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Pakistan After Bhutto

Published by Current on 2007-12-27

The assassination of former prime minister Benazir Bhutto at an election rally in the garrison city of Rawalpindi today dramatically changed the political and economic landscape of Pakistan.

There was no certainty that Bhutto's Pakistan People's Party would have won next month's parliamentary elections, and quite possibly made her prime minister for the third time in two decades. But foreign investors, particularly ones from the United States whom she had assiduously cultivated in her eight years of political exile, seemed inclined to support the view that the Harvard-educated Bhutto's ascendancy would have generated more badly needed investment because she seemed to offer the possibility of opening up more sectors of Pakistan's economy for foreign direct investment.

These sectors included agro-business, textiles, and manufacturing - sectors that lent themselves for badly needed job creation in a country of nearly 170 million mostly poor people, and one where the unemployment rate is touching 10 percent. Bhutto was known to have frequently met with leading bankers, investors and industrialists in the U.S., Britain and Europe, and also the Middle East. One leading investor based in Dubai - where Bhutto maintained a home - said today that he had been assured that Pakistan's economy would become a "model of free enterprise" if Bhutto regained political power.

"Benazir did not think that there was an inherent contradiction between Pakistan being constitutionally an Islamic state but one which promoted laissez-faire economics," this investor - a native of the United Arab Emirates - said. "On the contrary, she felt that the Islamic theocracy would welcome the creation of more jobs for the restless youth of Pakistan. Benazir felt that poverty wasn't ennobling, and that even the mullahs had to worry about how their followers would obtain a gainful livelihood. She felt that nation building couldn't occur by harboring religious resentments. As much as their Muslim faith, Pakistanis needed jobs."

Ironically, despite the political tensions between Bhutto, President Pervez Musharraf and another erstwhile prime minister, Nawaz Sharif of the Pakistan Muslim League-N - who's been barred from contesting the election himself - the country's economy has seemed to run on a distinctly parallel and depoliticized track. The annual growth rate has averaged 7 percent for almost a decade.

"Pakistan's economy has performed remarkably better than would be expected in a political crisis," said Anwer Sher, a Pakistani banker and real-estate consultant, based in Dubai, where Bhutto maintained a home and where her three children still live with their father, businessman Asif Zardari, as does her mother Nusrat. "This can partially be explained on grounds that the civil disturbances have not been crippling and, largely, the economic sector does see either way that an election in January and the settling of tensions domestically and with India will eventually happen.

"But now everything has been thrown off balance," he added. "Until the situation settles down, investors are going to be skittish, if not downright reluctant to pour more money into an economy that suddenly plunged into a political crisis of this dimension. In this time of turmoil, it would seem the economy will not be the focus of new investments -- and it I am afraid it will be a difficult period of the financial markets."

Sher, whose father Brigadier Qayyum Sher, was Pakistan's first military administrator in the 1950s, also expressed concern about the assassination's impact on the already tenuous political environment in the country.

"Benazir's assassination is tragic as it highlights the fragility of the nation to Islamic militants on the one hand, and effectively cripples the political process at a crucial time with elections around the corner," he said. "Benazir's political platform repeatedly challenged the militants and it seems they took her on and sadly succeeded. It is clear that in the context of Pakistani politics this will mean strife in her native southern province of Sindh where she was immensely popular, and they will feel her assassination will mean a tremendous loss to them. But more than provincial politics the reality is her death is a loss to the country. It will also build pressure on President Musharraf. Today's development clearly shows that his policies seem to have failed in fighting terrorism, and now he will perhaps postpone elections, a move that will cause further turmoil to the country."

Benazir Bhutto's murder today represented the third time that a member of her family was killed. Her father, former prime minister Zulfikar Ali Bhutto, was hanged by then President Zia ul-Haq in April 1979. (general ul-Haq was himself killed when a plane in which he was riding with several diplomats, including the U.S. ambassador, was mysteriously blown up.) The next year, Benazir's brother Shahnawaz, was murdered in still unexplained circumstances in France. And in 1996, another brother, Mir Murtaza, was also murdered.

Her assassination comes in the wake of disclosures that Pakistan's ruling regime diverted much of the $5 billion provided by the United States to combat Al Qaeda and the Taliban to weapons systems designed to counter neighboring India. Indeed, both Bhutto and her husband have been accused of illegally taking more than $1 billion in commissions from foreign defense suppliers, including Dassault of France. The couple denied the accusations, but criminal charges were filed against them nevertheless, and Zardari - known widely as "Mister Ten Percent" -- spent several years in a Pakistani prison.

Bhutto's own economic views went through a significant metamorphosis during the eight years that she spent in political exile. Earlier, she was a staunch backer of a strong military budget, one that was primarily aimed at developing weapons systems aimed at India, also a nuclear power like Pakistan.

In fact, much of Pakistan's annual defense budget of $18.7 billion - out of a overall national budget of $40 billion - involves weaponry aimed at combating India, with whom it has fought three wars in the last 60 years over the disputed Himalayan territory of Kashmir, which both countries claim. The allegedly diverted monies were simply a bonus, especially in view of Congressional reluctance to approve new direct military assistance to Pakistan, largely because of its nuclear program.

