolonged regional conflict, President Zardari has made Bhutto’s politics of reconciliation his own, thus steering Pakistan out of an enveloping crisis.

“The democratic government on assuming power inherited a huge portfolio of challenges that confronted the nation,” President Zardari explains. “Pakistan was facing both a political economic and a social crisis and both had to be addressed.”Pakistan is paying a heavy price for its border with Afghanistan. Domestic stability has been shaken by repeated terrorist attacks and a militant insurgency.

Thousands have lost their lives and up to 2.5 million internally displaced persons have driven the direct costs of this conflict to an estimated US$ 45 billion. And the poor state of the country’s economy and infrastructure only deepens Pakistan’s predicament. President Zardari’s government has responded with wide-reaching reform and decisive military action that have stabilized the country and brought new legitimacy to the state.

International efforts in counterterrorism were at last given full support. “We have chosen to fight terror and to stand firm in this struggle alongside our allies,” states Zardari. A large-scale military operation directed against insurgents, Taliban, and al-Qaeda operatives have been a major success, restoring government control to the Swat and Malakand valleys. 

Military attention has now shifted to Waziristan, and security along the Pakistani- Afghan border has been tightened. Crucially, President Zardari’s actionshave also won the support of his people. The judiciary has been restored to independence and a more inclusive style of policy-making, involving the consultation of diverse political interest groups including opposition parties, is gradually restoring Pakistan’s democratic traditions and institutions.

This, for Zardari, is the central challenge of his administration, “to make democracy sustainable, indeed irreversible,” a point that he made during a recent address at the International Institute of Strategic Studies in London. Economically the country has shown signs of improvement. Inflation has been reduced by half and Pakistani stock exchanges have recovered. But the country is still grappling with structural problems, notably a severe energy crisis, a water shortage, and unemployment, challenges which are now being addressed.

For Zardari, there is no rest. “Since taking office, my government has achieved tangible results during our first year in the office,” he says. “But this is just a start; we have a long way to go.”

STRENGTH LIES IN NUMBERS In search of greater regional integration

The success of regional objectives for peace, security, and the deterrence of militant extremism largely depends on Pakistan’s role, making the immediate and lasting stabilization of the country imperative. Pakistan has been a trusted U.S. ally for six decades, supporting efforts to contain Soviet communism in Afghanistan, the shadows of which are now haunting Pakistan.

“We are left to deal with the lingering after-effects of the Cold War which have plunged us into this war against terrorism and led us to pay such a heavy price,” explains Zardari. The on-going war in Afghanistan and at home,

“I hope that I will be the catalyst that delivers a permanentpeace to India and Pakistan.” Asif Ali Zardari President of Pakistan

exacerbated by a precarious economic situation, has exhausted Pakistan, limiting its potential as a moderating power in the region and putting internal cohesion at risk. Foreign Minister Shah Mehmood Qureshi is thus concerned about creating an environment that can prevent further radicalization and instability. “When eventually things are back to normal when militancy is entirely flushed out, we will need resources for reconstruction and we will need the international community’s help. In the long-term, we want to ensure that people are not drawn back to militancy,” he explains.

International assistance has been forthcoming. A group of more than twenty states and international organizations, the so-called Friends of Democratic Pakistan, is lending important political support to Pakistan’s democratic government, while an international donor conference in Tokyo resulted in pledges totalling more than US$ 5 billion in aid and loans. The United States, aware of its privileged relationship with Pakistan, has added to an earlier aid package worth US$ 1.9 billion by approving the so-called Kerry-Lugar Bill, tripling non-military aid to Pakistan to US$ 1.5 billion annually, for a total of five years.

The package, which Foreign Minister Qureshi called “an expression of commitment to Pakistan and the people of Pakistan,” includes a range of measures for economic and social development, including the construction of schools, roads and clinics. Still, total aid payments fall far short of the estimated US$ 38 billion the United States alone has made available to Afghanistan in the past nine years, a country with only a sixth of Pakistan’s population.

Under the circumstances, Zardari’s government urges a rapid dispensation of pledges made, to cover immediate needs and support Pakistan’s economy. “Given the severity of the internal security challenge the country is facing, it is critical that the economy is provided with a strong stimulus as quickly as possible so that the maximum number of jobs are created in the shortest time,” says Zardari. “If international aid flows are delayed, the country will be forced to cut development spending as well as the provision of critical social services. This could be a big setback for the global war on terror.”

