Military dictators are seldom associated with sound fiscal management. But on the dusty boulevards of Islamabad, where imposing white marble government buildings vie with more functional corporate headquarters, Pakistan's leader, General Pervez Musharraf, is demonstrating former soldiers can make effective economic administrators.

In some seven years since his successful military coup, Pakistan has been transformed from a debt-ridden basket case dependent on handouts from the International Monetary Fund to one of the most intriguing and best-performing emerging markets. Though often overshadowed by the neighbouring giants of China and India, Pakistan has its own story. With 165 million people, its population is the sixth-largest on earth and strikingly young, with some 80% under the age of 40. Much of the population is very poor, struggling to recover from the effects of last year's earthquake, or both. But signs of a consumer boom remain. About 1.5 million mobile phones are sold each month and operators report 94% growth rates. The world has taken note. Foreign direct investment, much of it from the Middle East, topped $3.5bn (€2.8bn) in the most recent financial year, double the previous year and 10 times more than five years ago. The country has received other unexpected boosts. Musharraf's move to ally Pakistan squarely with the US after 9/11 – the alternative, he revealed in his vainglorious recent autobiography, was to be "bombed back to the Stone Age" by the US – proved lucrative. Economic sanctions imposed after its 1998 nuclear tests were lifted and the US announced $3bn of assistance, including military aid and debt relief. Other nations rallied round to cancel or reschedule loans with the result that Pakistan's debt has dropped from a critical $32bn in 1999 to less than half that today. But the rosier outlook isn't just the result of outsiders' largesse. Musharraf's bold policies have been well executed by his team. Pakistan has raised some $5bn from privatisations since 1999, including selling 80% of the banking sector that was in state hands. Telecoms, utilities and assets in oil and gas have been put on the block, with more than a dozen large deals to come. Independent regulators have been set up, tax reforms pursued and a free press allowed to blossom. These reforms have facilitated Pakistan's return to international markets, raising a $500m, five-year Eurobond in 2004, six years after the Standard & Poor's agency rated its debt in "selective default" after nuclear tests. The Karachi Stock Exchange is in turbo-charge mode, its leading index growing sixfold since 2002, the best return of any stock market in the region. Financial services staff are reaping the rewards. Last week, MCB Bank, advised by Merrill Lynch, became the first Pakistan company to list on the London Stock Exchange when it raised $150m floating global depositary receipts. OGDCL, an oil and gas group, will follow this year, advised by Citigroup and Goldman Sachs. The Pakistan story has risks, of course, many of which can be seen on a map. To the east lies India; the nuclear-armed neighbours have fought three wars since partition in 1947 and relations are never less than piano-wire tense. West is Afghanistan. Enough said. At home, Musharraf faces challenges from anti-American, Islamic political parties, elements of which control a handy minority of parliamentary seats, and he can hardly be unaware of Pakistan's penchant for power grabs and coups. Those who live by the sword – well, you know the rest. But, for now, he looks safe and, while democracy seems some way off, bankers are not complaining.