Declan Walsh in Islamabad
Sunday November 4, 2007
Pakistan’s president Pervez Musharraf imposed emergency rule last night, plunging the nuclear power into crisis and triggering condemnation from leaders around the world. The action to reassert his flagging authority was, he said, a response to Islamic militancy and to the ‘paralysis of government by judicial interference’. He said that his country’s sovereignty was at stake. Judges and lawyers were arrested, troops poured on to city streets and television and radio stations were taken off the air. Musharraf also suspended the constitution and fired the chief justice, Muhammad Iftikhar Chaudhry, who spearheaded a powerful mass movement against him earlier this year. Read more »
November 4, 2007 (DPA)
Pakistani authorities Sunday swooped on opposition leaders and rights’ activists in a bid to contain public resistance to emergency rule declared by President Pervez Musharraf a day earlier to pre-empt any judicial onslaught on his authority. “Police have detained our several dozen senior leaders and workers in pre-dawn raids on their residences,” opposition Muslim League-Nawaz (PML-N) spokesman Ahsan Iqbal said. Nawaz Sharif, who is currently in exile in
( AP/Bloomberg) Former Prime Minister Benazir Bhutto joined opposition leaders in lambasting Pakistan’s decision to impose a state of emergency Saturday, saying “Today is the blackest day in the history of Pakistan “, calling the decision tantamount to dictatorship. This is not an emergency but martial law, because Gen. Pervez Musharraf imposed it as chief of army staff, not as a civilian president, she said. ‘We oppose this strongly and will not accept this situation.’ Addressing a hastily called press conference at her Karachi residence in the early hours of Sunday morning, she demanded immediate restoration of the constitution saying that the elections can not be free and fair in emergency. She further said that the elections must be held on time and declared that talks with General Musharraf could not continue under emergency. She said that extremism and dictatorship supported each other. Earlier Benazir Bhutto told Sky News that she believed the imposition of emergency rule in Pakistan by President Pervez Musharraf was designed to delay elections for “at least one to two years.” She said that delaying
By Griff Witte and Imtiaz Ali
On her arrival in Karachi, she was not allowed to deboard. But finally, Benazir came out of Karachi Airport after remaining in the plane for several hours following her return from Dubai.
The Bush administration, which has cast Musharraf as a key ally in its global fight against terrorism, said it was deeply disturbed by Musharraf’s moves.
Pakistan‘s Army Chief General Musharraf has imposed a state of emergency in Pakistan and issued a provisional constitutional order. He may address the nation tonight. All private TV networks have been put off air except the state-owned PTV. We had written yesterday that the way the government had allowed coverage of the developments in the
According to Bloomberg, in Islamabad barricades have been erected on roads leading to an area in which the houses of all Supreme Court judges are located. Al Jazeera reports seeing dozens of police blocking the road leading to the supreme court where many judges including the chief justice remain inside. The court has been hearing petitions about the validity of Musharraf’s reelection as president and was expected to annouce its decision next week. Paramilitary troops have been deployed at state-run television and radio stations.
The largest opposition party, Bhutto’s Pakistan People’s Party is not expected to offer any resistence to the imposition of emergency as Bhutto’s decision to leave for Dubai for a week is believed to have been taken at the personal request of General Musharraf.
November 3, 2007 (AP) Militants said Saturday they captured two police stations in a mountainous region of northwest Pakistan that has increasingly fallen under the control of Taliban and al-Qaida-linked extremists, bringing further embarrassment to President Gen. Pervez Musharraf’s government.
A flag was hoisted over one of the buildings after it was abandoned by officers in the scenic Swat valley, once a popular tourist destination now plagued by fighting between paramilitary forces and Islamic militants, said Sirajuddin, speaking on behalf of the insurgents.
Finbarr O’Reilly/Reuters A Canadian soldier, part of a NATO-led coalition, in Kandahar province last week. Read more »
“What happened to the Shah’s once very real support? Sums up a senior American businessman with many years’ experience in Iran: He lost contact with the peasants. He lost control of inflation. He lost contact with the mullahs. He lost control of SAVAK [the secret police]. He lost control of his own family and all the outrageous deals they made for personal profit. All he had left was the army.” So wrote Time magazine in its cover story of January 15, 1979 issue.
The story is relevant even today and offers great insights for all those who wonder what Pakistan should do. There is however, a major difference this time compared to 1979. Back then, Pakistan was fighting an American war and was pitied against the Soviets. This time it may be in for a shock. Fighting America’s war in the 21st century, it may have to confront Russia, China and Iran. The US is not spending over $800 billion or 6.1% of its GDP to fight religious extremism in Iraq and Afghanistan. What is happening in the tribal areas is just the tip of the iceberg! The 1979 Time cover story is reproduced below with emphasis added by us:
Please click to read the above article published in the International Journal of Intelligence and CounterIntelligence, 2003 issue: isi.pdf
The government frequently points to the increase in the number of mobile phone users as an evidence of progress. But this argument misses some crucial points.
The spread of technology, its tremendous benefits, and its ever-declining cost represent a global phenomenon that has made it possible for people to buy phones — sometimes on even borrowed money-as a long-term investment. Take Kenya’s example. In 2000 some 300,000 people used mobile phones; now, in that country of 35 million plus, nearly nine million do. Read more »
This year’s budget is populist in tone, inflationary in substance, neutral for the agriculture sector, pro-corporate in general, disappointing for the textile industry and largely irrelevant for the common person, although it offers some relief to government employees. While there has been no significant policy change, it is an attempt to address two of the most pressing near-term issues.
Faced with a record trade deficit and double-digit food price inflation, the government has been forced to levy a special surcharge of 1 per cent on all imports excluding vegetables/pulses, edible oil/ghee, petroleum products, medicines and fertilisers.
This small levy is unlikely to make a dent in the import bill and hence in the trade deficit. The reduction in the prices of essential items at the utility stores and expansion in their network was announced last year as well but failed to control the food price inflation. This is a cosmetic measure for public consumption rather than a serious effort to address the real supply side issues.
The government can draw satisfaction from a 7 per cent GDP growth, record level of foreign investment, good wheat production, record tax collections and a booming banking sector that has fuelled a consumer boom. The tax collections grew by 18 per cent — Rs840 billion and the next year’s target of Rs1030 billion is ambitious given no new taxes have been announced. The growth in taxes has been concentrated in a few sectors and withholding taxes. Read more »
Pakistan ranks as the seventh most dangerous country after Iraq, Sudan, Israel, Russia, Nigeria, and Columbia in a 121-nation study by the Economist Intelligence Unit.
While such rankings can be subjective (it may be the 10th or 11th), this is not good news for the government which claims that Pakistan has made unprecedented economic progress during its tenure, recording one of the highest GDP growth rates. Read more »
SEVENTY FOUR per cent of Pakistan’s population survives on a daily income of less than Rs120 (or $2) a day according to the recently released World Bank’s World Development Indicators. While the government uses a different definition of poverty, the international definition of extreme poverty implies daily income of less than $1 and that of moderate poverty, income of $1 to $2 a day. The percentage of Pakistanis living below the poverty line (income of less than $2 a day) is much higher compared with 58, 43 and nine per cent in Kenya, the Philippines and Malaysia respectively. Read more »
The government has set a revenue target of Rs1 trillion for the next fiscal year and has indicated that the current year’s target of Rs835 billion will be exceeded. Apparently, this sounds like an impressive achievement. The government sources maintain that the rise in government revenues can be attributed to overall economic growth as well as to better administration of taxes. Read more »
Published in DAWN
THE threat of Talibanisation and the alleged ‘deal’ between General Musharraf and Benazir Bhutto have dominated the news recently. The two subjects are perceived to be interlinked in that some analysts see the need for an understanding between these parties as something that would benefit both at a time of a seemingly growing threat from the extremist forces and tensions between Islamabad and Washington. However, some of the fundamental questions raised must be addressed before one jumps to welcome the possibility of a rapprochement between the government and the Peoples Party as need of the hour or condemn it as a sell-out. Read more »
Published in DAWN
THE lawyers’ community has shown a remarkable unity in rising against the unprecedented actions against the Chief Justice of Pakistan. The political parties are calling it an assault on the judiciary while the government has maintained that the opposition is politicising, what it calls, a ‘constitutional matter’. This characterisation is an oxymoron because politics, by definition, concerns all matters concerning governance and the three branches of government including the judiciary. The media has been outspoken in its coverage. Prominent former judges have termed this crisis as a defining moment in the history of Pakistan. Read more »
PAKISTAN’s official external debt has not gone down since 1999 although it has received record aid, investments, and remittances flows. It has gone up to $36.9 billion from $33.6 billion in 1999 despite receiving at least $10 billion in economic, military and development aid from the United States, over $6 billion in privatisation proceeds, and a relief of $1.6 billion in loan write-offs by foreign governments during the last seven years.
The rescheduling of Paris Club debts provided an additional relief of $ 1.2 to $1.5 billion annually in terms of debt service payments. Is the government’s debt management policy as sound and successful as it claims or a historic opportunity to restructure country’s high debt levels has fallen victim to political expediency or a false sense of achievement?
