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In an uncharacteristic criticism, Gen Musharraf also said the funds collected to help Kashmiris were being misappropriated by the very people who were collecting them.
"The world thinks that we are terrorists and responsible for violence around the world," Musharraf told a gathering of Islamic clerics at a religious conference in Islamabad adding that he would not allow religion to be used for political purposes.
He appealed to the clergymen to ponder over the impact of irresponsible statements being made by them, official news agency APP said.
"We are not tolerant and progressive and this is the situation we are living in now," he said.
"We have to achieve progress in the economy in consonance with our military power to get our point of view accepted at the international level," he told the conference attended by over 5000 ulemas (clerics) and organised on the occasion of Milad Nabi celebrations.
He said, "We have a military and nuclear power but our economy is very weak and is not in consonance with our military power."
He said because of the law and order problem within the country, there was a talk of even declaring Pakistan as a 'terrorist state', while others referred to it as a 'failed state'.
But the notion of writing off Pakistan as a failed state was wrong as it has acquired nuclear capability, he added.
Making a brief reference to the Kashmir issue, Musharraf said funds being collected to help Kashmiris ended up in the pockets of those who were collecting them.
Stating that Pakistan would continue to extend diplomatic support to the Kashmiris' struggle, Musharraf said his country would initiate measures to take care of the Kashmiri refugees who crossed over to the country.
Heavily armed police and para-military personnel relentlessly patrolled streets of Islamabad and other major towns in Pakistan to prevent any sectarian clashes during Milad celebrations.
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