Army rule no longer a default option in Pakistan: Hasnain Malik

Also says, since 2013 Pakistan has returned to broadly orthodox economic policy

Hasnain Malik, global head of equity research at Exotix Partners LLP and a keen observer of Pakistan, analyses the politics and economy of the country in an interview with Aditi Phadnis

How do you view the Pakistan Supreme Court's order that the Prime Minister (Nawaz Sharif) and his children should be investigated by a Joint Investigating Team (JIT)? How much will the Pakistan PM be able to ‘guide’ the investigation?

All five of the Supreme Court judges effectively viewed the explanation by the PM’s lawyers on the origins of his family wealth as lacking credibility but a majority of the judges felt further evidence was needed if the family was to be proved guilty of corruption. Hence the JIT. 

There is no reason to believe the PM can influence the JIT any more or less than the Supreme Court itself, even though some of the members of the JIT represent accountability agencies, which earlier proved incapable or unwilling to use their jurisdiction to pursue this evidence. Effectively, the PM’s case has moved from the pressure cooker of the Supreme Court to a slower simmer of the JIT; the heat is still on. 

How will this order impinge on the relations between the civilian political leadership and the Army?

No change at all. After the mass protests in 2014, the Army is in charge of foreign, defence, and security policies and the civilian government is in charge of economics, and to the degree they care, social, education and health care. 

The protests occurred both because Imran Khan’s Pakistan Tehreek e Insaf (PTI) successfully mobilised support over the issue of the alleged rigging of the 2013 elections and because the Army leadership of the time did not stand in the way of those protests (leaving the civilian government-controlled police to deal with the demonstrations on their own).

The Army, at that time, baulked at joining issue with the PM, given his freshly elected parliamentary majority, his push for a detente with India, and a case for alleged treason against former President and Army chief Pervez Musharraf. Those civilian government policies were effectively reined in once the protests reached a critical point, following the police’s use of tear gas and live ammunition, and the Army exerted its influence as an arbiter, and in the process re-established its control of the policies closest to its heart.

The Army has stopped short of exerting the sort of influence it may have done historically. It is comfortable with its relations with the civilian government as the superior partner without having to take on the onerous task of a full-blown administration and no longer risking the rise of one general, on a fairly long-term basis, over his peers, which throttles promotions and, in turn, risks disunity. The era when direct military rule was a default option has clearly passed.

There is no doubt that a JIT will affect the credibility of the government. Won't this in turn affect the relations between the civilian government and investors, who are putting in money in Pakistan?

The PM is not central to the pillars of the investment case: Better security, Chinese investment in infrastructure, and the release of pent-up household consumption and private sector capital expenditure. Deaths related to terror have dropped precipitously in the last three years and fell another 40 per cent year on year in the first three months of 2017. The China-Pakistan Economic Corridor (CPEC) has very clearly transitioned from a grand statement of intent in 2014 to active deployment of capital and construction. The Gwadar port and neighbouring economic free zones, trunk national road infrastructure, and new electricity generation plants, which in the first phase alone amounts to about 40 per cent of the installed capacity, are all testament to this. Double-digit volume growth for the auto assemblers is evidence of the benefits of better security for releasing much-delayed purchasing decisions. Similarly, double-digit volume growth of domestic cement sales, where the majority is used for home construction, shows that the consumer is spending on discretionary items again. 

On the corporate side, some of the largest companies are using the cash piles they have built in new business ventures. The pick-up in loan growth for the banks, which is still at an early stage, suggests that corporate houses are also beginning to invest after a long hiatus. If the JIT and the overall Panama Papers issue erode the credibility of the ruling Pakistan Muslim League Nawaz (PMLN) in the next election (to the degree it is free and fair) and the civilian government returns as a coalition, that would be unhelpful for the investment case. But that is of secondary importance, alongside better security, the CPEC and the release of pent-up domestic spending.

The Karachi Stock Exchange, multilateral agencies such as the International Monetary Fund, and others are bullish on Pakistan and the political will to carry out difficult reforms. But of the reforms themselves, there seems little evidence...whether it is the privatisation of loss-making entities or better tax realisation or a resolution of the circular debt...

Since 2013 Pakistan has returned to broadly orthodox economic policy, with the authorities focused on controlling inflation and the fiscal deficit, and rebuilding foreign reserves. There has been, however, almost no improvement on widening the tax net, utility network theft and utility bill non-payment, and dealing with troublesome state-owned enterprises. 

Tax rates on the documented economy have gone up and subsidies have been reduced, but efforts to bring more of the very sizeable grey economy into the documented sector have proved difficult. As a measure of this, tax collected as a percentage of GDP has risen a percentage point or so to 12 per cent but the IMF estimates it could be in excess of 20 per cent. 

Similarly, circular debt in the electricity sector has re-emerged. This requires the government to periodically inject cash or issue government securities as a way of clearing the shortfall in the industry's revenues. The shortfall results from network theft and non-payment by customers, and culprits may include municipal government bodies, state-owned enterprises, and companies in the grey market. 

The privatisation undertaken by the government has largely cherry-picked the well-run profitable firms in the state-owned portfolio, for example Habib Bank and United Bank. But the loss-making, troublesome firms such as Pakistan International Airlines, Pakistan Steel, and Pakistan Railways show no change. The government has been very reluctant to antagonise highly unionised labour and to lift the veil on what may have acted, for decades, as vehicles for the distribution of political patronage. 

These structural reforms require tackling vested interests, and that, in turn, requires better security to break the hold of politically protected mafias (which is not always the same as religious militants) and better governance to limit egregious corruption. 

That is a very long process but the last few years have built confidence that this is possible. 

Do you anticipate problems on account of the CPEC, which seems to be creating fresh tensions between those who are giving up land for the infrastructure corridor they feel they don't need (like the Baloch); and those who are eventually going to pay for it (like China)?

That is far too simplistic. Certainly, there is tension between the federal government (both the military and civilian sides) and provincial political interests. And this pre-dates the CPEC. But the security risks of the CPEC, and Pakistan more broadly, need to be understood in a wider geopolitical context with the region lining up with China and, to a degree, Russia, on one side, and India and the US, on the other, and with the GCC and Iran in opposition to each other but ambiguously positioned in South Asia. In this sense, Pakistan is subject to similar geopolitical forces as Afghanistan but with much, much more direct economic value at stake for China. 

The more accommodation and balance of power there exists across the region between all of these powers, the better it is for the CPEC, not to mention other major investment programmes funded by China or India in the likes of Bangladesh, Sri Lanka, and Myanmar. And, of course, the more friction between these powers, the higher probability of disruption. A balance of interests among these regional powers should help manage tensions between federal and provincial interests in Pakistan but competition among these regional powers likely exacerbates those tensions via the use of non-state proxies for destabilisation.

Also it should be clarified that China is not “paying” for the CPEC; it is financing the CPEC. In other words, China is providing most of the upfront capital for projects where returns on that capital, including the repayment of any debt component, are enshrined in contracts, which cover the revenues associated with those projects and where the Pakistan government provides a guarantee in the event of any shortfall in those revenues because of non-payment by the customers of those projects. If Pakistan's political and economic governance had been sufficiently robust in recent decades it could have raised this capital itself or put in place the rules for the indigenous private sector to do so (albeit with the help of foreign capital).