Pakistan furthermore prefers a “trade over aid” approach by way of better access to U.S. and EU markets for Pakistani producers, which could bring long-term development opportunities. Similarly, Zardari is committed to removing political barriers to intra-regional trade, including with India. The threat of terrorism has united the two countries against a common enemy and opened the door to dialogue and peace.

“Improved dialogue between Pakistan and India is the only way forward,” says Zardari. Explaining his motivation he adds that “improved relations with India are an opportunity for Pakistan.” If achieved, Pakistan and India stand to gain from the immense potential of creating a regional economic area as well as the dividends of a more peaceful relationship.

A stable and strengthened Pakistan could transform the entire region. “Pakistan is a difficult country to govern and there are always difficult choices to be made. But we will rise to difficult challenges,” Zardari says and counts on the world’s support. “One of the ways to help Pakistan is to stabilize the economy. Once the economy is stabilized, the standard of living raised and poverty addressed, we will be able to change the mindset that lures people to extremism and terrorism.” Shah Mehmood Qureshi, Foreign Minister

ECONOMIC POWER IN THE MAKINGPakistan's resource rich market of 176 million

In 2005 the global investment bank Goldman Sachs first developed the notion of the “Next Eleven” (N-11) – the next group of large-population countries that had the potential of growing to rival the G7 in economic power. The concept looked beyond the successful BRIC countries (Brazil, Russia, India, and China) and included Pakistan, which has every intention of following this trajectory. Pakistan is already South Asia’s second- biggest economy and, in its 60-year history, has never experienced negative growth, averaging more than five percent annually.

It has a rich natural resource base, domestic industry, and famously fertile lands that have made Pakistan one of the world’s biggest agricultural producers. With the investment, agricultural yields could be increased five-fold in a matter of years. Pakistan’s large  Population of 176 million is upwardly mobile and has a middle-income class of 40 million, larger than most European countries. Furthermore, its unparalleled geostrategic position makes it a natural hub for trade and investment. Pakistan connects the expansion markets of China and India with Central Asia, the Middle East, and Africa.

“Once we entrench democracy and improve governance, with our natural resources, the quality of human resources, and unbeatable geo-strategic location Pakistan will be unstoppable in 10 to 15 years time.” Shaukat Tarin, Minister of Finance

Yet, Pakistan is hampered by a heritage of structural problems. “Pakistan’s economy has been involved in a series of boom and bust cycles for the last 60 years,” explains Shaukat Tarin, Minister of Finance. “We have been unable to restructure our economy, and due to poor decisions our economy has suffered.” Growth and competitiveness are being undermined by an informal economy representing as much as 100 percent of GDP and by shortcomings in infrastructure in the water, irrigation, power, and transport sectors, as well as in public health, education, and labormarket flexibility.

New government plans want to put Pakistan on a more sustainable footing. “Our first priority is to stabilize the economy, but in the long run we want to create an enabling environment that is conducive to investment and growth,” says Tarin. While inflation and fiscal deficit have been brought under control, long-term competitiveness is to be guaranteed by a wide ranging nine-point agenda for economic and social reform. The program is now under way and accounts for related factors of growth. It foresees a range of social measures as well as support to Pakistani manufacturing and agriculture, improvements in infrastructure and foreign direct investment (FDI).

“If there were peace between Pakistan and India and the outstanding issues were resolved, Pakistan would take off like a rocket.” Hillary Clinton U.S. Secretary of State

This includes the strengthening of capital markets. Pakistan already boasts one of the largest exchanges in the region, the Karachi Stock Exchange (KSE). Named “Best performing world stock market” in 2002, it has maintained this reputation since. “Average market return has been over 24 percent on the KSE-100 index in any tenyear period going back to 1958,” explains Adnan Afridi, Managing Director of KSE. He runs a modern integrated organization and importantly believes in the opportunities of a liberal market.

“We are one of the few emerging markets so liberal and open to FDI,” says Afridi, while adding that still “at the best of times we trade at roughly 25 percent discount. Today we are standing at a 50 percent discount.” FDI inflows mostly go to Pakistan’s major oil & gas, banking, and telecommunications sectors, the latter of which has experienced unprecedented growth in mobile phone subscriptions, ahead of any other market globally, raising the total number of subscribers to 100 million at present.

