Strategy Note /

Pakistan: Army-judicial-civilian unity and China alignment, still positive

    Hasnain Malik
    Hasnain Malik

    Strategy & Head of Equity Research

    Vahaj Ahmed
    Vahaj Ahmed

    Head of Industrials Equity Research

    Tellimer Research
    27 November 2019
    Published byTellimer Research

    Domestic unity between the military, judicial and civilian branches of government and alignment with China on the China Pakistan Economic Corridor are key components in the positive investment thesis on Pakistan. 

    Recent events have illustrated that the institutions and personalities propping up both of these pillars are not in a static equilibrium. In our view, there is evidence of disagreement and jockeying for position which occasionally bubbles over into the public domain. But there is, equally, evidence of ultimate compromise (for those prepared to sift through the complexity behind the headlines). 

    Pakistan remains the most compelling structural reform story (in economics, domestic politics and geopolitics) in our global coverage of small Emerging and Frontier markets. Despite a 30% rally since the mid-August 2019 trough in the local KSE100 equity index, trailing price/book is still merely 1.2x, a 32% discount to the 5-year median. Real effective exchange rate of 95 is at a 15% discount to the 5-year median. FX reserves are still low (below 4 months of import cover) but are rising with disbursements under the IMF program and with foreign debt portfolio capital inflow to the local currency government bond market.

    Military, judicial and civilian unity

    Unity between the military, judicial and civilian branches of government grounds the political will for structural reform – fiscal consolidation (higher tax collection, public spending and subsidy restraint), documentation of the economy (tax filing, utility bill payment), address of loss-making state-owned enterprises, improvement of security and rule of law, and anti-corruption measures. 

    While three events in November, at first glance, cast doubt on that unity, the resolution of these events demonstrates, in our view, that there is sufficient alignment of interests to keep the structural reform story on track.

    (1) Protests – On the assumption that the mobilisation of mass protesters requires some form of permission (if not facilitation or encouragement) from the Army (or its subsidiary security and intelligence agencies), the large-scale protests under the banner of the JUI-F party (led by Fazlur Rehman), in November, initially suggested that there may have been cracks in the support of the military for the civilian government. This was reinforced by initial indications that the larger opposition parties (PMLN, PPP) would join the protests. The ultimate fizzling out of these protests (without achieving its publicly stated aim of forcing the PM's resignation) and the abandonment of JUI-F by the other opposition parties soon after the protests started, suggests that whatever compromises were sought, between whichever elements of the military, judicial and civilian parts of the government, behind the scenes, were quickly achieved. In some respects, this echoes the very short-lived protests in Egypt this year – they would not have occurred without some divisions opening up in the deep-state, but the speed with which they ended suggests that any such divisions were quickly bridged.

    (2) Former PM Nawaz – The release on bail for medical reasons (by the Lahore High Court) for former PM and PMLN leader, Nawaz Sharif (previously convicted for corruption and sentenced to seven years at the end of 2018) and his removal from the exit control list allowed him to travel to the UK. Both the bail decision and the allowance for overseas travel were clearly in opposition to one of the central pledges of the PTI (to address corruption, particularly that surrounding former PM Nawaz and former President Zardari). Note that the JUI-F protest was ended the same day as Nawaz Sharif landed in London. It is not possible for us to determine whether there are behind the scenes quid pro quo discussions underway between the Sharif brothers (Shahbaz, former Chief Minister of the largest province, Punjab, is also in the UK) and the military (e.g. a commitment to step away from politics or remit some of their overseas financial assets in return for freedom of travel).

    (3) Army chief – The Supreme Court's suspension of the PM Imran Khan's initial appointment of the Chief of Army Staff (General Qamar Javed Bajwa) for a second, consecutive 3-year term (due to start at the end of November 2019) looks like a judicial block of military-civilian decision at first glance. The wording of the judgement, however, emphasises procedural mis-steps in the appointment, not any ideological opposition to a further 3-year term. Furthermore, the rapidity with which the (civilian) Cabinet and President have met to correct these procedural mis-steps demonstrates that they remain committed to appointing Bajwa for another term.

    China alignment

    There appears to have been a renewal of the mutual commitment to the China Pakistan Economic Corridor (CPEC) from both the Pakistan and China side. This follows initial frostiness after the 2018 election of the PTI government, which saw one government advisor mention the possibility of contract renegotiation, wider domestic and international concern (including from the IMF) of the debt-related liabilities taken on in CPEC projects and a c75% drop in FDI from China from fiscal 2018 to 2019 (June year end). 

    (1) Dialogue – PM Khan visited Beijing in October 2019 (his third visit since the mid-2018 election) at the same time as the Army Chief Bajwa (who was there to discuss regional security) and the 9th CPEC coordination committee (comprising planning officials from both the Pakistan and the Chinese side to review progress and update priorities on projects) convened in Islamabad in November. Both the civilian and military sides are clearly engaging with the Chinese from the highest ranks downwards.

    (2) New CPEC Authority – The government has created a new body for managing CPEC domestically in October and empowered it with a former Army general at its helm (General Asim Saleem Bajwa, no relation to Qamar Javed Bajwa). But this authority sits under the Ministry of Planning, Development and Reforms (which is headed by a civilian); ie this demonstrates military-civilian cooperation.

    (3) Planning Minister changed – Asad Umar, former Finance Minister and one of the most senior PTI leaders, replaced Khusro Bakhtiar, a relatively less experienced and more junior politician, as the Planning Minister in November. Umar clearly enjoys more political heft domestically and likely represents a more credible face in front of the Chinese.