Musharraf Out: What Now for Pakistan?

Both parties in the governing coalition have dismal track records. Still, Karachi Stock Exchange shares rose on news of the strongman's resignation

by Mehul Srivastava

Pervez Musharraf, the controversial president of Pakistan, resigned on Aug. 18 from his increasingly precarious position as the country's constitutional leader. The move brought to an end nearly nine years of rule during which the Pakistani leader acted as a key American ally in the so-far fruitless search for terrorist Osama Bin Laden.

The departure of 65-year-old Musharraf, a former military leader, thrusts a nation shrouded in economic gloom, political uncertainty, and social upheaval into the hands of an acrimonious governing coalition. But on Aug. 18, Pakistanis rejoiced, with lawyers and political leaders literally dancing in the streets. Traders pushed up shares nearly 4.5% on the Karachi Stock Exchange, where the market had declined 30% since April, when Pakistan's new coalition government took power.

Pakistan's $146 billion economy is in bad shape, with electricity shortages affecting industrial growth and inflation running at a 30-year high of 24.33%, according to the Federal Bureau of Statistics. The Pakistani rupee has dropped 22% this year against the U.S. dollar, but rebounded 1.2% to close at 75.50 to the dollar on news of the President's resignation.

Facing Impeachment

Musharraf, who addressed the nation on TV wearing civilian clothes, said the country had seen unparalleled economic progress during his regime, referring to a boom in telecom and the financial sector. Pakistan's economy had grown by as much as 7% a year in the past five years, with about 6% growth in the last year. "I deny the charges that the economic crisis is caused by policies of my government in the past nine years," said Musharraf in his one-hour speech. "These problems have developed in the last six months."

Musharraf's resignation came following many months of often contentious negotiations about his future role after democratic elections last February resulted in a two-party coalition where both parties wanted Musharraf gone. A week ago, the coalition decided to impeach the President for illegally seizing power in 1999 and for allegedly damaging the economy. His resignation means he can no longer be impeached, but he still could be tried in court.

Musharraf gained control of Pakistan in a bloodless coup in 1999. After the September 11, 2001, terrorist attacks in the U.S. he became a staunch—if sometimes ineffectual—American ally in South Asia. In return, the U.S. gave Pakistan nearly $10 billion in military aid, boosting the economy considerably, and helped loosen up credit restrictions for the country.

Potential to Be A Powerhouse

But in the past five weeks, Pakistan's foreign exchange reserves have dwindled by nearly $1.1 billion, to $10.15 billion, hurt mainly by this year's rise in oil prices. The smaller reserves hint at problems faced by the coalition government. "Today's brief period of market upsurge was more to do with some relief that this impasse is over," said Senator Tariq Azim Khan, a close Musharraf supporter. "But in the long term, it will depend on whether the coalition government can stick together."

The instability of the coalition remains a matter of concern, says Mian Muzaffar Ali, a senior official at the Lahore Chamber of Commerce and a managing director of Ayesha Woolen Mills, one of Pakistan's largest exporters. "Roads and electricity can't be built overnight," he says. "What Pakistan really needs is some sort of stability so that there can be consistency in policies and some control over inflation."

Lost in the chaos of Monday's resignation was the fact that Pakistan's economy has the right fundamentals to mirror the kind of growth that neighboring India has enjoyed. With a large, English-speaking population, vast pools of engineering students, and a youthful population, Pakistan could become an economic powerhouse under the right conditions, says Agha Imran Hamid, a development consultant with the International Fund for Agricultural Development. "One of the reasons that the stock exchange rose slightly was an end to uncertainty," he says. "But a different sort of uncertainty can take grip if things are not under control—someone needs to be seen to be at the helm."

Pakistanis Ready for Change

The vexing issue, says Hamid, is that Musharraf's resignation does not provide Pakistan with a fresh alternative because the two parties that make up the ruling coalition have equally terrible track records in running the country. One is led by the widower of assassinated Pakistani People's Party leader Benazir Bhutto, and the other is led by former Prime Minister Nawaz Sharif, who was ousted by Musharraf in 1999 and only recently returned from exile in Saudi Arabia. "The downside of it is that the faces that we are seeing are the same old faces," he says. "But we can hope that civil society is stronger, that business communities are stronger."

Most people in Pakistan appear ready for a change, judging from the reactions broadcast on Pakistani TV and in interviews with businessmen across the country. "We have a lot of problems, but concentration of power is not the solution," says Muhammad Imran Khan, the chief executive of one of Pakistan's largest suppliers of steel products, Cables & Conductors Ltd. "What we need is a stable government for the next four or five years."

Khan, whose company exports steel wires, said he had lost customers in the past few years because they were afraid to come to Pakistan, especially because law and order had declined during extended strikes, bombings, and public demonstrations.

It remains unclear what will happen to Musharraf, and whether the two parties in the unstable coalition will be able to stay united without him as their common enemy. Musharraf is lobbying for immunity against prosecution and may receive it. Or he may go into exile in Saudi Arabia. The only thing for certain is that Aug. 18 marks the start of a new era for Pakistan.

Srivastava reports for BusinessWeek from New Delhi.