Even after having received such generous assistance, Pakistan external debt to GDP ratio is 28 per cent – slightly worse than Africa’s 26.2 per cent, which also happens to be the average for all the developing countries. The average external debt to GDP ratio of all emerging markets declined from 42.1 in 1999 to 26.2 per cent in 2006, underpinned by strong growth in the global economy and record investment flows into the developing countries.
It is argued that the former Prime Minister Nawaz Sahrif left a heavy external debt burden at 53 per cent of the GDP and the current levels represent a substantial improvement. The net debt flows (disbursements minus repayments) into Pakistan during 1990-1999 aggregated $5.4 billion compared to $1.1 billion during 2000-2006.
Hence, the growth in the debt slowed down during the last seven years. However, post-9/11, Pakistan received generous foreign aid as well as much higher levels of foreign direct investment. Remittances averaged around $4 billion a year during 2003-2006 compared to an average of $1.5 billion in the 1990s.
Nevertheless, Pakistan’s liquid foreign exchange reserves, after jumping to $10 billion-level in 2002-03, have more or less stayed around that level on average. The foreign exchange reserves of even Sub-Saharan countries (excluding South Africa and Nigeria) doubled to $50 billion during the same period. Brazil and Argentina repaid all of their $25 billion debt – by utilising their foreign exchange reserves – to the IMF in early 2006 to rid their countries of its influence.
In contrast, Pakistan has not able to reduce the external debt burden in absolute terms or build up its foreign exchange reserves. In fact, it has become the fourth largest borrower of the World Bank and the fifth-largest recipient of American aid to foreign nations. This shows its continued reliance on foreign governments and multilateral institutions – despite declarations of economic sovereignty – and a failure to mobilise domestic resources to pay for the development expenditure. Leaving aside all the technicalities and vague statements, there has been no convincing explanation for not having used the privatisation proceeds to reduce the external debt in a completely transparent manner.
Some policy makers argue that it is acceptable to borrow if the borrowing is for productive purposes. That is theoretically correct. However, if the borrowing record is littered with corruption and wasteful spending, and major sectors of the economy (large agriculturists, stock brokers, property barons, etc.) do not pay any tax at all, the proposition becomes quite debateable and the motives questionable.
This is a critical issue for Pakistan’s political economy because the subject of external debt has been a highly political one for most of Pakistan’s history since it has relied heavily on the US and institutions under the US influence for its external financing needs. So have many other developing countries – though not necessarily to Pakistan’s extent – in the past but most no longer do. This type of aid has been associated with corruption, waste and increasing debt burdens. It has even been viewed as a payoff to the third world dictatorships for their support and aid in helping the US in achieving its foreign policy objectives that have often clashed with the national interests of the borrower countries.
For example, the recently proposed US law, aimed at punishing oil companies that deal with Iran, will make it even more difficult to construct the Iran-Pakistan-India gas pipeline. Pakistan must import natural gas from Iran to meet an imminent shortage during the next few years. On the other hand, recent moves in the US congress threaten to cut military aid to Pakistan if it fails to “do more” and stop the Taliban insurgency from its tribal areas.
The government claims that it no longer borrows from the IMF and does not carry around a begging bowl. This is quite misleading because it has been borrowing more and more from other multilateral institutions like the World Bank (WB) and the Asian Development Bank (ADB). The borrowing from multilaterals has outpaced the borrowing from the Paris Club since 1999-2000. Its share in total public and publicly guaranteed debt has increased from 37.5 to 50.2 per cent in 2006.
Consequently, whilst the government has made progress in raising money from the international capital markets – a welcome and positive development – official sources still account for 90 per cent of Pakistan’s external debt, including the WB/ADB [48 per cent] and foreign governments [38 per cent]. IMF’s loans rarely exceeded 5-6 per cent of total external debt as it normally provided the balance of payments support and not long-term loans that constitute the bulk of our external debt.
The present government has criticised the previous governments for the accumulation of almost $18 billion debt in the 1990s and increasing Pakistan’s debt burden. While it is true that the debt accumulation in the 1990s was large, critics of the civilian governments conveniently overlook a key statistic: 77.2 per cent of the gross disbursements during 1990-1999 were utilised to repay the old debts. The debt-service to gross disbursement ratio jumped to 82.8 per cent during 2005-2006. The continuing increase in this key ratio throughout the 1990s and even during 2000-2006 indicates that more and more of new loan disbursements were used to repay the past debts; a significant percentage relating to the borrowings during the previous military regime of General Zia-ul-Haq.
Pakistan’s total external debt that stood at $8.7 billion in 1978, reached about $22 billion (50 per cent of the GDP) by the end of the 1980s. That Pakistan had to borrow more later in the 1990s just to service some of the old debts indicates that the loans were not properly utilised as they did not contribute to the development and therefore to the debt servicing capacity. This raises serious questions about the whole wisdom of politically motivated borrowings from the foreign governments and the institutions under their control.
It is therefore fair to ask whether any cut in aid from the foreign governments would be of real significance from a development perspective and particularly in a global economic environment when the private capital flows (through foreign direct investments and international capital markets) have become the dominant source of financing to the developing countries. As a group, they reduced their total external debt to the foreign governments and multilateral institutions (WB, IMF, ADB, etc.) through net repayments of $48 billion in 2006 whilst attracting a staggering $502 billion in net private capital flows.
Pakistan’s vicious cycle of borrowings from foreign governments and multilateral institutions, graft, waste, and accumulation of more debt to repay the old debts leads one to believe that the rulers have been putting excessive burden on the people and mortgaging their future by borrowing more and more while indulging in wasteful and unproductive spending while the ‘big fish’ get away with not only benefiting from the “development projects” financed by external borrowings but also with paying no taxes.
Pakistan’s foreign (or hard currency) debt to total debt (that is, including domestic debt) ratio of 47 per cent is high compared to an average of 28 per cent for emerging economies. Given our long-term track record of using foreign debt to indulge in wasteful expenditure, it would be in the best national interest to set up a special fund (in a hard currency, be it dollar or euro) to accumulate all the privatisation proceeds and use that for the early retirement of our external debt. Some countries, like Russia, have set up hard currency stabilization funds to provide for the rainy days.
However, this would be just one among a series of measures needed to reduce dependence on foreign debt. We must cut imports and reduce the rapidly deteriorating current account deficit that has prevented a build-up of foreign exchange reserves since 2003. We must also strive to increase the tax- to- GDP ratio from 10 per cent (one of the lowest) to 17 per cent within the next five years instead of making far-fetched 10-year plans.
The world today is experiencing unprecedented economic growth with huge pools of liquidity seeking investment opportunities. If Pakistan can reduce its macro imbalances by reducing foreign debt and mobilising domestic resources, it can attract a much greater level of foreign direct investment and achieve greater economic freedom. Shall we rise to the challenge or we will once again squander away a historic opportunity?
PRIME Minister Shaukat Aziz told the third annual Oil and Gas conference that Pakistan will proceed with plans to build a gas pipeline from Iran even if India pulls out of the project because its energy needs are expected to more than double by 2020.
It has taken a few years for the government to realise that transporting gas from the Central Asian republic of Turkmenistan is not a practical option. On December 27 in 2002, Foreign Minister Kasuri signed an agreement – in the presence of Afghan President Hamid Karzai – in Turkmenistan to construct a gas pipeline that was supposed to pass through Afghanistan. Read more »
By Yousuf Nazar
THE bulls are back in the ring, and Karachi’s stock market has climbed by 18 per cent so far this year outperforming the rest of Asia and almost all major stock indices around the world.
After trading in the range of 10,000-11,000 for most of the second half of 2006, the KSE100 Index broke the 11,000 resistance level to close at 11,844 last Friday. Total market trading reached $6.3 billion in January and aggregated about $4 billion during the first trading week of February.
The volume of borrowings used to finance purchases of stocks in the local CFS market surged by 45 per cent to $860 million and the financing rates shot to around 19 from 13 per cent in December. The index gained 12.3 per cent in January, which was largest gain in a single month since February 2005, when it rose by 22.5 per cent only to crash in the following months. What has been behind such a rapid rise in the Index and surging volumes since the New Year began?
Some market analysts have attributed this bull run to the extension in the exemption from capital gains tax announced by Prime Minister Shaukat Aziz on January 5 while others have pointed towards the fresh buying from the foreign investors as the principal reason for the strong performance. Perhaps both the factors coincided to encourage the market to take a bullish view.
In addition, there were reports that a foreign investment bank issued a “buy Pakistan, sell India” recommendation. This was quoted out of context because there was no such recommendation made by the portfolio strategists of that bank as Pakistan is not even part of their recommended international portfolio.
Others cited Pakistan’s price-to-earnings (P/E) multiples as being cheap compared to its regional peers. But they were cheap in December and Pakistan’s market has always traded at lower P/E multiples compared to larger Asian markets. This led us to probe deeper into the market activity and trading patterns during the past few months including January 2007.
