Pakistani coalition free to focus on problems

Leaders of Pakistan's coalition government yesterday set about seeking a replacement for President Pervez Musharraf and tackling pressing economic and security problems. Mr Musharraf, former army chief and key ally of the US in its campaign against terrorism, resigned on Monday to avoid impeachment nearly nine years after taking power in a coup.

Speculation he would resign had mounted since the fractious coalition government, led by the party of assassinated former prime minister Benazir Bhutto, said this month it planned to impeach him on charges of violating the Constitution.

Prolonged wrangling over Mr Musharraf's position hurt financial markets in the nuclear-armed country of 165 million people, and raised concern in Washington and elsewhere that it distracted from efforts to tackle militants, especially in areas bordering Afghanistan.

Mr Musharraf's resignation lifted Pakistan shares and the rupee on Monday and again yesterday.

Stocks jumped more than three per cent in initial trade as investors cheered the easing of political turbulence while the rupee strengthened more than two per cent against the dollar. Investors said Mr Musharraf's resignation removed a hurdle in politics, but markets were now waiting to see if the government could rule effectively.

"The market is now focusing on how well the coalition government can resolve the remaining issues," said Mohammed Sohail, a director of research at JS Global Capital. "Now is a testing time for the coalition parties."

Investors will be looking for concrete steps to restore confidence shattered by the political turmoil, analysts said.

These include shrinking the trade deficit by banning imports of non-essential items such as luxury consumer goods and cutting government spending by abolishing all fuel subsidies, one said.

Divisive questions still hang over Mr Musharraf's fate. There was no announcement on Monday on whether he would get immunity from prosecution and be allowed to live freely in Pakistan.

Factbox - Implications of Musharraf's resignation

Following are some of the political, economic and diplomatic implications of Mr Musharraf's resignation.

Internal politics

• Opposition to Mr Musharraf has bonded rival parties in the coalition government. His departure could see them drift apart.

• The Pakistan People's Party of assassinated former Prime Minister Benazir Bhutto leads the coalition, with former Prime Minister Nawaz Sharif's Pakistan Muslim League (Nawaz) its chief partner. The two main civilian parties are old rivals and despite recent cooperation will compete in the next election.

• One main issue on which they have been unable to agree is whether to restore judges purged by Mr Musharraf last year.

Security

• The coalition government has vowed full commitment to the campaign against violent militancy. Despite questions over its policy of trying to negotiate with militants, recent operations in the northwest should have reassured Washington and other allies that the government will match Mr Musharraf's security efforts.

• The military plays a dominant role in security policy, and its cooperation with the new government has been smooth.

Foreign relations

• The US, despite its close friendship with Mr Musharraf, said Pakistan's leadership was a Pakistani matter. Since Mr Musharraf's resignation US President George W. Bush has said he looks forward to working with Pakistan on the economic, political and security challenges it faces. Washington can be expected to press the coalition government to take a firm line to stop militancy, in particular attacks into Afghanistan.

• India enjoyed some of its best diplomatic relations with Pakistan in decades under Mr Musharraf. While the new government is committed to the peace process with India, launched under Mr Musharraf in 2004, India's fear is that a weak civilian government in Islamabad will not have the same muscle Mr Musharraf had over the army and the powerful military spy agency, which India suspects has a hand in most attacks on its soil.

Economy

• The government has vowed to turn its attention to economic problems after Mr Musharraf left. Inflation is at its highest in years, and trade and fiscal deficits are widening. High oil prices have depleted foreign reserves while the rupee has lost about a quarter of its value this year.

• The markets were off early highs on Tuesday and some economists expressed doubts about the new government's ability to deal with the economic challenges the country faces.

The next President

• Who becomes next president could depend on the powers the position retains. Mr Musharraf had authority to dismiss Parliament and make top military and judicial appointments. Coalition partners vow to strip the presidency of those powers and make it a largely ceremonial post.

However, analysts say Mr Bhutto's widower, Asif Ali Zardari, might want the job, in which case he will want to keep the powers.