But opportunities exist also in sectors such as real estate, construction and agriculture, and Minister Tarin believes there is substantial room for improvement. “If you consider the US$ 3-3.5 billion in FDI coming to Pakistan and compare it to the size of the market of 176 million people, in my mind we can do much better,” he says, emphasizing that “assets are undervalued and there are great investment opportunities for FDI with far above average returns.” Tarin concludes that if Pakistan persists with his reform agenda “we will restore not only growth but also faith in our economic development,” nudging Pakistan a step closer to economic leadership.

The Gateway to Asia

"Karachi’s ports are the gateway to Asia, servicing all of the Afghan transit trade routes to the rich Central Asian States. The Ministry of Ports and Shipping is facilitating such transit through generous “free time” for cargo and dedicated storage areas.”  Babar Khan Ghauri Minister for Ports and Shipping

Karachi, long known as the “Gateway to Asia” has from time immemorial been considered a safe harbour. President Asif Ali Zardari is unequivocal, “Pakistan is poised to serve as the regional hub of economic activity due to its strategic location.”

With billions spent on port infrastructure and with an abundance of development
projects underway, including infrastructure facilities, and cargo and ship handling projects, Pakistani Ports namely Karachi, neighbouring Bin Qasim and the new deep water port at Gwadar – are set to become the regional entrepôt; with the Chinese market of 1.2 billion on the doorstep and more than one billion Central Asians to the north.

Pakistan can easily service the landlocked Central Asian republics and capture trade to the Middle East and Africa. Given this geo-strategic advantage the proactive Minister for Ports and Shipping, BabarKhan Ghauri, is setting the tempo, declaring “the Government is committed to accelerating the economy by upgrading the nation’s ports.” This has ushered an aggressive policy framework and the creation of a pro-business climate.

The Government has played a supportive role whilst unleashing the private sector. It has set out to reduce red-tape establishing the National Trade Corridor Improvement Program (NTCIP), ensuring each port facility complements rather than duplicates whilst assiduously courting foreign investment. Emblematic of this hyper-activity and can-do approach was the Implementation Agreement finalizing construction of a floating LNG terminal at Port Qasim within a brisk 24-hour time-frame.

The Karachi Port Trust (which handles some 60 percent of Pakistan’s trade) has
an ambitious program of infrastructure development, encompassing a host of showcase
projects underway constructed under either a Public Private Partnership (PPP) or a Build Operate Transfer (BOT) funding model. Several key projects have attracted hundreds of millions of dollars in FDI.

Foremost amongst these are the dredging of the world’s first 18-meter container Port,
set for completion by 2013, the construction of a 1947-feet high Port Tower, Asia’s largest Food Street, a leisure complex along a scenic coastal stretch, and eye-catching plans to connect the deep water container terminal with the cargo village via a cross harbor bridge spanning 300 meters, and a berth reconstruction plan giving the port the ability to accommodate the most modern of vessels.

The state-owned Pakistan National Shipping Corporation (PNSC) is profitable despite a difficult global environment and has an extensive fleet modernization program. The company has recently tendered for several Aframax tankers and dry-cargo ships. As the hub of a logistics chain that stretches across the country, Port Qasim Authority is Pakistan’s largest container handling and bulk cargo port and a crucial supply network interface.

The port currently handles around 40 percent of the country’s seaborne trade and will expand its operational capability further by increasing its all-weather draught to 14 meters, enabling larger vessels to berth. Port Qasim has attracted large foreign direct investment to the amount of US$ 600 million for the development of a second container terminal, a grain and fertilizer terminal, and a coal and cement terminal, construction of which is under way.

The completion of these projects, combined with Port Qasim’s thriving industrial zone, will serve to improve the geo-economic profile of an entire region. Another estimated 400 industrial and commercial projects are in development that will contribute further to industrialization and employment creation. “We can expect to see an estimated US$ 2.6 billion in upcoming projects, which are in the pipeline,” says Minister Ghauri.


Amidst a storm in the global financial sector and a domestic security crisis, Pakistan’s banks have proven a rare exception of stability and growth. With little exposure to the fall-out that severely affected banks in developed economies, Pakistani banks have had the opportunity to continue strengthening their domestic and regional market penetration.

Full-scale privatization of the banking sector ten years ago has brought much development and improvement at the institutional level, a change nowhere more apparent than in Pakistan’s largest commercial bank, the National Bank of Pakistan (NBP). Prevailing in a difficult environment, NBP has shed its past as a predominantly public lender and instead transformed itself into a modern commercial bank.

