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.

• The constitution is suspended.
• Justice Abdul Hameed Dogar replaced Chief Justice Iftikhar Chaudhry.
• Provincial and federal assemblies in tact.
• Shaukat Aziz: General Elections may be delayed (for up to one year).
• Judges across the country have been sworn in under the PCO.
• Opp. leaders arrested (e.g. Atizaz Ahsin, Javed Hashmi, Imran Khan, and Asma Jehangir).
• Benazir Bhutto has stated that she is willing to work with Musharraf.
• Private news outlets are now under strict operating guidelines.
• The country remains relatively calm.

Intel Forecasts Validated
Last week, we had reported that a major decision would be made on November 1st relating to the Musharraf government. Both our sources and Dawn are now reporting that the decision to declare a state of emergency was made on November 1st. Back in September, we had also stated that there moves were afoot by the government to force then-Chief Justice Iftikhar Chaudhry’s resignation and that he would be out of office in a month; a month and a half later, Chaudhry finds himself out of a job.

What’s next?
As of yesterday, sources are reporting that the state of emergency will be short lived and that Musharraf will remove his uniform. If this is going to be Musharraf’s strategy, it’s a wise one. Keeping emergency rule short and removing his uniform shortly thereafter, will dampen opposition to him and preempt the organization of a large-scale protest movement that he will not be able to contain. He will also have accomplished his goal of removing one of the biggest thorns in his side: f0rmer Chief Justice Iftikhar Chaudhry.

As of now, the opposition is in disarray with much of its leadership and nearly 500 activitsts already detained. Though talk of emergency rule had reached a fever pitch the day before, no one believed Musharraf would follow through thinking that move would be political suicide. Interestingly, the public for the most part has been quiet. But even if Musharraf is able to ride this out and successfully transition back to democracy as a civilian president, we do not foresee him completing his second 5-year term.

In the coming days, there may be full-on military activity in Pakistan’s northwest, specifically Swat and North Waziristan. Militants in the area may already be expecting this and are likely looking to come to an accord with the government. This was exhibited with the release today of the remaining 250 Pakistan Army troops that had been captured in late August. According to our sources, Pakistan currently has over 100,000 troops in the northwest. In addition to two heavy infantry divisions, two more infantry divisions have been moved in to the region with the intention of retaking each tribal agency/provincial district one at a time.

International Reaction
International reaction has almost universally been one of “disappointment” and “concern.” In reality however, these public statements are just lip service. For countries whose opinion actually matters for Pakistan — namely the United States and China — the primary concern was and still is the war on terror.

The United States. The White House termed Musharraf’s move as “disappointing” calling for him to remove his uniform and hold elections in January. Secretary of State Condoleeza Rice echoed similar sentiments calling for calm and a swift return to constitutional order. She also said that financial assistance to Pakistan would be reviewed. To retierate, these are all face saving statements for consumption by the domestic US audience and international community. The Bush administration cannot be seen as supporting anti-democratic moves. It should also be remembered that the Vice President’s office runs all Pakistan-related foreign policy, not the State Department.

However, the most noteworthy and underreported statement came from the Pentagon stating that emergency rule would not effect US military support for Pakistan. Behind closed doors, all that matters for the Bush administration and other Western governments is that the war on terror continue full force and the Pentagon statement highlighted that.

China. China is Pakistan’s closest ally and largest benefactor, bar none. China has been mum over the last few months when its come to the state of affairs in Pakistan in line with their policy of domestic non-interference. After yesterday’s imposition of emergency rule, the Chinese came out and stated that they were “concerned,” but that the Pakistani government and people were capable of solving their own problems. So long as the government in Islamabad enacts policies that will not destabilize the region or specifically China’s own troubled Xinjiang province, the Chinese will continue to support Pakistan and in this case, Musharraf.

Musharraf’s Address: “Pakistan First”
IB readers can view Musharraf’s nearly hour long address to the nation last night below as well as in our newly added media section. Most of the address is in Urdu but beginning at 36:30, he speaks briefly in English for his “friends in the West.” To quickly summarize, Musharraf criticized the Supreme Court’s “judicial activisim” saying that it impeded on the government’s ability to prosecute the war on terror and manage the economy. He also went on to say that terrorists had become too emboldened and that the government needed to be able to take swift action against them; thus he had taken this action for emergency rule.

Resources

• Text of the Proclamation of Emergency
• Text of the Provisional Constitutional Order (PCO)
• Text of Musharraf’s first PCO in October 1999
• Text of the former Supreme Court Order Voiding the PCO