Aditi Phadnis: The man Pakistan banks on

PLAIN POLITICS

Shaukat Aziz

From nearly defaulting, it's back in the reckoning, thanks to Shaukat Aziz and 9/11.

This is the story of how Shaukat Aziz, banker, economist and now Prime Minister of Pakistan, from being an armchair critic of the way his country was being run, came to occupy the driver's seat.

Aziz drove to his office at 7.00 am on a day that began like any other, six and a half years ago and made his way to the 50th floor of a building on Park Avenue in Manhattan, where Citibank is housed. His coffee was perking, the television was on mute and Aziz was mentally reviewing the tasks for the day when his secretary put her head through the door. "Do you know there's been a coup in Pakistan?" she asked.

Aziz turned up the volume of the television and found the military had indeed taken over Pakistan "" again. In July of 1999, Prime Minister Nawaz Sharif had been in the US and had assented to the humiliating Blair House Agreement with President Bill Clinton that had resulted in the end of the Kargil war "" brought on because of the Pakistan Army's efforts to alter the India-Pakistan border, believing it would deepen Pakistan's leverage in negotiating Kashmir. The operation, which comprised judicious salami-slicing of the Line of Control, had gone hideously wrong. In a bid to shift the blame of the Kargil war from himself to the Pakistan Army (although research now proves he knew exactly what was going on), Sharif had put in motion plans to sack the Chief of Army Staff, Gen Pervez Musharraf, replacing him with the Director General of the ISI, Gen Khwaja Ziauddin Butt.

But he hadn't reckoned with Gen Musharraf, who had no intention of riding off alone into the sunset. On that cool day in October 1999, he proved that fortune favours the brave by landing in Karachi when his plane was denied permission to land in Islamabad, taking over PTV, imposing censorship, exiling Sharif and his cohorts and pronouncing himself Chief Executive of Pakistan.

People like Aziz, living far away from their country but intensely patriotic nevertheless, reacted to the coup with mixed feelings. It was embarrassing to live in a cradle of democracy like the US and defend a coup back home. But it was equally clear that Pakistan needed divine (or military) intervention to prevent it from becoming a failing state. The nuclear explosions in 1998 had not treated the country kindly. In 1999, Pakistan had an external debt of over $30 billion and a paralysing domestic debt of approximately the same amount. Debt servicing had outstripped defence expenditure, which had climbed by 24 per cent in 1998-99. Recurring defence costs, declining production, massive misuse of government contracts and loans to businessmen and an ineffectual taxation structure had corroded Pakistan's fiscal structure, taken a toll on the banking system and left the national exchequer depleted. A decision to freeze foreign exchange accounts in 1998 had resulted in massive flight of capital. Pakistan was teetering on the verge of default because of a balance of payments crisis.

Aziz was just absorbing the piece of news when he got a call from Islamabad. It was Pakistan's new ruler. Aziz took the call warily. Musharraf was direct, civil and polite. "Pakistan needs your advice," he said to Aziz, who responded by saying he was to visit Islamabad next month and would be happy to call on the General. "No, it has to be this weekend," said Musharraf. So Aziz set off on a 20-hour trip to Pakistan, and met Musharraf at the General Head Quarters "" the infamous GHQ "" that he visited for the first time. He returned to New York to consult his employers and his family on an offer it would have been hard for any Pakistani to refuse "" the chief of Pakistan's economic reconstruction team. His first job was to develop a speech for Musharraf that would spell out the ground rules for revamp of the economy. On November 1, 1999, Aziz took over as Pakistan's finance minister and in 2004, as prime minister. He still considers that speech a seminal work.

He set to work to implement it. The first step was to squeeze public expenditure to reduce the fiscal deficit in an economy desperately in need of growth stimulus. The headlines kept proclaiming "default' and efforts at debt rescheduling met with little success. The Pakistani rupee-dollar rate was touching 100. Growth appeared distant and poverty reduction a mirage. The GDP growth rates in the first three years of his tenure were a mere 3 per cent, lower than ever before.

9/11 came as a shock but there's no telling what might have happened to the Pakistani economy if Osama bin Laden had been suspected of hiding in, say, Trinidad and Tobago, and not Afghanistan. Pakistan became the US's frontline ally in the war against terror and it was in business again.

Suddenly, aid from the West began to pour in. Past debts were rescheduled, leading to a sharp decline in the debt-serving burden. Project aid commitments by donors, which were below $200 million in the first two years of the Musharraf regime, rose six times to $1.2 billion per year in 2001-04, while non-project aid commitments rose three-fold. Actual disbursements of non-project aid rose more than 10 times during the years after 9/11 and, for the first time since the coup, the net aid became positive and substantial. What is more, a money laundering law forced foreign currency accounts to go legit, bringing them under the official scanner.

Aziz says he realised early on what Pakistan needed. What he doesn't say is: the will to reform came only after 9/11. Now, Pakistan has a fiscal responsibility and debt limitation law that will eliminate the entire revenue deficit of Pakistani Rs 125 billion by June 30, 2007, and reduce the outstanding public debt of Rs 1,500 billion to 60 per cent of GDP by June 30, 2012. It also commits the government to reducing the outstanding public debt by at least 2.5 per cent of GDP every fiscal, while ensuring that social and poverty-related expenditures are not reduced below 4 per cent of GDP annually.

A labour force survey indicates that job creation has been going up steadily from 2.23 million in 2002-03 to 5.54 million in 2004-05. Pakistan got actual FDI worth Pakistani Rs 1,524 million in 2004-05. This increased to Rs 3,500 million (provisional) in 2005-06. Interest payments amounted to 23.3 per cent of the total revenue in 2004-05. In his current job, he is labouring to develop a thick skin, has hired a former BBC journalist to work on an image makeover, and is working on strengthening Pakistan's locational advantage that includes deepening links with organisations like the Organisation of Islamic Conference. Aziz has a job so long Musharraf is around. 2007 will decide whether he will return to Manhattan.