Governed by an independent board, with no interference from its largest shareholder, the government, NBP is now firmly established as one of the region’s leading financial institutions. Chairman and President, Syed Ali Raza, is widely credited with NBP’s growing
success. A former executive of the Bank of America, he joined the bank in 2000. Following wide-reaching structural changes and the introduction of new banking products, he has managed to recast NBP as a highly competitive market player.

NBP profit increased from US$ 12 million in 2000 to US$ 335.5 million in 2007, a remarkable performance which has earned the bank much international recognition and a series of prestigious awards, including the recent “Best Foreign Exchange Bank 2008” by the financial journal “Global Finance.”

Today, NBP is a powerful driver for the development of Pakistan’s private sector, even if current market conditions are far from optimal. A domestic energy crisis is hindering economic growth and the fight against terrorism has burdened Pakistani society with enormous costs. “The last few years have been very difficult,” says Raza.

But he remains resolutely optimistic about the future. “I think that our growth speaks volumes about the underlying potential of the country,” he explains. “This country has sheer size, talent, natural resources, and an unparalleled strategic location.”

NBP is building on these opportunities and on the growth of Pakistan’s large single market, an increasing export base, and Pakistan’s strategic location vis-à-vis the booming markets of China and India, Central Asia, and the Middle East. As Raza points out, “the reason why financial institutions are successful lies in their ability to find niches where there is huge demand but where banks have not yet created products to meet that demand.” Accordingly, NBP has in recent years established a presence in the wider region matched by no other bank. “NBP will be the only institution in the region to cover Central Asia, South Asia and the Middle East,” says Ali Raza. “I think this is going to give us a huge competitive advantage.”

Beyond its international roll-out – NBP has an established presence in now more than 20 countries – NBP is continuously expanding its service offer, particularly in growth segments such as retail lending.

“The retail business, from nearly zero percent of the business four to five years ago, now constitutes about 25 percent,” highlights Raza. Mortgage lending, investment banking, and an advisory business for mergers & acquisitions are other segments NBP is targeting for future development. Ali Raza is determined to take NBP’s business to the next level. 

“If we can develop our capital markets to ensure we create the right leverage to propel our economy to the next level, this market will really take off.

Pakistan’s Brave New Energy Policy

In October 2009 Pakistan had the largest ever oil and gas offloading in its history granting exploration licenses (during an intensely competitive bidding round) for 41 exploration blocks.

Raising $175 million and with a projected minimum expenditure of $500 million within three years. With an influx of foreign cash, technical know-how and a progressive new energy policy in place, Pakistan’s oil and gas sector looks poised for a renaissance.

This event coupled with the incentives offered earlier in the year - with the introduction of the 2009 petroleum policy - has galvanized the intentions of a large number of international players in a county with significant hydrocarbon potential. Successful bidders included behemoths like; British Petroleum and ENI of Italy amongst many others clamouring to get a piece of the action, “This shows the confidence of investors in our policies and in the country”, said Syed Naveed Qamar Minister of Petroleum.

The 2009 petroleum policy sets the framework for a concerted attempt by the Government at investment promotion, the introduction of liberal incentives, a fair pricing mechanism and the creation of a highly competitive regulatory framework. With crude oil production only meeting 18% of the countries demand this is of vital national interest.

Working in partnership with foreign companies is the key to unlocking the countries hydrocarbon reserves. “They will benefit the country from their technical expertise and modern technology,” said Minister Naveed. With a more level-playing field in place for all market participants, both foreign and domestic, the government has set out to create a far more conducive investment environment.

Whilst many of Pakistan’s oil and gas companies still have significant state holdings, the spirit of international cooperation is deeply entrenched, with a long history and manifold cross-border investments and joint ventures, Pakistan’s oil and gas companies have many foreign partnerships both within the country as well as regionally.  

Pakistan Petroleum Limited (PPL), the largest and oldest of the E&P groups and pioneer of natural gas is no stranger alliances and they have an ambitious vision to expand their international exploration. Thanks to a joint venture with Austria’s OMV, the company has a block in Yemen and is pursuing an exploration program in Africa in a bid to globalize operations.  Deputy Managing Director Asim Murtaza Khan insists “PPL is a strong company, we are highly liquid and our financial performance is solid and we are confident that we will be looking forward to large discoveries.”  

Meanwhile, the Oil and Gas Development Company Ltd (OGDCL),  the flagship of Pakistan’s E&P sector, and the market leader in reserves and production, warrants attention. Holding 46% of the countries recoverable oil reserves and around 36% of gas reserves, OGDCL is listed both in Pakistan and on the London Stock Exchange. 2009 was a key year with the signing of a multi-billion dollar gas pipeline accord with Iran.

