Real Ramifications of Pakistans ‘State of Emergency’

On Nov. 3, President Musharraf of Pakistan declared a state of emergency, which closed nearly all the non-government-controlled media, suspended the judiciary and curtailed public assemblies. It also began arresting activists and judges. In his report “Emergency in Pakistan“, Bill O’grady of Wachovia Securities, examine’s the president’s motives for this apparent coup, the impact of this action on the Global War on Terrorism, and the most likely outcome of this event. As always, we will also discuss the market ramifications.

What does Musharraf want?
It appears President Musharraf had two motives. First, he wanted recent elections to give him legitimacy, and second, he wanted to maintain his status in the military.
Comments from Western diplomats who had a conference with the Pakistani president shortly after the emergency order clearly indicate that his goal was tied to concerns surrounding the judiciary. Last month, General Musharraf was “re-elected” to the presidency. It wasn’t much of a contest, as the major opposition leaders were in exile. However, there was a legal problem with the vote: The president was still the head of the military, and it is constitutionally unclear whether one person can hold both roles of military leader and civilian president. The Supreme Court was expected to make a decision on the president’s military status by Nov. 15. Although most expected the court to “bless” the outcome, Musharraf apparently feared it would not. After all, he had a political crisis earlier this year with Chief Justice Mohammad Chaudhry. In order to ensure a favorable decision, Musharraf declared a state of emergency; one of his first acts was to fire the chief justice.The official reason given for the emergency order was to improve the government’s ability to fight Islamic insurgents. However, there is little evidence to support this claim. Media reports show the curious spectacle of mass arrests of blue-suited protesting lawyers. It appears that the bulk of the arrests are against secular democracy advocates and political opponents who are clearly not Islamic insurgents. Thus, it is likely that Musharraf’s goal was solidifying his political position. Having the Supreme Court confirm the constitutional legitimacy of the October election was apparently critical, even if that court was packed with newly minted judges.The key institution in Pakistan is the military. Pakistan was created soon after India was granted independence from Britain. Although Indian leaders wanted to craft a multi-religious nation, Muslims objected, and thus a homeland in Pakistan was created. Pakistan is a country, but a sense of nation hasn’t really developed. Instead, there are strong tribal elements to the country that tend to be more important to personal identity. In addition, the mountainous regions that border Afghanistan have always been autonomous. The British were never able to subdue this region, and the border with Afghanistan was deliberately established to divide the tribes and make them easier to govern. The only institution that has national appeal is the military; that’s why there has been little opposition to numerous military governments since independence.It is for this reason that President Musharraf wants to maintain his role as military commander. He fears, with good reason, that giving up his military status could undermine his power and make him vulnerable to being ousted by another military figure. In addition, civilian governments in Pakistan have tended to be corrupt, so Musharraf would gain little by becoming solely a civilian leader.

