President Gen. Pervez Musharraf’s gamble appears to be paying off. Chief Justice Iftikhar Chaudhry stands sidelined along with some of his recalcitrant colleagues, much of the fractured opposition is either detained or under arrest, and protests have been manageable. Though Benazir Bhutto appears to have entered the fray (now under house arrest), her actions may just be pressure tactics in the complex negotiations between herself and Musharraf. It all could very well be a show as well to maintain her credibility. Regardless, the coming days can prove to be either uneventful or incredibly volatile. Here we examine the continued impact of emergency rule on various areas of Pakistani domestic and foreign affairs.

US-Pakistani Relations
Many out there are declaring their own emergency for the state of US-Pakistani relations. The fact of the matter is that despite the increasing criticism emerging from the White House, relations between the two countries remain strong. President Bush may have touted his recent phone call to Musharraf demanding that he step down as army chief and hold elections, but the reality is that Musharraf had already committed to both, as my sources had stated. That’s why Bush was able to make the demands he did, he knew that Musharraf already intended on doing what he’s asking.

The bigger news may be that despite repeated denials, the Bush administration knew that emergency rule was coming in Pakistan. High-level sources have reported that the Bush administration, specifically Deputy Secretary of State John Negroponte, had been informed days in advance of the decision.

Though Musharraf’s relationship with the Bush administration is strong, sources are also indicating that the establishment fears fall-out from the US Congress, the American media and think tanks. This was already evidenced by Musharraf’s recent calls to members of Congress, attempting to allay concerns and prevent a halt in the flow of financial aid to Pakistan.

Emergency Rule’s Financial Impact
When markets opened the Monday after the declaration of emergency, the Karachi Stock Exchange (KSE) plummeted 5 percent, experiencing its worst single-day decline in the exchange’s history. Though the news of emergency rule and the resultant stock market plunge may be worrying for investors and Pakistanis alike, they should rest assured that the current volatility is only a short term phenomenon.

(courtesy of the Wall Street Journal Online)

The primary concern of both foreign and Pakistani investors is whether the fiscal and monetary policies of the current government will continue down the road. We witnessed this when the Supreme Court declared Musharraf’s presidential candidacy valid (the first time around) and as a result, the KSE skyrocketed the following day. After all, it’s been Musharraf’s policies over the course of the past 8 years that have generated Pakistan’s immense economic growth; last year alone Pakistan attracted nearly $8 billion in foreign investment, no small accomplishment.

What investors must further realize is that even if Musharraf is forced to step down, his economic policies won’t go with him.

The army is at the center of the Pakistani state and will be involved in the country’s governance for decades to come if not in perpetuity. Its role as the guarantor of the Pakistani state has now expanded to include the economy and for good reason. It became painfully aware to the Pakistani military that a strong economy was needed to fund its war machine, as sanctions and economic weakness set the country’s defense acquisition programs back years if not decades. But most importantly, the Pakistani military, and in particular the army, has massive business concerns across the country. To keep Army Inc. profitable, the health of the economy must remain strong.

That is why investors shouldn’t fret when it comes to Pakistan and current economic policies - they’re not going anywhere.

The Army’s Cohesion and Pakistan’s Wild West
Several times now, rumors have arisen suggesting Musharraf has been placed under house arrest. Likely spread by the opposition, the rumors fly in the face of what can be expected of the Pakistan Army.

With the exception of the Rawalpindi Conspiracy in 1951, there have never been any incidents of open insubordination within the Pakistan Army. If the situation becomes untenable for Musharraf and the army’s popularity diminishes as a result, the army as an institution will quietly ask Musharraf to step down. We’ve also stated in the past that the current Vice Chief of Army Staff (VCOAS) and successor to Musharraf, Gen. Ashfaq Kayani, is a thoroughly professional soldier who not only respects the chain of command but is also a Musharraf loyalist.

What does the army think about the emergency though? Sources have indicated to us that the army remains unified and the response to the emergency has been relatively positive. On the other hand, sources have also stated that there is resentment within the army regarding operations in Pakistan’s northwest, particularly Swat, with many in the army stating that they do not want to fight fellow Pakistanis. This may be why despite the declaration of emergency, we haven’t seen immediate action in Swat as the army internally debates a course of action. The situation is worsening though. Dawn has reported that a third major town in Swat recently fell to Islamist forces loyal to Maulana Fazlullah.

Humorous Anecdote: Many are aware that former ISI chief, Gen. Hameed Gul had been arrested when the emergency was first declared. Many of you however, may not know what he was up to when he was arrested. Much to my amusement, very close relatives of his informed me that the wily 71 year-old was on his way with flowers and cake for the now-deposed Supreme Court justices, who had just struck down the PCO. He is currently in jail, detained for 30-days.