The article was originally written on 18th September 2001

I have been asked to comment of the likely impact on Pakistan, the Middle East in particular and the Asset Management Industry on the whole.

I do not have enough insight of the Middle East and shall restrict my comment to the likely impact on Pakistan, the capital markets and the asset management industry here.

The magnitude of the tragedy has for the first time brought world focus and consensus on eliminating terrorism. But in addition to the terrorist act we have witnessed on 11th September 2001, there is a much bigger potential terror lurking in the region, which is the risk of a nuclear conflict between India and Pakistan. Pakistan seems to be a front line state that will need to act against terrorism and confront Afghanistan with regard to Osama bin Laden I shall first try and deal with why Pakistan is in focus.

Geo-political situation

Geographically Pakistan is located in the northwestern part of the Indian sub-continent, with the Arabian Sea to its south, India to its east, Iran to its west, Afghanistan to its northwest and China to its north. Sandwiched between Pakistan and China is the territory of the former princely state of Kashmir, the source of a bitter dispute between Pakistan and India.

Historically Afghanistan has had deep links with the area that comprises Pakistan. Throughout recorded history invading armies have entered India through Afghanistan. Most invaders ended up settling down in northern India. During a major portion of the last one thousand years, rulers of Kabul have ruled northern India or vice versa. There is a common cultural and religious heritage between Pakistan and Afghanistan. In the more recent history, the relationship between the two started on a bitter note when Pakistan came into political existence fifty-four years ago, with Afghanistan claiming a large part of Pakistan’s territory. Relations remained strained till the Soviets invaded Afghanistan and Pakistan became the key country supporting the Afghan mujahideen (freedom fighters), with the US providing military aid and Saudi Arabia providing financial support.

The present day Afghan government consists of second-generation mujahideen who, in many cases were raised in orphanages-cum-religious schools. The word "Taliban" means "students", unfortunately these orphaned children were, with the connivance of Pakistan, Saudi Arabia and the US, brainwashed into becoming zealots willing to become cannon fodder. In the mean while the Soviets were driven out and the Afghan mujahideen turned warlords were left to fight for territory. The Taliban, who were graduating from their schools in Pakistan entered the scene and took control from the warlords. The US does not want to know them while Pakistan and Saudi Arabia recognise them as the legitimate government of Afghanistan and try to continue exerting their influence on them. The Afghans are a bitter lot, left in miserable circumstances by the free world.

Pakistan and Terrorism

Pakistan has been an arena for terrorist activity for several years. In Karachi (our financial and commercial capital) alone we witness acts of terrorism almost daily. I do not mean muggings, robberies or kidnappings for ransom; such crimes are common in large cities the world over particularly in poorer countries. The terrorism I mention is the product of bigoted minds – innocent people are being killed in Pakistan by terrorists for no reason other than belonging to a certain religious sect within the overall Islamic religion or at times for belonging to a certain sub-ethnic background (again, within the same basic ethnic background). It not a fight between good and evil, nor between civilisations – it is terrorism being perpetrated by a few misguided individuals at times through paid criminals and at times through brainwashed zealots. These terrorists can easily cross over to Afghanistan through a long and porous border. This has also soured relations with our neighbour Iran, which is predominantly of the Shiite sect of the Islamic faith and several persons of that sect who are a minority in Pakistan have been targets of terrorist killings.

The reason that terrorists are free to move around unchecked is because the country has large numbers of persons living below the poverty line – some them are willing to become hit men purely for a fee and some out of outrage for society leaving them in a desperate state. On top of this, a very large number of people (the majority of the 140 million population) are illiterate and unable to recognise criminals, who at times pretend to be the modern day Robin Hoods.

We also have some Pakistani citizens who are outraged enough by the state of affairs in the Indian administered Kashmir, that they are willing to join what they see as a freedom struggle. These persons go across and join the guerrilla war against the Indian army. India sees these persons as terrorists, but most Pakistani’s do not, as the targets of their attacks is the occupying army and not the average citizen. Then there are others who have been raised in the Afghan orphanages, these zealots do not know anything but the fact that they must fight to keep the evil forces of occupation out of their homes. These zealots see camaraderie with those fighting for ridding Kashmir of the occupying forces.