Although the foreign investors made net purchases of $110 during the first six weeks of 2007, the average daily traded volume on the Karachi Stock Exchange jumped to $412 million from an average of $212 million during December 2006. But the averages do not reveal the whole picture. On February 2, the aggregate volume reached a staggering $943 million. This indicates a massive level of short-term trading both in the official and unofficial badla markets. It appears that some local operators decided that the time was right to make a killing in a matter of days or weeks by using borrowed funds or, what the professionals would call, highly leveraged short term bets. What makes such large players so confident that they can ride on an initially small stimulus provided by foreign buying?
To some it represents a bullish sentiment and hence a reason to buy but some others attribute this to the old habit of the local speculators to take advantage of a shallow market that can fluctuate violently when “real money” flows in and the investors take delivery of the shares. Rumours of front running abound. This refers to the illegal and unethical practice of purchase of shares by a broker in anticipation of a rise in its price after a buy order has been received from a client but the broker buys the shares for his own account before the client order is filled.
Lot of easy money is believed to have been made this way. To prevent this or any other violation of law, many countries now require that the brokers record all telephone conversations of their trading personnel because it is usually quite difficult to check insider trading but there is no such requirement in Pakistan.
Leaving that side, in order to better understand the recent trading activity, it is important to highlight some important features of the market.
The ten largest companies account for about 60 per cent of the index but a much higher 85 per cent of the value traded on average. It is rather a small market and vulnerable to manipulation. Although the market capitalization is frequently quoted around $ 50 billion, it is much less in terms of the free float which is around $ 7 billion This means the shares available for trading (excluding the holdings of the government or principal owners of companies) are significantly less than what appears to be the case.
More importantly, this means that most of the foreign buying tends to be in a handful scrips and even a $20-30 million inflow can have a disproportionate impact on their prices if it is accompanied by much larger level of trading or speculation by the local players.
Given that the speculative trading tends to be concentrated in the shares of the companies with large weights in the index, the market index can exhibit large movements in a short period. During the last eighteen months or so, the foreign investors’ net purchases have been lumpy or sporadic as illustrated by following graph
While the foreign investors stayed on the sidelines for about six months after a sell-off during March-April 2006, they came back in September and October for some buying but remained net sellers during the rest of 2006. As usually is the case in stock markets around the world, the second week of January saw fresh buying by the foreign investors who bought about $29 million of stocks in a matter of four days.
At the same time, the CFS (continuous financing system), that represents borrowings for the purchases of stocks by local brokers, went up by $22 million on just one day and by $41 million during the first two weeks of January. For the entire month of January, foreigners’ net purchases were $103 million but the CFS outstandings went up by $208 million. The index rose by about 400 points (or 3.6 per cent during the first two weeks) and finished the month up 1231 points or 12.3 per cent.
However, even if one takes into account the aggregate volume of foreign buying and increase in CFS outstandings (that is, $311 million), there is only one explanation of the aggregate volume of $6.3 billion that was traded during the whole month of January. There has been a phenomenal increase in day trading and unofficial badla market activity. This would be hard to sustain as was experienced in the previous market crashes during March 2005 and May-June 2006.
Here it relevant to note that the cost of borrowing (or badla) rose to 18-19 per cent in January 2007 from about 11-13 per cent in the previous month and some market reports suggest that the local mutual funds have been taking profits during the first week of February as they anticipate correction in the coming weeks.
Now let us look at what activity took place in some of the biggest stocks that moved the whole market since the beginning of the New Year. The ten largest shares in the index shot by 10-30 per cent in a matter of few week, led by National Bank of Pakistan (NBP), Pakistan Telecom (PTC), Muslim Commercial Bank (MCB), Pakistan State Oil (PSO), Bank of Punjab (BOP), Pakistan Petroleum (PPL) and Oil and Gas Development Co. (OGDC)) that rose as follows:
Per cent Rise in CFS
Jan. 1 – Jan. 31 ($ million)
NBP 24.5 52.4
PTC 24.7 8.4
MCB 21.1 7.0
PSO 15.6 9.7
BOP 13.5 27.4
PPL 10.9 32.0
OGDC 8.5 46.8
As the data shows, 90 per cent of the increase in total CFS market was concentrated in just six stocks that led the advance in the stock market following initial purchases made by the foreign portfolio investors otherwise there was little in the fundamentals to justify 15-25 per cent changes in stock prices.
Given the facts and trading pattern, it appears that the real reason behind the relatively low trading volumes during the second half of 2007 was not the imposition of the capital value tax (CVT) as has been claimed by some observers and brokers. The market was dull because foreigners were net sellers during four of the six months including November and December. As soon as fresh buying came in January, the local punters jumped on the bandwagon and started making highly leveraged bets at high interest rates and CVT ceased to be an issue. Let us see how long this bull runs on borrowed money?
EFFECTIVE taxation of agriculture income and imposition of capital gains tax on short-term stock trading and real estate investments can raise at least an estimated Rs200 billion (equivalent to about 66 per cent of the budget deficit) in additional government revenues.
Large areas of economy get away with paying no tax at all. The culprit is the lack of will of the successive rulers (past and present) who have never attempted to address the core issues and mobilise political support to undertake the tax reforms that are essential to reduce fiscal deficits.
Pakistan must widen its tax net to raise sorely needed revenues for the development of a decrepit physical infrastructure and for educating and training one of the six largest and youngest (albeit relatively illiterate) working populations in the world. This will also reduce the dependence on foreign aid, especially at a time when the democrats-controlled US Congress is considering a ban on US assistance to Pakistan if Islamabad fails to halt the resurgence of Taliban inside its territory. During FY 2005-06, the government’s collections from direct taxes amounted to Rs224.6 billion or about $3.7 billion. The trading volume at the Karachi Stock Exchange averaged around $500 million a day during 2006 or about $120 billion (almost equal to Pakistan’s GDP) for the entire year. Stockbrokers do not pay taxes on capital gains and nor do those who make millions and billions on property and land deals. The income tax collection from agricultural estates is a paltry Rs1 billion or so per annum.
It is not difficult to understand why the government is so poor and runs budget deficits that result in higher interest rates and inflation – a form of regressive tax on the middle and poor classes. Pakistan has one of the lowest tax to GDP (gross domestic product) ratios in the world and this ratio has declined in the recent decade despite growth in the absolute amount of taxes. As the size of the economy has grown, so has the volume of taxes but is the situation any better than it was ten years ago?
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MAKING the half-yearly monetary policy statement, State Bank Governor Shamshad Akhtar told a press conference last Thursday that the central bank will maintain its (tight) monetary policy stance while “effective administrative measures” are needed to control food prices.
The SBP appears to be saying it has done as much as it can to control inflation and it is now up to the government to take corrective measures on the administrative or supply-side to bring down food price inflation that has led to Pakistan’s overall inflation rate to accelerate to a twelve-month high of 8.9 per cent in December. The Governor left the benchmark policy rate (3-day Repo Rate) unchanged at 9.5 per cent.
The monetary policy statement of the State Bank of Pakistan (SBP) makes two other important points: (a) inflation remains stubbornly high and is likely to exceed the 6.5 per cent target for the current fiscal year, and (b) the monetary policy continues to be supportive of the economic growth as threshold level of inflation for a stable economic growth. in the range of 4-6 per cent..
The assertion that Pakistan, being a developing country, needs a high inflation rate (6 per cent or so) to support a 6-8 per cent GDP growth is seriously questionable and is not supported by hard evidence from the most recent comparable GDP growth and inflation data of some major emerging markets as shown in graph 1.
Pakistan stands out with the highest inflation rate and the only country in the group whose inflation rate (8.9 per cent) is more than its GDP growth rate (6.6 per cent). This suggests that either there is something so unique about the structure of Pakistan’s economy that the divergence of its GDP growth and inflation data from the norm of even other developing and oil importing countries (leave aside those of the developed markets) has a valid and legitimate reason or the data itself is questionable.
However, even if we take data at its face value, the graph shows that most of these developing countries are growing at around six per cent or more while their inflation rate is around four per cent or thereabouts. The only exception is India whose inflation rate is 6.7 per cent but then its current GDP growth rate of 9.2 per cent is also significantly higher than Pakistan’s 6.6 per cent. The monetary policy statement does acknowledge that the inflation is relatively higher compared to its competitors and trading partners and this higher domestic inflation has offset the gains emanating from nominal depreciation of the rupee against other currencies. Is it making a case for an accelerated depreciation of rupee in the coming months because the monetary policy has failed to achieve the inflation target?
When most of major developing countries are recording healthy GDP growth while keeping overall inflation (this includes food and energy inflation) under five per cent, should not the government set five per cent inflation rate as target for the next fiscal year? This assumes additional significance – aside from domestic economy and political considerations in an election year – since the relatively higher inflation is hurting competitiveness and exports growth instead of supporting the declared policy objective of encouraging economic growth.
Still, it is fair to say that the SBP, primarily through open market operations and changes in the reserve ratios, has managed to bring down the overall growth rate in the private sector borrowings. Based on the monthly average loans outstanding of the scheduled banks, the loan growth during the six months to December 2006 was 14.5 per cent compared to 25.3 per cent growth during the previous year.
However, the impact of the overall tightening in the credit supply has been somewhat diluted by a Rs34.7 billion increase in loans under Long-term Financing for Export Oriented Projects (LTF-EOP) and R26.8 billion increase in loans under Export Finance Scheme (EFS), both offered at concessional or reduced rates.