On the distribution side, Pakistan State Oil (PSO) is Pakistan’s largest oil marketing company with the largest number of retail outlets – and a major supplier to aviation, railways, ports and shipping, power projects, the armed forces and the agricultural sector. Mr. Irfan K. Qureshi, MD, - formerly of Chevron Texaco- speaks of his wish to modernize PSO and introduce best-practice from the private sector. He underlines the fact that “PSO is a goldmine, a great company, and a cash-cow for the government”

Against this backdrop, Sui Northern Gas Pipelines Limited (SNGPL) the country’s largest integrated gas company -with more than 3m domestic consumers - is now actively seeking diversification of its business by offering services for clients internationally, and commercializing its expertise.Emblematic of both the rush to modernize and the growing internationalization of the sector , an eye watering US$6bn of FDI is currently being channelled into a flagship deep conversion project of the PAK Arab Refinery Ltd (Parco), a key player in Pakistan’s oil supply and logistics, and itself born of a successful partnership between the GOP and the Abu Dhabi Petroleum Investment Company (IPIC). This project represents the largest single FDI ever made in Pakistan.  

Prime Minister Sayed Yousuf Gilani has repeatedly underscored the need for a better understanding of the energy situation in Pakistan it seems as if the global oil and gas community has begun to answer that call and is now set on wrestling a fortune form the countries frontier.  

Pakistan Powers Up - Opportunity in Crisis

Pakistan faces a crippling energy crisis with a capacity to produce just 80% of the electricity it needs. With demand outstripping supply the country faces power shortages of 2500-3000 MW and it is expected that this demand-supply gap will increase by approximately 5500 MW in 2010 coupled with a consistent growth in demand of 6-7% (per annum) with the potential to cause debilitating blackouts and suffocating industry in the cash-strapped country.

With just 60- 70% of Pakistan’s 162 million people having access to electricity, the country is desperate to revamp its network and achieving sufficient power supply for sustainable economic growth. 

The government has made it a priority to enhance the countries power generation capability. Establishing the National Electrical Power Generation Regulatory Authority (NEPRA) to enforce transparent regulations and considerable progress has been made towards the development and overall market design of the power sector.

Electricity in Pakistan is generated, transmitted and retail supplied by two public sector utilities: The Water and Power Development Authority (WAPDA) and the Karachi Electrical Supply Corporation (KESC).  And there are around 16 independent power producers  (IPP’S) operating in the country including major multinationals like; Siemens, General Electric, AES and International Power.

There are also ambitious plans to attract foreign investment in thermal, coal-run and wind-power generation. With 5 Mega-Hydropower projects, at a cost of US$20.3bn under-construction, these are due for completion by 2016 and a further 14 new projects under-study.

During the recent high-level US delegation to Pakistan, US International Energy Affairs Coordinator David Goldwyn reiterated their commitment to helping Pakistan overcome its inadequate energy supply saying that, “Pakistan has very solid plans to address its energy requirements”. Unveiling a US$125 million program and giving assurances that US private sector firms will invest in energy projects. Notable amongst these has been the Matrix Group who have signed a potential $1bn MOU to build two power generation plants at Port Qasim and Karachi Port which would add 50MW of power to the national grid. 

Fully 40% of the country’s generation capacity is now in private hands with another 2,200 MW IPP’S under construction and there is now a comprehensive strategy to ensure energy security.  With the setting out the Policy for Power Generation Projects that includes as its centre-piece an investor-friendly set of fiscal and financial incentives intended to create a lower risk profile for would-be investors. With the government repeatedly stressing its commitment to increase private sector participation and substantiated by major divestments.

Indeed for investors looking to invest in energy, Pakistan is now among the World’s greatest opportunities. With a range incentives measures including a “one-window” facility for processing private power generation projects above 50MW.  Government risk coverage for exchange rate variations, protection against change, taxes and “political risks”. As well as guarantees for the performance obligations of its entities such as the power purchasers and province and the introduction of predictable long-term tariff reductions intended to lower market risks.

The Government has also stressed that there is vast hydropower potential the availability of high-skilled labour and abundant indigenous coal resources. The Thar Lignite reserves in the province of Sindh alone is estimated at around 175 billion tonnes. Reforming the electricity supply network in Pakistan will, however, remain formidably challenging. 


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