There has always been a certain unease both at home and abroad that Pakistan’s recent economic progress has happened under a government that took power through a coup, led by a man who continues to wear a military uniform some years after promising to relinquish it.
Such concerns boiled over into public outrage on March 9, when president Pervez Musharraf – self-professed practitioner of “enlightened moderation” – suspended the head of Pakistan’s supreme court, chief justice Iftikhar Mohammad Chaudhry, for supposed abuses of power. Pakistan’s legal community among others was outraged, launching public demonstrations and voicing fears that the independence of the judiciary was being damaged.
Pakistan - arguably one of the region’s most underappreciated economic success stories - appears to have undermined some of its progress before most of the world had even noticed it making any.
The prime minister Shaukat Aziz, however, dismissed the troubles as little more than a dispute, and one that was of no consequence to investors. “The intelligent foreign investor has good people on the ground, and they know exactly that this is not an issue,” he said at the time.
His chief economic adviser Salman Shah is similarly quick to defend his government’s behaviour. “If you are following Pakistan, you can see that everything is being done according to a process and the Supreme Judicial Council is examining the issue. This is something the judiciary itself will be deciding on,” he tells Emerging Markets. “It will establish and strengthen the judiciary for the future.” Chaudhury could yet be reinstated, he says. “If the judicial process result is that he comes back, he comes back.”
Within Pakistan’s private sector, there is anxiety but not panic. “It certainly is a serious issue, but the market seems to have ignored it,” says Nasim Beg, CEO of Arif Habib Investments, one of the country’s largest fund managers. The Karachi bourse was up over 5% in the month after Chaudhry’s suspension. “Most people here are concerned about it, but they are not overly worried about any fundamental change in the economic direction, the policies, the growth we are seeing, or companies’ earnings.”
Ashfaque Khan, adviser to the finance ministry, is similarly adamant that the recent “incident of the judiciary” has not at all undermined the investors’ confidence. “Such activities are not going to dampen economic activities in Pakistan,” he tells Emerging Markets.
Headline numbers
On headline numbers, Pakistan is doing exceptionally well. The country is expected to record 7% GDP growth this fiscal year, to make it five consecutive years in which the government has hit its medium-term growth target of 6-8%. Foreign direct investment was $3.52 billion in the 2005-06 financial year, a tenfold increase in six years, with $5 billion a quite achievable full-year figure this time around. The currency is stable, the privatization programme is among the most successful in Asia in recent years, and the stock market has boomed.
Foreign investors have not voted with their feet either. In the month after the suspension, portfolio flows were net positive, and stood at around $600 million positive in mid-April.
“We continue to see the entire legal community supportive of the chief justice, and they feel it is a bad decision at the level of the government,” says Beg. “But there is no public outcry at street level.”
Farrukh Khan, CEO of the country’s biggest home-grown investment bank, BMA Capital, believes there is “a realization on the government side that the issue should have been better handled,” but also notes the markets have ignored the controversy. Even if the furore damages the government’s standing in this year’s general elections, and results in a change of leadership, he has little expectation of policy changes.
“If one looks at Pakistan’s economic history, there has been remarkable consistency in policy over the last 18 or 19 years,” he says, pointing out that privatization actually commenced in 1988 under the Bhutto administration and has been followed by subsequent leaderships.
Besides, he says, many structural reforms are already long completed: five years ago, 80% of banking assets were in the public sector, and now 80% are in the private sector, which has major knock-on effects to the broader economy such as misuse of political loans, non-performing loan overhangs and sophistication of approach. “I don’t at all foresee a structural change like a bank being nationalized. Nobody has ever mentioned rolling any of this back,” Khan says.
The latest troubles come at a time when foreigners really seemed to be engaging with Pakistan for the first time. Standard Chartered Bank’s landmark $413 million purchase of 80.86% of Union Bank in August has been followed this year by ABN Amro paying a reported $227 million for 93.4% of Prime Bank. The country has enjoyed two highly successful global depositary receipt issues (from private-sector Muslim Commercial Bank and public-sector Oil and Gas Development Co) as well as last year’s well-received $800 million sovereign bond offering, the country’s first venture into the Rule 144A market, and with one tranche of the deal having a 30-year tenor.
Ashfaque Khan, director-general of the debt office and economic adviser at the ministry of finance in Islamabad, points out that 30 years is equal to half of the country’s entire lifespan (it turns 60 as an independent state this year).
Private equity has also been engaging with the country, having long ignored it, including a $300 million fund launched jointly by BMA and the Gulf group Abraaj Capital. Are backers of these funds having second thoughts? “No,” says Omar Lodhi at Abraaj in Dubai. “Political changes and regime succession aside, we believe Pakistan has embarked on an economic course and trajectory which will be maintained irrespective of who is in office.”
Filtering down
A continuing debate in Pakistan asks just how far the headline numbers have translated to an improvement in the quality of life of Pakistan’s poor. In any country the numbers around such issues are contentious, but Aziz says that 15 million people have come out of poverty in the last seven years, reducing poverty levels from 34% of the population to 24%. (Studies from the World Bank and UN Development Programme acknowledge a fall in poverty levels but tend to put it in the 25-28% range.)
“It depends on whether you see the glass as half full or half empty,” says Khan. “A lot of progress still needs to be made, but I think the government is cognizant of that. Development expenditure has increased very substantially over the last few years and the share of income. There has been improvement, but there is still a long way to go.”
Beg adds: “My own assessment is there is a fair amount of truth in it [government numbers]. The bulk of our population lives off agriculture and agricultural services, and we have constantly seen the government step in and support agricultural production”, increasing price levels. “It’s resulted in food price inflation, which is a concern, but it does result in transfer of earnings for the agricultural workforce.”
Nevertheless, there are significant disparities in prosperity based on location (North-western Frontier Provinces suffering worst), industrialization (three-quarters of the poor are in rural areas) and gender (female literacy in Pakistan is 29%, according to an Asian Development Bank paper). And any leadership in Pakistan faces the perilous balancing act between appeasing western allies with progress on the so-called war on terror, and also trying to appease its own populace, particularly since much of it exists within tribes that in many cases are not bound by Pakistan’s own constitution.
At the time of writing, the government was working out what to do about a fundamentalist mosque, the Lal Masjid or Red Mosque, which has heavily armed itself and begun launching Taliban-like attempts to implement strict interpretations of Shariah law – including issuing a fatwa against a female minister pictured hugging a paragliding instructor. The chief cleric has threatened to launch thousands of suicide attacks.
Flare-ups like these may be the reason people on the ground in Pakistan think the government is keen to strike a deal with moderate, mainstream parties, including the Pakistan People’s Party associated with Bhutto. “There will probably end up being a greater influence of more moderate parties in new assemblies at the federal and provincial level,” says Beg. “What’s worrying all of us is the current politics. We can do without extremism.”