By Paul Anderson BBC correspondent in Islamabad

The Karachi Stock Exchange is up sharply since the start of war in Iraq

Pakistan is defying the tough times for the world economy that have followed US military action in Iraq and Afghanistan, and the war on terror.

Scan the business pages of Pakistan's main newspapers and there is scarcely a sour note to be found.

Sugar output hits record, they trumpeted in late April. Manufacturing sector grows by 8%. Karachi Stock Exchange hits new high.

"Before [war on] Iraq started there were apprehensions that the price of oil would rise," says Arif Habib, head of Arif Habib Securities, which trades on the Karachi Stock Exchange (KSE).

"People were expecting some general push in costs in the economy," he said.

"But oil prices have come down substantially. A negative affect on international trade because of the war hasn't materialised, and since the beginning of the war, the KSE has increased by 14%."

Safe accounts

Not bad for an economy which three years ago was on its knees, unable to service its foreign debt of $38bn.

Our growth rate is getting better, and there are a lot of investors who are talking a real look at Pakistan Privatisation & Investment Minister, Abdul Hafeez Sheikh

Mr Habib says the terrorist attacks in New York in 2001 had two consequences for the Pakistani economy, which helped shore up the country's finances.

Capital flight was reversed because people, coming as they do from a country associated in some eyes with terrorism, knew their money would be safe from being frozen in foreign bank accounts.

And millions of Pakistani workers abroad sent their money back home.

The result was that foreign exchange reserves soared to $10bn from $2bn.

Positive outlook

The past two years have seen the rupee stabilise and interest rates decline.

And because of Pakistan's support for the war on terror, multinational lending institutions and individual countries have written off or rescheduled debt.

"I'm optimistic," says Privatisation & Investment Minister Abdul Hafeez Sheikh.

"If you look at the macro-economic situation, as well as the international environment, it seems like Pakistan is in a good position to build on the stability engineered by President Musharraf," he said.

"Our growth rate is getting better, and there are a lot of investors who are taking a real look at Pakistan."

Mixed views

It is Mr Sheikh's job to talk up the economy and investment prospects, of course.

The lack of a consumer boom worries some economists

And not all economic experts share his optimism.

Many point to rising unemployment, others to the absence of a trickle-through to the country's poverty stricken millions.

There is also the fact that no consumer boom has accompanied the macro-economic boom; and that's a key test.

The World Bank for example, recently recommended that vast chunks of Pakistani manufacturing industry, including steel and fertilisers, should be phased out: so-called sunset industries incapable of competing on world markets.

Building confidence

But those running such industries, such as Saquib Shirazi, chief executive of Atlas Honda in Karachi, disagree profoundly.

He says his company, which manufactures small motorcycles in a joint venture with Honda Japan, grew by 100% in the past couple of years, confounding the World Bank view.

The key to further growth, he says, is for the government to stick to its course so that confidence among internal and external investors in manufacturing is not destroyed.

That will help generate more direct and indirect employment, he says, and make Pakistan globally competitive.