Indeed, much of India's $22 billion defense budget - out of an overall $154 billion budget - is also geared toward meeting perceived threats from Pakistan - and from China, with whom India has border disputes as well. But India receives no military or development assistance of any consequence from the U.S., although political and military ties between the two countries have improved dramatically under President Bush, who has agreed to provide India with nuclear technology even though, like Pakistan, India refuses to sign the Nuclear Non-Proliferation Agreement.

What is surprising, however, that despite the escalating arms race in the Subcontinent, the economies of both countries have been performing remarkably well. India's abandonment of socialism and its embracing of more market-oriented policies - with increased investment from American companies in the manufacturing sector and the equity markets - have resulted in average annual economic-growth rates of between 7 and 9 percent for the last seven years. But Pakistan hasn't been far behind, with growth rates in recent years of 7 percent annually.

Even in foreign direct investment, Pakistan has done surprisingly well for a country of barely 170 million people. For the last five years, it has averaged $7 billion annually in FDI - not bad, considering that its GDP of $475 billion is less than half that of India, whose trillion-dollar economy consists of 1.2 billion people. India has averaged some $12 billion in FDI annually, although its minister of commerce and industry, Kamal Nath, contends that the figure may rise to $20 billion this year. (Some Indian economists consider that assertion too optimistic.)

Pakistani officials have been particularly encouraged by the infusion of foreign capital in the domestic telecommunications market, which reportedly has 100 million subscribers. Last June, SingTel, the Singaporean telecom giant, paid $758 million for a 30 percent stake in Pakistan's third-largest operator, Warid Telecom.

Warid's chief executive officer, Hamid Farooq, said that the company - which has an "enterprise value" of nearly $3 billion - now has almost 10 million subscribers and a market share that's expected to grow beyond 16.6 percent in 2008. Warid executives also said that the company had become EBITDA positive in less than two years of operation, after it paid a license fee of $291 million in 2004 raised from a consortium of nine core investors, including The Abu Dhabi Group in the United Arab Emirates. Pakistan has six mobile operators, of which Warid ranks third. Soon after starting operations, Warid laid nearly 3,500 miles of fiber-optic cables across Pakistan to facilitate better service to its customers.

Farooq's enthusiasm about the Pakistani economy is shared by SingTel's CEO, Chua Sock Koong. "SingTel has made substantial investments in markets with high growth potential in South Asia, such as India and Bangladesh. Warid Telecom in Pakistan is a natural fit," she said. "We see strong upside in terms of the company's performance."

The chief executive officer of The Abu Dhabi Group, Bashir Tahir of Pakistan, told reporters that Warid is now set to commence operations in Uganda and the Democratic Republic of Congo. In addition, Tahir said, Warid expansion plans include Cote d'Ivoire, Angola, Ethiopia and Nigeria.

Like the telecommunications industry, the banking and real estate sectors continue to remain healthy in Pakistan. "While the banking industry needs consolidation and higher capital deployments, the telecom and real estate sectors are at their best performance in years," Anwer Sher says.
He adds, "Both new capital formation, either through foreign investments or domestic capital deployment, will the key to continue supporting a demand-led economic cycle. While inflation [currently around 7.9 percent] will need to be curbed, especially if consumer demand is not met, the underlying investments in infrastructure will be the key to sustaining growth."

That's where Pakistan's political stability will continue to be a major factor. The additional investment that Pakistan needs from US and European sources is unlikely to be forthcoming until next month's election provide a clearer picture of the system's capacity for democratic governance and transparency.

The United States - which buys nearly 25 percent of Pakistan's exports of textiles and agricultural products - is especially sensitive to the political impact of the elections on Pakistan's domestic economy, where more than 24 percent of the population is termed by the World Bank to be living under the poverty line - or less than the equivalent of $5 a day. While the overall unemployment rate is around 7 percent, the rate among the country's largest demographic segment - men and women between 18 and 30, who constitute 65 percent of the population - is said to be more than 10 percent.

Today's assassination, of course, has created turmoil that no one really expected. President Pervez Musharraf is expected to continue as president, but it's uncertain now if the Pakistan People's Party or the Pakistan Muslim League-N will dominate the national assembly.

Regardless of the election results, manufacturing and infrastructure development are the key areas that need to be made stronger. The agriculture-based sectors also need more funds for expansion and better productivity.

But the election results will be keenly awaited by traders in the Karachi and Lahore stock exchanges, whose indices had risen 1,000 percent since 1999, when General Musharraf ousted Prime Minister Sharif in a bloodless military coup. But when Musharraf declared a national emergency last month, The Karachi Stock Exchange - which lists 754 companies with a market capitalization of $56 billion - fell 5 percent.

Already, President Musharraf has lost the architect of Pakistan's economic recover, Shaukat Aziz, a Citigroup executive whom he brought on board as finance minister after the military coup of 1999 when Musharraf overthrew and exiled Prime Minister Sharif. Aziz opened up the economy to foreign investment and paid down the humongous external debt. Aziz used his many contacts in the Middle East, especially in Saudi Arabia, to obtain more development aid as well as foreign direct investment. Indeed, during Aziz's tenure, Pakistan's external foreign-exchange reserves grew from a negative balance of $2 billion to a positive balance of nearly $20 billion (but still a tenth of India's foreign reserves).

Musharraf promoted Aziz to the prime ministership, but the latter resigned last month, reportedly in private protest against Musharraf's declaration of emergency.


Pranay Gupte,
Senior Writer and Global-Affairs Columnist


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