The combined increase in loans under these financing schemes accounted for 54 per cent of the Reserve Money (M0) growth during the first half of the current fiscal year. Although there may be legitimate reasons for offering export financing at concessional rates, the reports about the abuse of such facilities abound with money being diverted to real estate and stock market investments. Such schemes can offset the benefits of a monetary tightening and derail the progress made in since late 2004. Given their large proportion in overall money supply growth, it is fair to argue that their rapid build-up may have adverse effects on the core function of the monetary policy, that is, achieving low inflation in the next 12-18 months.
Notwithstanding this, the impact of the monetary tightening is visible in rising interest rates and a deceleration in the principal indicator of the money supply, that is M2, during the first six months of FY2006-07. The three-month Karachi interbank offered rate (KIBOR) averaged 10.39 per cent during December 2006 compared to 8.98 per cent during January 2006. While raising interest rates is a perfectly legitimate response to building inflationary expectations, there is an other side to it.
If real interest rates, that is, nominal interest rates minus inflation, are higher compared to a country’s competitors, they can hurt growth, particularly exports. Some policy makers argue that the local businesses and industrialists should not just look at the lower nominal interest rates in India because Pakistan’s inflation rate is higher. Simple enough, but a comparison of the real interest rates between Pakistan and India reveals a somewhat different and more complex picture.
Graph 2 shows real interest rates in Pakistan and India. The monthly averages of 3-month KIBOR and 3-month MIBOR (Mumbai interbank offered rate) and monthly inflation (CPI) rates were used to calculate the real rates. The graph shows the real interest rates in Pakistan have stayed generally higher during 2006 compared to India’s. Although it is difficult to quantify the impact, higher real interest rates do contribute to higher cost of production and hurt international competitiveness.
Moreover, the data has some difficult implications from a monetary policy standpoint. The real interest rates in Pakistan depict a declining trend since mid-2006 while those in India show an upward trend.
Declining real interest rates can portend a higher inflationary environment 18 months down the road, as monetary tightening takes at least that long to make a dent in inflation. Here, it is relevant to note that the SBP’s last Thursday statement starts with a rather bold assertion that “monetary policy measures adopted in July 2006 augmented earlier tightening and reduced core inflation (Non-Food Non-Energy – NFNE) to 5.5 per cent by December 2006 from 7.4 per cent a year earlier.”
Given the widely accepted view, acknowledged even by the SBP Governor, that monetary policy takes 18 months or so to impact inflation rate; it is not clear how the July tightening has caused headline inflation to drop in just 6 months? While this may be excused as a statement made more for public consumption rather than on a serious note, more important issue is the recent and growing trend of emphasising core inflation as opposed to overall inflation that includes food inflation. Maybe it is just a better number to talk about because it looks good.
On the other hand, one may argue that core inflation is also followed closely in the developed economies such as the United States. However, there is a major difference between Pakistan’s inflation (CPI) measure and those of the developed world. Food inflation is the single largest component of Pakistan’s CPI and constitutes 40 per cent of this index compared to only 17 per cent or so in the U.S. and some other developed markets.
Together with energy, food inflation accounts for almost 48 per cent of the CPI or overall inflation in Pakistan. Therefore, in Pakistan’s context, core inflation (that is, Non-Food Non Energy inflation) is not as meaningful a measure as in some other developed countries. While supply-side factors do play a role in inflation, this should not detract the central bankers from targeting the overall inflation rate as the primary focus of the monetary policy. Monetary tools, such as margin requirements, do play a role in commodity financing and should be used appropriately to respond to the financing needs of essential items.
Moreover, while financial deregulation and innovation have made the money supply harder to interpret in the developed markets, domestic money supply control can be a relatively more effective tool of monetary policy in economies like Pakistan where private sector access to foreign borrowing and markets is fairly limited. The fact that a large sector of the economy is undocumented has little to do with the effect of money supply growth on inflation as has been well established in high inflation developing countries like Brazil and Turkey.
The SBP maintains it is capable of skilful management of the often difficult and complex objectives of meeting national growth priorities, liquidity and demand management, and controlling inflation. As central bankers around the world know too well from history, it is difficult to manage just one goal – low inflation – let alone many.
Given the propensity of the borrowers in Pakistan to abuse concessional credits and the difficulties in managing multiple and some times conflicting near-term policy objectives, the SBP will be better off to make achieving an inflation rate of five per cent or less as its core target for next 12-18 months. That by itself will facilitate growth and price stability. Failure to achieve low inflation will hurt growth and exports down the road as monetary policy mistakes can take up to 18-24 months to show up in even higher inflation numbers. But by then, elections will be over.
Pakistan’s trade deficit hit an all time record of $6.5 billion for the six months ended December 2006 as exports growth continued to stagnate while imports rose to new record. The trade policy whose stated objective has been to facilitate exports-led growth does not seem to be working. Pakistan’s trade liberalisation policy, pursued since the early 1980s, has not delivered the exports-led growth experienced in the East Asian economies for more than two decades.
Pakistan’s GDP growth while impressive during the past four years has been led by consumption and an exports-led growth seems like a distant dream. The government’s top economic managers continue to espouse the benefits of trade liberalisation and maintain that in an age of globalisation, this is the only way forward. Free trade agreements abound and Pakistan’s markets have never been so open. The proponents of ‘free trade’ appear to give the impression that it is the widely accepted way forward to development. Is it?
Even renowned western economists like Joseph Stiglitz, former chief economist of the World Bank and a Nobel laureate, have rejected the notion of free trade as a panacea for development and the so-called Washington Consensus as a means to lift the developing countries out of poverty. In the context of the ‘free market’ policies being pursued by the current government (over which even the main opposition parties do not seem to have any substantial difference of opinion), it is instructive to go back to the early 1990s. Trade and capital market liberalisation were two key components of a broader policy framework, known as the Washington Consensus – a consensus forged between the IMF (located on 19th Street in Washington D.C.), the World Bank (on the 18th Street), and the U.S. Treasury (on the 15th Street) on what constituted the set of policies that would best promote development.
It emphasized downscaling of government, deregulation, and rapid liberalisation and privatisation. Many Latin American and East European countries took it as a gospel and religiously followed its prescriptions. Almost two decades later, the two countries that have grown the fastest, that is China and India, are the ones that did not follow these policies. Our political leadership, be it in the government or in the mainstream opposition parties like the PPP or the PML (N), seems to believe that once the economy is liberalised and privatised, sustained economic development will follow and benefits will trickle down to the poor. Is it that simple? Not just that, this notion is out-dated and has been rejected by some of the World’s leading development economists as well as by the World Bank itself.
Latin American and East European countries that followed the policy framework laid down by the Washington Consensus have had mixed success with their share of disasters but it is those Asian countries who devised their policies in accordance with their own individual circumstances and environments have been the most successful. These Asian countries believed in the importance of markets, but they realised that market had to be created and governed, and that sometimes private sector might not do what needs to be done. While China and Korea were slow to privatise, they focused on exports-led growth, especially in the early days of development, and limited imports that would undermine local manufacturing and agriculture.
Asia tigers followed a course markedly different from the Washington Consensus, with a role for government far larger than the minimalist role that is being currently articulated in Islamabad. Both China and India did not rush to privatise large-scale manufacturing, banks, or the oil and gas industry nor did they allow unrestricted short-term capital flows. While they opened up their markets for long-term investors, they made sure that the foreign investors transferred technology and trained local workers, so that they contributed to the nation’s development.
While it is true that China and India are very competitive in terms of labour productivity, they did not gain this competitive advantage through any ‘market’ reforms. For example, since 1978, China has been the world’s most successful economy, growing at an average per capita rate of eight per cent per year. At that rate, its per capita income has doubled every nine years, (our planners should note this simple mathematical rule that it takes an average of eight per cent growth to double an income level in nine years. How we have been able to achieve almost doubling of our per capita income in less than nine years when our average growth rate has been less than eight per cent is something of a statistical miracle) and thus had increased more than eight-fold by 2005.
China did not start privatising until only a few years ago. Paradoxically, the foundations of China and India’s historic successes were laid down during the much castigated ‘socialist’ period. Both invested heavily in education, particularly science and technology education, as well in heavy engineering and other capital-intensive industries. In China, the liberalisation started from the agriculture sector in the early 1980s as it was ready for the markets after the Green Revolution of the 1970s, which promoted the use of better farming techniques and new seeds and increased crop yields many time over.
The next steps of China’s reforms, in the early 1980s and early 1990s, involved liberalisation of international trade and investment, but initially only in specially designated free-trade zones, known as special economic zones (SEZs). Foreign investors looking for trained and low-cost workers found no shortage of human talent as the ‘communist’ China had invested heavily in basic education and these SEZs jump started the labour-intensive exports-led industrial revolution that has transformed China and indeed the global economy.
The government took an active and leading role in planning and building these SEZs as the trained human resources were already available. Both China and India continue to follow five-year official planning cycle with clearly defined goals and policies. We also did that but the critical difference is that our policies provided just protection and subsidies to a selected few while China and India made large investments in basic education and heavy industries.
