Out with the New, In with the Old
Sources also report that President Musharraf has grown weary of the Chaudhry cousins (Parvez Elahi and Shujaat Hussain) and intends on bringing in the Sharif brothers (Nawaz and Shahbaz) to dilute their influence. I doubt Musharraf will entirely rid himself of the Chaudhries — he will need some civilian allies — but instead he will likely marginalize them to the point that they are forced to share power with the likes of Benazir Bhutto and the Sharifs. This is in line with our analysis from September stating that Musharraf wanted a diluted coalition government in place; it would shield him from criticism for being undemocratic, all the while allowing him to carry on his policies unchecked while coalition members would bicker among one another.

Resentment within the Army
We had reported earlier that there was resentment in the Pakistan Army over operations in Swat. Now, we are being told that there is broad resentment among the army’s mid-to-low ranking officers over Musharraf’s handling of Benazir Bhutto and Nawaz Sharif. They are particularly upset that Nawaz Sharif is being allowed to return, after they helped show him the door nearly a decade ago. The discontent over Musharraf’s policies has not spread to senior army leadership, which remains on board, likely understanding the compromises he needs to make in light of international (read: US) pressure. It also doesn’t hurt that they’re all hand picked Musharraf loyalists. Ultimately, this is bad news for Musharraf. The army is his constituency and power base. If his support continues to erode, he could soon find himself out of a job.

Intel Validation
We revealed exactly two weeks ago that the Bush administration, specifically Deputy Secretary of State John Negroponte, had advance knowledge of President Musharraf’s plans of imposing a state of emergency in Pakistan. Today, the Wall Street Journal reported just that — that American diplomats had prior knowledge of the impending emergency.

Negroponte’s Visit
Undersecretary of State John Negroponte’s visit to Pakistan is probably the week’s biggest event. Having arrived in Pakistan on Friday, Negroponte met with President Gen. Pervez Musharraf, his advisor Tariq Aziz and Vice Chief of Army Staff Gen. Ashfaq Kayani. Wratcheting up pressure on Musharraf, the Bush administration dispatched Negroponte to demand a specified date when Musharraf would end the state of emergency. Negroponte went home dateless on Sunday.

The visit itself is not significant, but the potential American response is. In the eyes of the White House, Musharraf may no longer be the reliable ally he once was. Yes, there have been disagreements between the Bush adminstration and Musharraf from time to time (e.g. the Iran-Pakistan-India gas pipeline), but never on high-profile matters like this. Couple Musharraf’s recalcitrance with the fact that Washington probably doesn’t appreciate how his alleged power grab could compromise the war on terror, and you may have a recipe for an American backed effort to remove Musharraf from power.

To those of you gasping at the thought, just take into account the fact that Negroponte met with Gen. Kayani twice during his visit, which according to many indicates American support for the general. If Musharraf goes, willingly or unwillingly, there’s atleast a fall back option. Kayani is a known Musharraf loyalist and unlikely to engage in any intrigues, but power does have its allure.

Interim Government Announced
The other big news of the week centered around Pres. Musharraf’s appointment of Senate Chairman Mohammadmian Soomro as caretaker prime minister along with the rest of his cabinet that will form the interim government.

Sources had reported over a week ago that Soomro would be appointed interim prime minister but I questioned the veracity of the news and did not report it. After all, Soomro is a known Musharraf loyalist and PML(Q) party member; a caretaker prime minister would need to be neutral for national elections to have any semblance of legitimacy. Surprisingly, not only was Soomro included in the interim government, but so were a whole host of vocal Musharraf supporters.

Musharraf, it appears, was not about to take any chances by having an interim government create a sticky situation for him or voice any opposition to him.

Some eyebrows were raised with the inclusion of Salman Taseer in the interim government given his prior links to the PPP. Taseer is the business magnate behind WorldCall and the Daily Times among other major business ventures. Sources insist that there is no signfiicance, however, Taseer’s involvement and Bhutto’s relative freedom vis-a-vis other opposition leaders may imply that some sort of accomodation is still possible between Musharraf and the PPP.

Skyguard Delivery Halted
On Wednesday, Switzerland indefinitely halted the delivery of Skyguard air defense batteries to Pakistan due to the on-going situation in Pakistan. Intended for the Pakistan Army, the 21 vehicle mounted anti-aircraft systems were excess inventory from the Swiss armed forces. In addition to the Skyguard units already owned and operated by the Pakistan Army, six batteries had already been delivered from the most recent purchase.

The prevention of delivery will not significantly damage Pakistan’s air defense capabilities, but it does raise fears that other left-leaning government may do the same for more vital defense equipment. One prime example is Sweden, with whom Pakistan recently signed a multi-billion dollar deal to purchase seven Erieye Airborne Warning and Control Systems (AWACS).

The Swiss will ultimately relent, however, the damage has been done to their future prospects of arms sales to Pakistan. Pakistan will likely turn to more reliable partners, such as France and China, for purchases and co-development of more advanced air defense systems. The same happened after the United States’ continual embargo of F-16’s that had been paid for by Pakistan; Pakistan, in conjunction with China, ended up developing and producing the JF-17 Thunder, a plane arguably better than earlier block F-16’s.

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.