Amid an intermittently violent political transition in Pakistan, investors need to exercise caution and patience. That’s the message from the Eurasia Group’s Global Political Risk Index (GPRI) to its clients.
In an email interview with Mint, Maria Kuusisto, Eurasia Group’s London-based Asia analyst specializing in India and Pakistan, however, added that many of the reforms initiated by President Pervez Musharraf over the past eight years have been institutionalized. Which is why, she said, no new government is likely to reverse the pro-foreign investment environment. She also said that even as the Pakistani military prepares to cede some control, it is unlikely to surrender political power completely. Edited excerpts:
How would you describe the current political situation in Pakistan?
Pakistan is going through a transition from the Musharraf/military-dominated political setting to a more complex political setting. The transition period will be marked by political bargaining and alliance-building between different political actors designed to secure a strong performance in the national and state elections, and a strong position at the post-election negotiation table.
On the one hand, President Pervez Musharraf and Pakistan People’s Party (PPP) leader Benazir Bhutto are attempting to find common ground and boost their popularity. On the other hand, Pakistan Muslim League-Nawaz (PML-N) leader Nawaz Sharif is trying to hold together a fragmented opposition alliance.
The post-election political setting is likely to be marked by the military’s strategic withdrawal from the centre stage and increasingly indirect involvement in Pakistani politics. This will create space for the secular political parties to enter the political setting and play a more prominent role. The new political setting will be marked by a close relationship between three key players: the independent/politically active prime minister (potentially Benazir Bhutto), the weakened/civilian president (Musharraf) and the new chief of army staff.
Is President Mr Pervez Musharraf likely to represent greater political risk than President General Pervez Musharraf?
From the business point of view, President Pervez Musharraf is likely to pose a greater political risk. Musharraf’s eight-year rule has been marked by relatively low political risk in Pakistan. Prior to March 2007, there were not any major political debates or turmoil that would have fundamentally undermined the government and led to a change in its composition or policies. Musharraf introduced centralized and effective leadership, expert-designed and driven pro-investment reforms and policies, relatively transparent and robust bureaucratic procedures, and close cooperation with the US/West.
Musharraf’s powers and influence will be much more limited in the new political setting, by the increased participation of political parties and indirect participation of the military. Pakistan’s history indicates that political parties’ rule tends to increase political risk. In the 1990s, Pakistan witnessed short-lived civilian governments, which cancelled and re-negotiated policies and projects.
Since risk often camouflages reward, would you advise investors to treat the current turmoil as an opportunity?
I see the current turmoil as part of a political transition and, therefore, advise my clients to ‘wait and see’ how the political situation develops, before making major investment decisions. Pakistan has several booming sectors, such as banking and finance, telecommunications and power, and oil and gas, and these sectors are likely to continue to provide lucrative business opportunities.
Pakistan has seen brisk economic growth under the rule of Musharraf, who grabbed power by ousting an elected leader. Why should the situation change if he stays on by subverting democracy?
I think Pakistan’s economy will continue to grow (recent years 6-7% GDP growth) even if a more complex political environment emerges that enables secular political parties to enter the political setting. Pakistan’s economic fundamentals are relatively solid and many of the Musharraf government’s reforms and policies have been institutionalized. Any new government is likely to understand the positive impact of these policies and continue to support them.
Is the return of true democracy in Pakistan desirable for investors, given that over the past four decades the military establishment has become inextricably linked with the economy?
I would argue that there is unlikely to be a ‘return to democracy’. Pakistani history demonstrates that even during periods of ‘democracy’, the military has been an influential force, behind the scenes. The military continues to have strong political, economic and social interests, and a long tradition of governing the country. This means that it will not withdraw from the political setting completely and allow meaningful democracy to emerge.
What are the key political signals that investors in Pakistan should look out for?
Investors will need to carefully follow the outcome of the national and state elections, the nature of the post-election government and the dynamics within the new political setting. The elections are likely to see a strong performance by PPP and PML-N.
The post-election political setting is likely to see the emergence of a coalition government led by either one of these two parties and a new political agenda. These new political players need to form a working relationship with key institutions—such as the Supreme Court—as well as both Musharraf and the new chief of army staff. This could create tensions.
Do you see the political situation in Pakistan impacting your risk assessment of India in the near future?
I do not expect a major change in Pakistan’s approach to India. Although Musharraf has been the driving force behind the peace process with India, both PPP and PML-N are likely to continue engagement with India.
Bhutto has even suggested that she would make peaceful resolution of the Kashmir issue her key priority. This willingness to continue engagement with India is linked to the fact that both the PPP and PML-N leaders understand the need to maintain a good investment environment in Pakistan and focus energies on stabilizing the situation along the Western border.