In contrast, Mexico, which signed the North American Free Trade Agreement (NAFTA) with the United States and Canada in 1994, has not seen the benefits the free trade advocates thought it would bring to Mexico. NAFTA did not result in rapid growth during the first decade following the signing of NAFTA (per capita income grew by only 1.8 per cent) and its economy grew more dependent on the United States. Mexico followed the Washington Consensus and rapidly privatised and liberalised its economy while not investing enough in infrastructure and human development.
Today, Mexico’s exports are having a tough time competing with China’s goods despite the existence of a ‘free trade’ agreement with the United States. It is just not tariffs or subsidies that make goods cheaper or competitive. Labour productivity in China (as well as in Korea, India or Taiwan) is higher simply because of decades of investment in education and training. Tariffs played a limited role in China’s success.
Now more importantly, and our policy makers should make a careful note of this, the Washington Consensus is no longer the accepted conventional wisdom it once was. Following the success of Asian economies and disappointing results of following its straight jacket policies in Latin America and Eastern Europe, even some of the World Bank’s top officials, like its former President Jim Wolfensohn and the Chief Economist Joseph Stiglitz, began to accept that that the strategy of just getting government out of the way of the private sector and markets had failed. By the late 1990s, following the collapse of the Russian economy in August 1998, the policy of just privatising and liberalising had been abandoned even by the World Bank which came up with what was called the comprehensive approach to development – with emphasis differing from country to country and from time to time.
According to Mr. Stiglitz’ own admission, the comprehensive approach to development did not contain anything really new: “they were variants of the strategies that had worked so well and for so long in East Asia but had been ignored” by the believers of what he called market fundamentalism.
We would be better off if we can come up with our development strategy, learn from the successes of China and other Asian countries and stop following the now discredited and out-dated strategies advocated by the market fundamentalists and believers of rapid liberalisation and privatisation as a panacea for development.
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THE much-awaited GDR offering of Oil and Gas Development Company (OGDC), promoted as Pakistan’s largest ever, fell short of expectations in terms of size and pricing with a negative impact on OGDC share price in the local stock market. The KSE 100-share index dropped by 231 points to close at 10,388 on Friday following the offering in London.
The sale of government’s 8.8 per cent (376.79 million shares) stake in OGDC raised $712 million on November 30, but did not meet the earlier target of selling 10-15 per cent stake to raise $1 to $1.5 billion.
The Minister for Privatisation had billed this as the largest ever equity offering of a Pakistani company abroad at a press conference on November 12 but this GDS offering did not exceed the $900 million sale of a 10 per cent stake in Pakistan Telecommunication Company in September 1994.
However, it is a welcome development that a Pakistani company has been able to raise such a large amount in the international capital markets after a long time and does indicate confidence of the international investment community in Pakistan’s economic prospects as well as about OGDC’s future. Read more »
THOSE who have worked in the financial industry for a long period may have come across an adage: “the balance sheet of a bank is like a bikini. What it reveals is interesting; what it hides is vital.”
The US experts’ report (conducted by a firm called Diligence) containing the findings into the alleged causes of the stock market crash in March 2005 contains some glaring contradictions and omissions for it to assert categorically that “under the existing circumstances, and on the basis of the evidence examined to date, we render findings and conclusions that greatly differ, in many r respects, with the findings and conclusions rendered by the Taskforce [of Justice Saleem Akhtar].
“Most significantly, we do not find sufficient evidence to support the paramount scheme of manipulation in the manner put forth by the Taskforce for the period in question. Nor do we find sufficient evidence to support the alleged scheme’s primary element (withdrawal of COT) that was ostensibly responsible for the fall of market prices. We find no patterns of activity or credible evidence to support a theory that, during March 2005, certain influential brokers systematically and manipulatively inflated and then deflated market prices, reaping substantial profits in the process.”
The report should have stated that it did not find sufficient evidence to support or refute the findings of the task force. Here are the reasons why? Read more »
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GENERAL Musharraf’s book has already raised a storm of controversies ranging from Richard Armitage’s threat to bomb Pakistan to the stone age to Dr Qadeer’s role in the transfer of nuclear technology, Kargil episode and Pakistan’s efforts in combating terrorism. Whether the general’s account is a fair description or a self-indulgent narrative will ultimately be judged by history.
The general perception is that the general was right in changing the course of Pakistan’s Afghan policy in the aftermath of 9/11. But it is this conventional wisdom that needs a closer examination in a broader historic context. There had been a few occasions in the past when elites and the political pundits were almost unanimous in their view on a matter of national importance, only to be proven disastrously wrong later. One may recall the tragic events of 1971 when the army, politicians, and a section of the media were unanimous in their support of the military action launched by General Yahya Khan.
There were many in West Pakistan who took delight in the sadly mistaken belief that Pakistan had been saved. Yahya Khan, though discredited later, was seen as a professional soldier who could fix the ‘traitor’ Mujeeb-ur-Rehman and stand up to Indira Gandhi. The rest, as the cliché goes, is history. Again in 1977, the establishment, the businessmen and upper classes wre fully convinced that Bhutto was the root cause of all the ills and his removal from the scene would put the society back on the right track. Decades later, even his most bitter opponents, like late Nawabzada Nasrullah Khan, admitted that Bhutto was a brilliant, honest and nationalist leader who gave Pakistan its first consensus constitution.
Today we are confronted with two popular myths: (a) General Musharraf had no option but to do what he did in the aftermath of 9/11 and (b) that the fundamentalists would take over the country if he fails. This needs to be debated in the light of hard facts. General Musharraf’s version of recent events not only falls short of the truth but has also dangerous implications for the future of Pakistan. The wide coverage in the US media of his version is of little consequence from a long term perspective. Any student of history would recall that Anwar Sadat was a darling of the US media and was the most loved Arab leader in the US after he signed the peace treaty with Israel in 1979 but his policies did not do any good to Egypt. A fanatic of the Muslim Brotherhood, the extreme right-wing politico-religious party, assassinated him.
Let us first look at General Musharraf’s claims and their credibility. He asserts that Kargil was a military success and it was Nawaz Sharif who buckled under the American pressure. This claim stands contradicted if one gives a close look at the speech of the former US ambassador to Pakistan, Robert Oakley, made at the US State Department on March 23, 2001. He had said:
“Pakistan is another example. Again, the most powerful political institution in the country was the one with which we didn’t want to deal because they were military not civilian. The one time we did deal with them was during a crisis. President Clinton quite wisely asked General Zinni to call upon General Musharraf, someone he had gotten to know before he became the Army Chief. As a result of their conversation, General Musharraf, as an Army Chief, said, `We’d better climb down from Kargil before we have a huge war with India’. This was a direct result of their conversation. Zinni didn’t threaten; he didn’t make any promises.”
Robert Oakley is not a member of the PML-N nor a friend of the MMA. He stated this in 2001 long before the demands for an independent enquiry into Kargil were made by the opposition. This, one can say, highlights three characteristics of General Musharraf’s political style. He jumps headlong into a crisis without thinking about its implications; he is too quick and eager to make a policy U-turn under direct American pressure contrary to immature and bold claims about being his own man and having the ability to stand up to pressure; he not only denies responsibility for policy blunders but tries to sell them as the right steps taken in the greater national interest.
This is a pattern we see not only in the Kargil debacle but also in his handling of the crisis unleashed by the events of 9/11 and thereafter.
Now let’s look at the widely accepted view that there was no option but to surrender to the list of demands made by Colin Powell and Richard Armitage. This argument may be appealing to people who have not closely followed the evolution of the Cheney doctrine since the late 1990s. While a layman can be excused for ignorance, responsible military and civilian leaders are expected to have an understanding of the global power politics, particularly the US foreign policy.
The centrepiece of Cheney doctrine was oil and Iraq as the first target and Iran the second. Terrorism was to be used only as a pretext for intervention and never to become a priority item on the Bush administration’s agenda (even after 9/11), a theme which has been so well documented by the former US chief of anti-terrorism Richard Clarke in his book “Against All Enemies.” Richard Clarke served seven US presidents including Bush senior, Bill Clinton and Bush junior and has been described as the man who knows more than anyone in the US, about terrorism, Al Qaeda and the US policy.
Now an argument can be made that this is hindsight. It is not. Had our wise experts in the military establishment been following the evolution of the neo-cons’ thinking since the 1990s, particularly that of Cheney and Paul Wolfowitz, they would have seen through the emptiness of the threats made by Colin Powell and Armitage. The real targets were Iraq and Iran. The US could not and cannot afford to have an unstable Pakistan particularly when the whole Cheney doctrine centered on control of the oil reserves in the Middle East and ensuring the safety of supply routes through the strait of Hurmuz. What it means is that Pakistan may not be indispensable to the execution of the long term US policy agenda, the latter can never afford to have an unstable Pakistan as long as there is a hostile regime in Iran.