The Global War on Terrorism
Pakistan’s support of military operations in Afghanistan is critical. Afghanistan is a landlocked nation. Without overflight permission, supplies would need to be delivered through (or over) areas of either the former Soviet Union or Iran. The latter is very unlikely; the former has become increasingly problematic given deteriorating relations between the United States and Russia. Because Russia’s influence in these former Soviet states has been increasing, we have seen less support for U.S. policy from these nations. The United States managed to secure President Musharraf’s support, although reports suggest there was some “arm twisting” involved. Musharraf’s memoirs claim Deputy Secretary of State Richard Armitage indicated that if his government failed to support U.S. efforts in Afghanistan, his nation would be “bombed into the stone age.”
Although President Musharraf has supported U.S. and NATO efforts in Afghanistan, his assistance against jihadist insurgents has been less than stellar. There have been high-profile arrests of senior al-Qaida operatives since 2001. But the Taliban and other fellow travelers have been allowed to operate in the western tribal regions. There are two reasons for this situation. First, as mentioned above, these regions have been autonomous for centuries. In general, these tribes are sympathetic to the religious aims of the Taliban and thus tend to support them. In addition, there is a code of protecting travelers and visitors; when jihadists from Afghanistan move across the border into Pakistan, these tribes usually protect them. Second, in the early 1980s, under the military government of General Zia, the military shed its secular policy and began to promote religious fervor within its ranks. This trend dovetailed with the mujahideen’s war against the Soviet Union in Afghanistan. It should be noted that the Pakistani intelligence services showed a similar trend toward Islam.Unfortunately, the Islamic leanings within the Pakistani military undermine U.S. and NATO efforts against jihadists operating in Afghanistan. Three recent events highlight this issue. The government was forced to trade 25 convicted terrorists for 213 soldiers who were captured by jihadists. Forty government paramilitary soldiers surrendered two towns in the Swat Valley without resistance to insurgents. And the military has refused to pursue Baitullah Mehsud, an Islamist insurgency leader, who provides material support for foreign insurgents operating in Afghanistan. In addition, it is believed that he may have been the mastermind of the recent car bombing that marred the return of Ms. Bhutto from exile. Comments from anonymous military officials suggest that they see attacking jihadists as turning their weapons on their own kind. Thus, the military rank and file tends to oppose military action in the tribal regions, and their performance bears that out.Thus, the military and intelligence communities in Pakistan are generally unsympathetic to the U.S. Global War on Terrorism. A couple of items highlight this situation. This summer, the Musharraf government declared a cease fire with insurgents in the tribal regions. NATO commanders noted that soon after, insurgent attacks in Afghanistan increased. We also note that the military has been willing to arrest secular activists, lawyers and judges in the recent state of emergency; there is no evidence to suggest these resources have been used to arrest jihadist insurgents.

What will Musharraf do?
Prior to the emergency order, it appeared the president and former Prime Minister Benazir Bhutto had cut a deal where she would return from exile to become Prime Minister and Musharraf would take the position of president in the new government. It remained unclear whether Musharraf would remain head of the military as well. In response, Ms. Bhutto returned to Pakistan; at the parade marking her return, she narrowly avoided injury from a car bombing for which she was the target.
Initially after the emergency order, Bhutto said little against Musharraf; however, she is now under apparent house arrest to prevent her from organizing protest marches. It is unclear whether Bhutto can be co-opted by the president. Even without her, though, if Musharraf can ensure a favorable outcome for the Supreme Court on his ability to hold the highest civilian and military offices in Pakistan and the decision can be seen as legitimate, the current state of emergency could end early next year. Musharraf has indicated that he plans to hold elections in February and step down from his military post at that time, but there are significant doubts that either will occur.What is evident is that Musharraf will continue to court the military for his support. If the military turns against the president, his position will become untenable. And given the military’s bias toward supporting the Islamists, we would not expect aggressive actions to be taken against the tribal regions.

For U.S. foreign policy, developments in Pakistan are a double reversal. Not only does this apparent coup undermine President Bush’s support for democracy, it appears that the Pakistani military is retreating from the Global War on Terrorism. Although this is clearly an unwelcome situation, it could become worse. If Musharraf is replaced, it is possible his successor could be unfriendly to the United States and perhaps undermine Western efforts in Afghanistan. Thus, we would expect the Bush administration, despite misgivings about recent developments, to continue supporting Pakistan’s president.
Because Pakistan possesses a nuclear weapon, an unstable or unfriendly government would be a major problem for the West. At this point, we do not expect an unfriendly change in control in Pakistan, but if one developed, the West would find itself in a very difficult position. Invading a nation with a nuclear weapon could be problematic; a Pakistan unfriendly to the West would likely work to remove the Karzai government in Afghanistan and become a significant threat to India.Thus, we expect Musharraf to remain in power but probably ruling an authoritarian government. If this assumption is correct, the situation should not be a major short-term issue for the financial markets. However, current conditions are fluid and if civil unrest rises to the point where the current government is threatened, instability could have an adverse impact on the financial markets. Assets that would likely benefit would be Treasuries and precious metals; equities would likely suffer.

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