The Pakistan government is faced with the tough task of discerning between terrorist organisations and freedom fighters who may well have persons in their midst who are brainwashed enough to be used by others for misguided terrorist missions. The only way to curb terrorism is to clamp down hard on terrorists everywhere. The bitterness that the deprived communities feel is genuine and must be addressed. The freedom fighters will have to be drawn into a political dialog, which would lead to peace in the region, which in turn would rid the region of becoming a nuclear flash point. A similar approach will have to be taken in other regions of unsettled territorial disputes. Perhaps the UN would have to be strengthened by making it more of a voice of the world community rather than that of a chosen few nations.

Pakistan’s decision to fight terrorism

The Pakistan government has taken the right decision of extending full co-operation to the US for clamping down on terrorism. At the same time it is demanding UN sanction for whatever action that needs to be taken. It is also making an effort for dialog with the Afghans. As a result of Pakistan’s stand, we may well see Pakistan suffer some terrorist attacks from groups living within our midst or across the border. This is a price we will have to pay if we are to rid ourselves of all the threats we are faced with. In the long term we would hope to see better times ahead but in the short term there will an immense risk of destabilising event. The decade of the 1990s was a lost decade for Pakistan’s economy and hopefully we can turn things around.

The likely impact – on the capital markets

The impact on the US economy and its trading partners is likely to be immense. The US is one of Pakistan’s major trading partners. What happens to the world economy as a result of the devastation will be shared by Pakistan to a fair extent, especially in terms of its exports of textiles, it major foreign exchange earner. However, in terms of the asset management business, there is insignificant foreign investment in our capital markets. This means that we are more or less immunised from any major outflows as a result of foreign fund managers pulling out whether driven by the need to reinvest in their home economies or by the nervousness that is prevailing due to Pakistan’s proximity to Afghanistan.

In the short term, Pakistan’s domestic markets are expected to remain extremely nervous. But if the political issues can be settled with our neighbours and terrorism is eradicated, I see this as an excellent long-term opportunity.

The next few days, weeks and months will determine how the events will unfold. The markets are likely to remain extremely nervous during this period. But long-term investors can make the best of this opportunity. Unless one believes in doomsday scenarios, such opportunities seldom present themselves.

I would hope that in the next few months we shall see a lot of political dialog and the gradual removal of many impediments in the path of our economic growth. Pakistan and the region rid of militancy can only bode well for the entire region, but more so for Pakistan, which carries a larger relative economic burden of defence spending and waste of resources.

All the three stock exchanges have suspended trading for three days starting Monday 17th September after having suffered fall of almost 10% between 12th and 14th September 2001. (The markets had shut by the time WTC was struck on 11th September). The exchanges may or may not open for trading on Thursday. The money and currency markets are open reasonably stable. There is no panic on the streets. Mind you, we are used to living with some degree of terror.

The asset management industry is relatively new in the free market sense. There is one large state run Unit Trust which has been around for almost forty years, but as is with most state run enterprises, it is inefficiently run is scheduled for being privatised shortly. There is one private sector run Unit Trusts, which is about for years old and we are about to launch two Unit Trusts with some sub-plans in the near future.

Asset management companies should, to my mind, share in the economic growth that I hope shall follow some very nervous times ahead. We at Arif Habib Investments are planning to launch our mutual funds in the next few weeks. (We are at the final stages of getting regulatory approvals and tidying up some of the administrative arrangements).

I have already mentioned the low literacy levels in Pakistan. This naturally converts to a very low level of understanding of the capital markets. As the markets come back to life and more and more people become involved in them, asset management companies will have a leading role to play. This is the right time to enter this business provided one is willing to sit out the nervous period ahead.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.