This position is further reinforced by the fact that given the peaceful but bitter power struggle between Russia and the US in Central Asia (which has the third largest concentration of oil reserves after the Middle East and Russia), the last thing US would do is to bomb Pakistan. This would be a strategic suicide. But we panicked without taking the time to formulate a considered and well thought out response in a manner that would have leveraged all the cards Pakistan held and still does, notwithstanding our establishment’s ill-conceived, nay, ridiculous strategy of supporting the Taliban (till 2001) to provide the so-called strategic depth.
The second piece of the current conventional wisdom is that Musharraf must continue to remain in power because as he goes, the jihadis and fundamentalists would take over the country. The short answer to this view is, `yes’ they most likely will step in if the army rule continues and the democracy is denied a fair and uninterrupted chance. The Iranian revolution led by an army of theocrats could not have taken place had the US allowed Iran to function as a democracy under Mossadeq and had not supported a coup against a democratic government in 1953. It was the continuation of the US-backed autocratic regime under the Shah of Iran that precipitated the plunge of a liberal Iran into a fundamentalist and authoritarian society.
The US repeated the same mistake in Lebanon. Had it not tried to prop up a pro-western government in Lebanon through the force of gun in the 1980s, Hezbollah would not have emerged as the most organised popular force in the country and even in the entire Arab world. Had Saudi Arabia not suppressed dissent and allowed political activity, Al Qaeda would not have gained the ground it did after the forced-exile of Osama bin Laden from Saudi Arabia to Sudan in 1991. And at home, if Zia had allowed political parties and civil institutions to grow, Pakistan’s institutions would not have been as weak as they are now.
ON October 2, Russia rejected calls from the European Union to lift economic sanctions on Georgia, saying it had cut transport links to curb a dangerous military build-up by its pro-western neighbour. In unusually strident remarks, Russian Foreign Minister Sergei Lavrov also took a swipe at the United States, saying its support for Georgia had “stimulated” Tbilisi into taking unfriendly steps against Russia.
Russia cut rail, air and postal links with ex-Soviet Georgia in response to the arrest of four Russian soldiers on spying charges. Tbilisi released the four on October 9 in what it termed a goodwill gesture. But Moscow made it clear the spying row was just part of what it sees as a deeper dispute with Georgia, which has irked Moscow by aggressively pursuing membership of Nato and the European Union and pulling out of Russia’s orbit. Read more »
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A New York Times article (August 9) comments that “moderate reformers across the Arab world say American support for Israel’s battle with Hezbollah has put them on the defensive, tarring them by association and boosting Islamist parties. The very people whom the United States wanted to encourage to promote democracy from Bahrain to Casablanca instead feel trapped by a policy that they now ridicule more or less as “destroying the region in order to save it.”
The issue is not just limited to the Middle East. Here at home, the government and the “mainstream” political parties, notably those belonging to the Alliance for the Restoration of Democracy (ARD), have to do a lot of serious thinking and soul-searching about the growing radicalisation of political thinking from Indonesia to Morocco, spurred by an unashamedly and almost blind support of the United States to the recent Israeli aggression against Lebanon.
The issue of military’s role in Pakistan’s politics has been the subject of ARD’s charter of democracy and the military has been blamed for not allowing the growth of democratic institutions and practices, but military’s dominance of our history is closely linked with our foreign policy under which we have always sought aid from the US in exchange for the support and help in achieving the latter’s strategic objectives in the region.
The US-Pakistan defence relationship has served the US foreign policy interests while enabling the US to keep a strong grip over Pakistan’s domestic polity. Obviously, Pakistan is not an isolated case where the US policy makers supported corrupt, autocratic and incompetent regimes to further their strategic interests. The democracy and development in the US-allied states (e.g. Pakistan, Egypt, Saudi Arabia and Indonesia) took a back seat as the US sought reliable partners to pursue its global and regional foreign policy goals. It is in this context that the present debate about army’s role in our political history needs deeper examination.
While the ARD’s charter and a letter to President Musharraf written by “distinguished citizens”, that included former heads of ISI, have received a lot of media attention, it is quite interesting that almost none of the opposition parties or for that matter, the “distinguished citizens” have commented on the US-Pakistan Army nexus that has been a critical factor in sustaining prolonged periods of army rule in Pakistan.
Now another group of prominent citizens has written a similar letter to the president. If we are going to have a truly representative government and an independent legislature and judiciary, are we going to have an independent foreign policy? Or can we have a democracy and an independent foreign policy?
The Israeli actions juxtaposed with Dr Condoleezza Rice’s declaration of a “new Middle East” may prove to be the beginning of a new era in the Muslim and Arab countries where for any government or political party to support US foreign policy in the region would become a political liability. Sensing this mood, even the otherwise moderate and pro-US King Abdullah has spoken. In an interview with the BBC (August 8), he criticised the international community for only offering a piecemeal way of dealing with the crises in the Middle East.
He spoke of a region that was being radicalised by the growing support for Hezbollah as it fought back Israeli onslaught in the just-ended war. The moderates, he said, were being marginalized. The BBC correspondent, who interviewed the king, said it was clear that countries like Jordan and Egypt, who have close ties with the United States and peace deals with Israel, feel deeply worried, if not threatened, by this crisis.
Here in Pakistan, unless the “moderate” political forces can provide a model of democracy and development that does not depend on US military and economic assistance, their ability to provide a viable alternative to the military or autocratic rulers, is likely to be seriously tested in the coming years. The challenge seems greater now than compared to any other point in post-cold war period. It would be naive to assume that the US (under neo-conservatives or democrats) would actively support the “moderate” political parties in their demand to hold free and fair elections to establish a truly representative government.
The Bush administration’s brief honeymoon with a vision for democracy in the region is already over for all practical purposes with the election of Hamas in Palestine. More importantly, the prospect of a Hezbollah-dominated government in Lebanon is a thought scary enough for any US government to entertain any ideas about representative rule in the region’s countries.
Let’s now come to what is really wrong with the premise that the mainstream parties appear to believe that the route to power goes via Washington. One only has to look at Latin America to see that populist leaders have managed to win elections despite their anti-US stance on a range of policy issues.
President Lula in Brazil [the largest economic power in Western Hemisphere], Chavez in Venezuela [the fifth largest producer of oil from whom the US imports 15 per cent of its crude oil requirements] and Evo Morales in Bolivia [one of the world’s largest producers of coca, the raw material for cocaine] have won elections in the last four years despite their leftist credentials. But wasn’t Latin America the first to embrace the new world order and undertake large scale privatisation starting in the 1980s?
And the US-supported economic reforms were to transform these economies. Then how come, we are witnessing the revival of the populist politics right under the nose of Uncle Sam?
A leading US economist, Paul Krugman, writing about the Latin American experience with economic reforms and privatization in his latest book, The Great Unravelling says: “the actual results have been mixed. On the economic side, where hopes were initially highest, things have not gone too well. There are no economic miracles in Latin America, and there have been some notable disasters, Argentina’s crisis being the latest.
The best you can say is that some of the disaster victims, notably Mexico [a close US friend], seem to have recovered their balance (with a lot of help, one must say, from the Clinton Administration) and moved onto a path of steady, but modest, economic growth … so while the US may have hoped for a new Latin stability based on vibrant prosperity, what it actually got was stability despite economic woes, thanks to democracy. Things could be lot worse.”
There are a few lessons here. Economic reforms alone (read privatisation and deregulation) without infrastructure and human development are not going to provide any relief to the economic woes of the people nor do they provide a foundation for a sustainable high economic (GDP) growth. Second, military dictatorships brought neither political nor economic stability to Latin America but democracy did bring some stability. Third, it is possible for political parties to win popular support and win elections despite US opposition provided their leadership has confidence in their domestic support and conviction in their policies.
In Pakistan’s case, however, the traditional political parties face the additional challenge of convincing the electorate that they can bring some progress to a country ravaged by poverty and corruption despite their poor track record while they were in power. But if they still continue to indulge in corruption as well as remain cronies and followers of the US policy, the under-privileged and the illiterate may find the alternative of “jihad” much more appealing. After all, they don’t have much to lose!
In interviews, however, American intelligence officials and high-ranking military officers said that Pakistanis were indeed flown to safety, in a series of nighttime airlifts that were approved by the Bush Administration. The Americans also said that what was supposed to be a limited evacuation apparently slipped out of control, and, as an unintended consequence, an unknown number of Taliban and Al Qaeda fighters managed to join in the exodus. The Administration ordered the United States Central Command to set up a special air corridor to help insure the safety of the Pakistani rescue flights from Kunduz to the northwest corner of Pakistan… [According to] an Indian assessment, thirty three hundred prisoners surrendered… A few hundred Taliban were also turned over to other tribal leaders… That left between four and five thousand men unaccounted for. “Where are the balance?” … None of the American intelligence officials I spoke with were able to say with certainty how many Taliban and Al Qaeda fighters were flown to safety, or may have escaped from Kunduz by other means. India, wary of antagonizing the Bush Administration, chose not to denounce the airlift at the time….Diplomatic notes protesting the airlift were sent to Britain and the United States. Neither responded… “
In Afghanistan last November, the Northern Alliance, supported by American Special Forces troops and emboldened by the highly accurate American bombing, forced thousands of Taliban and Al Qaeda fighters to retreat inside the northern hill town of Kunduz. Trapped with them were Pakistani Army officers, intelligence advisers, and volunteers who were fighting alongside the Taliban. (Pakistan had been the Taliban’s staunchest military and economic supporter in its long-running war against the Northern Alliance.) Many of the fighters had fled earlier defeats at Mazar-i-Sharif, to the west; Taloqan, to the east; and Pul-i-Khumri, to the south. The road to Kabul, a potential point of retreat, was blocked and was targeted by American bombers. Kunduz offered safety from the bombs and a chance to negotiate painless surrender terms, as Afghan tribes often do.
