Forbes : Pakistan Clampdown: Setback For Democracy, Fine For Business

Pakistan Clampdown: Setback For Democracy, Fine For Business

Ruth David | November 5, 2007

Activists and Pakistan’s pro-democracy lawyers may be alarmed by the declaration of emergency rule, but the business community isn’t as worried.

What worries them is the prospect that military ruler Pervez Musharraf could lose his grip on power.

The relatively firm rule of the president general has been good for the economy, with steady growth, a rising stock market and substantial economic aid from the West.

“There is uncertainty among the business community, but Musharraf seems to have the situation under control. The latest developments have more of a political face than an economic one,” said Naushin Mahmood, director of the Islamabad-based Pakistan Institute of Development Economics.

In the business district of Karachi and in the capital Islamabad on Monday, it was another working day – shops, offices and schools were open, helping maintain a sense of normalcy in a nation that is accustomed to military rule. This is the fifth time that martial law has been imposed in Pakistan.

Pakistan’s benchmark Karachi Stock Exchange fell 4.6% to close at 13,279.60, but market analysts in Karachi said the key reason for the fall was concern that Musharraf was not in control, as opposed to the state of emergency. Rumors that the general was under house arrest spooked investors.

The Pakistani rupee weakened slightly against the dollar.

Musharraf’s “second coup” Saturday came on the heels of increasing militant violence and uncertainty about his own future. (See: “ Musharraf Declares Emergency Rule”) The Supreme Court was scheduled to rule later this month on whether he is eligible for another term as president.

Since Musharraf came to power in a bloodless coup in October 1999, he has brought in billions of dollars in aid money from the West, which sees his regime as a key ally in the fight against al Qaeda and Afghanistan’s Taliban movement. Around $11 billion has come from the U.S. alone.

Though Secretary of State Condoleezza Rice said that the Bush administration would review aid to the country – the U.S. had warned Musharraf not to declare martial law – she indicated there would not be a complete suspension of funds.

“We’re not worried not about Western countries cutting off all aid, since Pakistan is so important strategically,” Frederic Neumann, HSBC’s Asia Pacific economist, said from Hong Kong. “With elections coming up in the U.S., the Bush administration would not want a destabilized Pakistan.”

The country’s economy has expanded 7.5% annually over the last five years, but political concerns have kept some foreign investors away. Last year, Pakistan got $8.5 billion in foreign investment. In the run-up to the emergency, the stock markets sold off by around 10%.

In a speech to the nation Saturday, Musharraf said the recent rise in militancy was hurting foreign inflows, and investors were waiting on the sidelines to see if the situation would stabilize.

In July, security forces stormed the historic Lal Masjid (Red Mosque) in Islamabad, a stronghold of clerics who wanted to impose Islamic law in the country. In the last few months, bombings in key cities claimed close to 500 lives.

Over the next few months, large investors are likely to hold off on putting money into the markets, but long-term investors will continue to look at Pakistan because they’ve already factored in political risk when it comes to investments in the country, said Neumann. And the Karachi Stock Exchange, which appreciated close to 40% this year, may not be significantly affected because its rise has been driven by domestic investors and expatriates based out of the Middle East.

“Musharraf continuing will be the best thing for business,” said an economist with a Karachi-based bank, who wished to remain anonymous. “But people are not sure for how long he can stay in power; especially if international pressure to restore democracy increases. Domestically as well, we’re not sure if the military is backing the president. His support levels have definitely fallen over the last few months,” the economist said.

On Monday, government officials in Islamabad said elections would be held in January, as scheduled. Musharraf’s term as president expires on Nov. 15, and the national and provincial assemblies need to be dissolved then. Last month, Musharraf won a vote by lawmakers to grant him another term as president.

A key risk to business lies not in Musharraf’s crackdown alone but in the response by civil society and how the military deals with it, said HSBC’s Neumann. “If people don’t accept martial law and you have escalating violence on the streets, there’s going to be a lot more trouble,” he said.

The next few days are going to be crucial in ascertaining how the situation plays out, but for now, it is business as usual in this country of 160 million and an interventionist military.