Be careful what you wish for: goodbye Musharraf

Euromoney magazine, market leader, September 2008

So, he’s gone. After nine years, Pervez Musharraf has resigned as Pakistan’s president. Western media has in the main taken his departure as a positive, a representation of democracy in action. But, while there’s no question that seizing power in a military coup is a desperately unfashionable way to take government these days, the achievements in Pakistan’s financial sector and privatisation programme do bear scrutiny, and raise big questions about the future.

Here are some figures from Pakistan’s Board of Investments. They show foreign direct investment, combining greenfield and privatisation proceeds but not portfolio investment. 2001-2, not long after Musharraf’s 1999 seizure of power: US$485 million. Then $798 million, $949 million, $1.52 billion, $3.52 billion, $5.14 billion and for 2007-8, $5.15 billion, a more than tenfold increase in six years. Total foreign investment including portfolio flows came to minus $8.4 million in 2001-2, and hit $8.43 billion in 2006-7. If foreigners were queasy about a military government, it didn’t show.

Pakistan’s privatisation programme during that period has been described, with reason, as one of the most successful in Asia. Progress wasn’t always smooth: by 2006, problems had arisen in the sale of 26% of Pakistan Telecom to Dubai’s Etisalat, while the sale of Pakistan Steel Mills was derailed by the Supreme Court. But as one Karachi banker told us then: “I can’t think of any country which in five years has sold its three large banks, a telecom company, a refinery, two fertiliser companies, and is about to privatise its gas and petroleum marketing companies.”

Then there’s the banking sector. Things have been going so well here that before the global credit crunch, State Bank of Pakistan central bank governor Shamshad Akhtar had had to start asking banks to do a bit less well; the net interest margin of the industry, representing the difference between the rate banks pay customers on deposits and what they charge them on loans, got as high as 7.7% in 2006, more than double the average for the rest of Asia. She had to exert what she called “moral suasion” to get them to show a little largesse, although in the end sub-prime and inflation did it for her.

In recent years Pakistan has won the approval of the global capital markets too, with highlights being the $800 million Regulation S Rule 144A sovereign bond, including a 30-year tranche, and a groundbreaking GDR from Muslin Commercial Bank (now MCB).

Sacking judges and wearing a military uniform years after promising to remove it seem destined to have a longer-term place in the popular view of Musharraf’s legacy, but the business and finance side thrived under his strong-armed stewardship, and particularly that of finance-minister-then-prime-minister Shaukat Aziz, the ex-Citibanker.

Asking what happens next raises the thorny question of whether true democracy, while clearly the only way to empower a population, rather gets in the way of growth while doing so. This is the India/China debate: are the multitude of national, federal and local electorates, the unions and the protests and the people power, the reason that India has barely any decent highways and China can build a high speed train most of the way to Mount Everest? In the Pakistan context, did Musharraf achieve so much because he got a clear run for most of his nine years to sort things out unimpeded by meaningful opposition, with both his main political rivals deported?

Everyone who matters in the new ruling coalition has talked about a continuation of Pakistan’s policy towards privatisation, foreign investment and the banking sector, but these are never priorities when there’s a struggle for power going on. At the time of writing the coalition was falling apart; expect, at best, a period of turmoil before things move forward again in Pakistan.