Surrender negotiations began immediately, but the Bush Administration heatedly—and successfully—opposed them. On November 25th, the Northern Alliance took Kunduz, capturing some four thousand of the Taliban and Al Qaeda fighters. The next day, President Bush said, “We’re smoking them out. They’re running, and now we’re going to bring them to justice.”
Even before the siege ended, however, a puzzling series of reports appeared in the Times and in other publications, quoting Northern Alliance officials who claimed that Pakistani airplanes had flown into Kunduz to evacuate the Pakistanis there. American and Pakistani officials refused to confirm the reports. On November 16th, when journalists asked Secretary of Defense Donald Rumsfeld about the reports of rescue aircraft, he was dismissive. “Well, if we see them, we shoot them down,” he said. Five days later, Rumsfeld declared, “Any idea that those people should be let loose on any basis at all to leave that country and to go bring terror to other countries and destabilize other countries is unacceptable.” At a Pentagon news conference on Monday, November 26th, the day after Kunduz fell, General Richard B. Myers, of the Air Force, who is the chairman of the Joint Chiefs of Staff, was asked about the reports. The General did not directly answer the question but stated, “The runway there is not usable. I mean, there are segments of it that are usable. They’re too short for your standard transport aircraft. So we’re not sure where the reports are coming from.”
Pakistani officials also debunked the rescue reports, and continued to insist, as they had throughout the Afghanistan war, that no Pakistani military personnel were in the country. Anwar Mehmood, the government spokesman, told newsmen at the time that reports of a Pakistani airlift were “total rubbish. Hogwash.”
In interviews, however, American intelligence officials and high-ranking military officers said that Pakistanis were indeed flown to safety, in a series of nighttime airlifts that were approved by the Bush Administration. The Americans also said that what was supposed to be a limited evacuation apparently slipped out of control, and, as an unintended consequence, an unknown number of Taliban and Al Qaeda fighters managed to join in the exodus. “Dirt got through the screen,” a senior intelligence official told me. Last week, Secretary of Defense Rumsfeld did not respond to a request for comment.
Pakistan’s leader, General Pervez Musharraf, who seized power in a 1999 coup, had risked his standing with the religious fundamentalists—and perhaps his life—by endorsing the American attack on Afghanistan and the American support of the Northern Alliance. At the time of Kunduz, his decision looked like an especially dangerous one. The initial American aim in Afghanistan had been not to eliminate the Taliban’s presence there entirely but to undermine the regime and Al Qaeda while leaving intact so-called moderate Taliban elements that would play a role in a new postwar government. This would insure that Pakistan would not end up with a regime on its border dominated by the Northern Alliance. By mid-November, it was clear that the Northern Alliance would quickly sweep through Afghanistan. There were fears that once the Northern Alliance took Kunduz, there would be wholesale killings of the defeated fighters, especially the foreigners.
Musharraf won American support for the airlift by warning that the humiliation of losing hundreds—and perhaps thousands—of Pakistani Army men and intelligence operatives would jeopardize his political survival. “Clearly, there is a great willingness to help Musharraf,” an American intelligence official told me. A C.I.A. analyst said that it was his understanding that the decision to permit the airlift was made by the White House and was indeed driven by a desire to protect the Pakistani leader. The airlift “made sense at the time,” the C.I.A. analyst said. “Many of the people they spirited away were the Taliban leadership”—who Pakistan hoped could play a role in a postwar Afghan government. According to this person, “Musharraf wanted to have these people to put another card on the table” in future political negotiations. “We were supposed to have access to them,” he said, but “it didn’t happen,” and the rescued Taliban remain unavailable to American intelligence.
According to a former high-level American defense official, the airlift was approved because of representations by the Pakistanis that “there were guys— intelligence agents and underground guys—who needed to get out.”
Once under way, a senior American defense adviser said, the airlift became chaotic. “Everyone brought their friends with them,” he said, referring to the Afghans with whom the Pakistanis had worked, and whom they had trained or had used to run intelligence operations. “You’re not going to leave them behind to get their throats cut.” Recalling the last-minute American evacuation at the end of the Vietnam War, in 1975, the adviser added, “When we came out of Saigon, we brought our boys with us.” He meant South Vietnamese nationals. ” ‘How many does that helicopter hold? Ten? We’re bringing fourteen.’ ”
The Bush Administration may have done more than simply acquiesce in the rescue effort: at the height of the standoff, according to both a C.I.A. official and a military analyst who has worked with the Delta Force, the American commando unit that was destroying Taliban units on the ground, the Administration ordered the United States Central Command to set up a special air corridor to help insure the safety of the Pakistani rescue flights from Kunduz to the northwest corner of Pakistan, about two hundred miles away. The order left some members of the Delta Force deeply frustrated. “These guys did Desert Storm and Mogadishu,” the military analyst said. “They see things in black-and-white. ‘Unhappy’ is not the word. They’re supposed to be killing people.” The airlift also angered the Northern Alliance, whose leadership, according to Reuel Gerecht, a former Near East operative for the C.I.A., had sought unsuccessfully for years to “get people to pay attention to the Pakistani element” among the Taliban. The Northern Alliance was eager to capture “mainline Pakistani military and intelligence officers” at Kunduz, Gerecht said. “When the rescue flights started, it touched a raw nerve.”
Just as Pakistan has supported the Taliban in Afghanistan, Pakistan’s arch-rival India has supported the Northern Alliance. Operatives in India’s main external intelligence unit—known as RAW, for Research and Analysis Wing—reported extensively on the Pakistani airlift out of Kunduz. (The Taliban and Al Qaeda have declared the elimination of India’s presence in the contested territory of Kashmir as a major goal.) RAW has excellent access to the Northern Alliance and a highly sophisticated ability to intercept electronic communications. An Indian military adviser boasted that when the airlift began “we knew within minutes.” In interviews in New Delhi, Indian national-security and intelligence officials repeatedly declared that the airlift had rescued not only members of the Pakistani military but Pakistani citizens who had volunteered to fight against the Northern Alliance, as well as non-Pakistani Taliban and Al Qaeda. Brajesh Mishra, India’s national-security adviser, said his government had concluded that five thousand Pakistanis and Taliban—he called it “a ballpark figure”—had been rescued.
According to RAW’s senior analyst for Pakistani and Afghan issues, the most extensive rescue efforts took place on three nights at the time of the fall of Kunduz. Indian intelligence had concluded that eight thousand or more men were trapped inside the city in the last days of the siege, roughly half of whom were Pakistanis. (Afghans, Uzbeks, Chechens, and various Arab mercenaries accounted for the rest.) At least five flights were specifically “confirmed” by India’s informants, the RAW analyst told me, and many more were believed to have taken place.
In the Indian assessment, thirtythree hundred prisoners surrendered to a Northern Alliance tribal faction headed by General Abdul Rashid Dostum. A few hundred Taliban were also turned over to other tribal leaders. That left between four and five thousand men unaccounted for. “Where are the balance?” the intelligence officer asked. According to him, two Pakistani Army generals were on the flights.
None of the American intelligence officials I spoke with were able to say with certainty how many Taliban and Al Qaeda fighters were flown to safety, or may have escaped from Kunduz by other means.
India, wary of antagonizing the Bush Administration, chose not to denounce the airlift at the time. But there was a great deal of anger within the Indian government. “We had all the information, but we did not go public,” the Indian military adviser told me. “Why should we embarrass you? We should be sensible.” A RAW official said that India had intelligence that Musharraf’s message to the Americans had been that he didn’t want to see body bags coming back to Pakistan. Brajesh Mishra told me that diplomatic notes protesting the airlift were sent to Britain and the United States. Neither responded, he said.
Mishra also said that Indian intelligence was convinced that many of the airlifted fighters would soon be infiltrated into Kashmir. There was a precedent for this. In the past, the Pakistani Army’s Inter-Services Intelligence agency (I.S.I.) had trained fighters in Afghanistan and then funnelled them into Kashmir. One of India’s most senior intelligence officials also told me, “Musharraf can’t afford to keep the Taliban in Pakistan. They’re dangerous to his own regime. Our reading is that the fighters can go only to Kashmir.”
Kashmir, on India’s northern border, is a predominantly Muslim territory that has been fiercely disputed since Partition, in 1947. Both India and Pakistan have waged war to support their claim. Pakistanis believe that Kashmir should have become part of their country in the first place, and that India reneged on the promise of a plebiscite to determine its future. India argues that a claim to the territory on religious grounds is a threat to India’s status as a secular, multi-ethnic nation. Kashmir is now divided along a carefully drawn line of control, but cross-border incursions—many of them bloody—occur daily.
Three weeks after the airlift, on December 13th, a suicide squad of five heavily armed Muslim terrorists drove past a barrier at the Indian Parliament, in New Delhi, and rushed the main building. At one point, the terrorists were only a few feet from the steps to the office of India’s Vice-President, Krishan Kant. Nine people were killed in the shoot-out, in addition to the terrorists, and many others were injured. The country’s politicians and the press felt that a far greater tragedy had only narrowly been averted.
In India, the Parliament assault was regarded as comparable to September 11th. Indian intelligence quickly concluded that the attack had been organized by operatives from two long-standing Kashmiri terrorist organizations that were believed to be heavily supported by the I.S.I.
Brajesh Mishra told me that if the attack on the Parliament had resulted in a more significant number of casualties “there would have been mayhem.” India deployed hundreds of thousands of troops along its border with Pakistan, and publicly demanded that Musharraf take steps to cut off Pakistani support for the groups said to be involved. “Nobody in India wants war, but other options are not ruled out,” Mishra said.
The crisis escalated, with military men on both sides declaring that they were prepared to face nuclear war, if necessary. Last week, Colin Powell, the Secretary of State, travelled to the region and urged both sides to withdraw their troops, cool the rhetoric, and begin constructive talks about Kashmir.
Under prodding from the Bush Administration, Musharraf has taken action against his country’s fundamentalist terror organizations. In the last month, the government has made more than a thousand arrests, seized bank accounts, and ordered the I.S.I. to stop all support for terrorist groups operating inside Kashmir. In a televised address to the nation on January 12th, Musharraf called for an end to terrorism, but he also went beyond the most recent dispute with India and outlined a far-reaching vision of Pakistan as a modern state. “The day of reckoning has come,” he said. “Do we want Pakistan to become a theocratic state? Do we believe that religious education alone is enough for governance? Or do we want Pakistan to emerge as a progressive and dynamic Islamic welfare state?” The fundamentalists, he added, “did nothing except contribute to bloodshed in Afghanistan. I ask of them whether they know anything other than disruption and sowing seeds of hatred. Does Islam preach this?”
“Musharraf has not done as much as the Indians want,” a Bush Administration official who is deeply involved in South Asian issues said. “But he’s done more than I’d thought he’d do. He had to do something, because the Indians are so wound up.” The official also said, however, that Musharraf could not last in office if he conceded the issue of Kashmir to India, and would not want to do so in any case. “He is not a fundamentalist but a Pakistani nationalist—he genuinely believes that Kashmir ‘should be ours.’ At the end of the day, Musharraf would come out ahead if he could get rid of the Pakistani and Kashmiri terrorists—if he can survive it. They have eaten the vitals out of Pakistan.” In his address, Musharraf was unyielding on that subject. “Kashmir runs in our blood,” he said. “No Pakistani can afford to sever links with Kashmir. . . . We will never budge an inch from our principled stand on Kashmir.”
Milton Bearden, a former C.I.A. station chief in Pakistan who helped run the Afghan war against the Soviet Union in the late nineteen-eighties and worked closely with the I.S.I., believes that the Indian government is cynically using the Parliament bombing to rally public support for the conflict with Pakistan. “The Indians are just playing brinkmanship now—moving troops up to the border,” he said. “Until September 11th, they thought they’d won this thing—they had Pakistan on the ropes.” Because of its nuclear program, he said, “Pakistan was isolated and sanctioned by the United States, with only China left as an ally. Never mind that the only country in South Asia that always did what we asked was Pakistan.” As for Musharraf, Bearden said, “What can he do? Does he really have the Army behind him? Yes, but maybe by only forty-eight to fifty-two per cent.” Bearden went on, “Musharraf is not going to be a Kemal Atatürk”—the founder of the secular Turkish state—”but as long as he can look over his shoulder and see that Rich Armitage”—the United States Deputy Secretary of State—”and Don Rumsfeld are with him he might be able to stop the extremism.”
A senior Pakistani diplomat depicted India as suffering from “jilted-lover syndrome”—referring to the enormous amount of American attention and financial aid that the Musharraf government has received since September 11th. “The situation is bloody explosive,” the diplomat said, and argued that Musharraf has not been given enough credit from the Indian leadership for the “sweeping changes” that have taken place in Pakistan. “Short of saying it is now a secular Pakistan, he’s redefined and changed the politics of the regime,” the diplomat said. “He has de-legitimized religious fundamentalism.” The diplomat told me that the critical question for Pakistan, India, and the rest of South Asia is “Will the Americans stay involved for the long haul, or will attention shift to Somalia or Iraq? I don’t know.”
Inevitably, any conversation about tension between India and Pakistan turns to the issue of nuclear weapons. Both countries have warheads and the means to deliver them. (India’s capabilities, conventional and nuclear, are far greater—between sixty and ninety warheads—while Pakistan is thought to have between thirty and fifty.) A retired C.I.A. officer who served as station chief in South Asia told me that what he found disturbing was the “imperfect intelligence” each country has as to what the other side’s intentions are. “Couple that with the fact that these guys have a propensity to believe the worst of each other, and have nuclear weapons, and you end up saying, ‘My God, get me the hell out of here.’ ” Milton Bearden agreed that the I.S.I. and RAW are “equally bad” at assessing each other.
In New Delhi, I got a sense of how dangerous the situation is, in a conversation with an Indian diplomat who has worked at the highest levels of his country’s government. He told me that he believes India could begin a war with Pakistan and not face a possible nuclear retaliation. He explained, “When Pakistan went nuclear, we called their bluff.” He was referring to a tense moment in 1990, when India moved its Army en masse along the Pakistani border and then sat back while the United States mediated a withdrawal. “We found, through intelligence, that there was a lot of bluster.” He and others in India concluded that Pakistan was not willing to begin a nuclear confrontation. “We’ve found there is a lot of strategic space between a low-intensity war waged with Pakistan and the nuclear threshold,” the diplomat said. “Therefore, we are utilizing military options without worrying about the nuclear threshold.” If that turned out to be a miscalculation and Pakistan initiated the use of nuclear weapons, he said, then India would respond in force. “And Pakistan would cease to exist.”
The Bush Administration official involved in South Asian issues acknowledged that there are some people in India who seem willing to gamble that “you can have war but not use nuclear weapons.” He added, “Both nations need to sit down and work out the red lines”—the points of no return. “They’ve never done that.”
An American intelligence official told me that the Musharraf regime had added to the precariousness of the military standoff with India by reducing the amount of time it would take for Pakistan to execute a nuclear strike. Pakistan keeps control over its nuclear arsenal in part by storing its warheads separately from its missile- and aircraft-delivery systems. In recent weeks, he said, the time it takes to get the warheads in the air has been cut to just three hours—”and that’s too close. Both sides have their nukes in place and ready to roll.”
Even before the airlift from Kunduz, the Indians were enraged by the Bush Administration’s decision to make Pakistan its chief ally in the Afghanistan war. “Musharraf has two-timed you,” a recently retired senior member of India’s diplomatic service told me in New Delhi earlier this month. “What have you gained? Have you captured Osama bin Laden?” He said that although India would do nothing to upset the American campaign in Afghanistan, “We will turn the heat on Musharraf. He’ll go back to terrorism as long as the heat is off.” (Milt Bearden scoffed at that characterization. “Musharraf doesn’t have time to two-time anybody,” he said. “He wakes up every morning and has to head out with his bayonet, trying to find the land mines.”)
Some C.I.A. analysts believe that bin Laden eluded American capture inside Afghanistan with help from elements of the Pakistani intelligence service. “The game against bin Laden is not over,” one analyst told me in early January. He speculated that bin Laden could be on his way to Somalia, “his best single place to hide.” Al Qaeda is known to have an extensive infrastructure there. The analyst said that he had concluded that “he’s out. We’ve been looking for bombing targets for weeks and weeks there but can’t identify them.”
Last week, Donald Rumsfeld told journalists that he believed bin Laden was still in Afghanistan. Two days later, in Pakistan, Musharraf announced that he thought bin Laden was probably dead—of kidney disease.
A senior C.I.A. official, when asked for comment, cautioned that there were a variety of competing assessments inside the agency as to bin Laden’s whereabouts. “We really don’t know,” he said. “We’ll get him, but anybody who tells you we know where he is is full of it.”
India’s grievances—over the Pakistani airlift, the continuing terrorism in Kashmir, and Musharraf’s new status with Washington—however heartfelt, may mean little when it comes to effecting a dramatic change of American policy in South Asia. India’s democracy and its tradition of civilian control over the military make it less of a foreign-policy priority than Pakistan. The Bush Administration has put its prestige, and American aid money, behind Musharraf, in the gamble—thus far successful—that he will continue to move Pakistan, and its nuclear arsenal, away from fundamentalism. The goal is to stop nuclear terrorism as well as political terrorism. It’s a tall order, and missteps are inevitable. Nonetheless, the White House remains optimistic. An Administration official told me that, given the complications of today’s politics, he still believed that Musharraf was the best Pakistani leader the Indians could hope for, whether they recognize it or not. “After him, they could only get something worse.”