BMI's Executive Summary

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In late November 2007, the political situation in Pakistan remained extremely fluid. Having declared martial law on November 3, President Pervez Musharraf has committed to the holding of a general election in early January 2008. His ability to run for office has been endorsed by the Supreme Court – albeit by a bench of judges largely appointed for him. Further, the legitimacy of his re-election as President by the standing assemblies on 6 October 2007 is questionable, given that the vote was boycotted by opposition parties. Looking forward, the January poll bring two major risks. One risk is that the election is boycotted by the opposition parties and that massive civil unrest is the consequence. The other risk is that protest votes give political power to parties that are associated with Islamic militants: this would have negative implications for security in Afghanistan and India, as well as in Pakistan.

During Q407, the situation has deteriorated in two other ways. First, the declaration of martial law has drawn massive criticism from the US, the EU and other allies who share an interest in countering militant Islam. In the event that the deterioration in relations between Pakistan and the US leads to the delay or cancellation of arms deals, Pakistan will likely turn to alternative suppliers – such as China. China and Pakistan have a mutual interest in containing India. Further, China has already established itself as a substantial supplier of military material (frequently at discount prices) to Pakistan. In any event, Pakistan has for some time had a policy of diversifying its sources of arms.

The other way in which the situation has deteriorated is that, quite aside from the unrest associated with the declaration of martial law and the return to Pakistan of Benazir Bhutto, the army faces escalating violence on three fronts. The army is fighting pro-Taliban militants in the tribal areas adjacent to Afghanistan. It is also fighting local extremists who have been angered and alienated by the army's storming of the Lal Masjid (Red Mosque) in July 2007. Furthermore, although it has received relatively little publicity, particularly in the mainstream foreign media, the army is also dealing with a serious insurgency in Baluchistan.

As if all this were not enough, NATO's forces in Afghanistan are not clearly gaining the upper hand in combat against the Taliban's forces. The main evidence for this is the continuing surge in the production of opium – Afghanistan's major export and the Taliban's main source of cash. Further deterioration in the security situation could cause the tempo of the Pakistan army's three conflicts to increase significantly. At this stage, the deterioration in the overall security has not yet had an observable impact on Pakistan's significant activities as both an importer and exporter of arms. For some time, the armed forces have been in the middle of a major modernisation. As noted in Q307, it appears likely that total defence spending will rise by around 10% in the current (2007-08) year – or by slightly more than overall GDP. Recent developments include the successful test of a Hatf VIII Raad air-launched cruise missile, and the announcement by the air force of a clear preference for the US F-16 over the Saab Gripen. Meanwhile, Pakistan's significant indigenous arms industry has been developing its relationships with customers in South Korea, Turkey, Vietnam and Saudi Arabia.

Although the dispute between India and Pakistan over Kashmir has been completely overshadowed by all the other developments, it would be fair to say that trends in Q407 were, on balance, positive. In August 2007, the Hisbul Mujahedin claimed responsibility for the killing of a former senior Indian policeman: however, this was the first high-profile killing since the beginning of the year. Separately, the Indian army claimed that it had killed 10 militants in and around Kashmir. In late October, General Musharraf announced reforms that gave greater autonomy to the regional authority in the North of Pakistan: these reforms met with a mixed response. Probably far more importantly, though, commercial trucks crossed the India-Pakistan border (in Wajah, Punjab) for the first time since Partition in 1947: this is a clear sign of reduced tensions in what is a major inter-state conflict for both countries.

Looking into 2008, domestic political issues will undoubtedly continue to dominate headlines. However, it seems reasonable to assume that the armed forces of Pakistan will remain in control of the various problems that they confront (i.e. three internal conflicts, a heightened level of general unrest and the ongoing cold war with India). Musharraf's regime may end or become more democratic, but complete chaos and anarchy seems unlikely. Significantly, the economy is in reasonably good shape. We would suggest that there are three key factors to monitor through the first half of 2008. Probably the most important is the quantity of opium that is being produced in Afghanistan. Increased opium production both helps the Taliban to fund its activities and highlights the lack of control of NATO's forces in that country. A surge in opium production would be consistent with a worsening of the situation in Afghanistan and greater challenges for Pakistan's army in its conflicts with militants in the tribal areas of the North West Frontier Province.

The second key factor is the progress made by Pakistan in signing procurement deals with suppliers in the US (and other NATO countries) and actually taking delivery. A meaningful (as opposed to rhetorical) embargo on arms supplies to Pakistan would imply that the country is no longer seen as a crucial ally in the war against terror: such an outcome would almost certainly be consistent with a meaningful deterioration in the overall security situation in South Asia. The final factor to monitor is the level of trade between India and Pakistan. Traditionally, the two rivals have not been significant trading partners. The opening of the common border to commercial traffic represents a major change. Increased links between Pakistan and the booming Indian economy should be good news for regional stability, at least over the long term. A rapid increase in trade would be a surprising, but very positive, sign. The vast majority of the challenges faced by Pakistan's government (whether or not it is led by Musharraf) and armed forces have very little to do with the country's long-standing rivalry with India.

Contents

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Chapter 1 - Executive Summary

Chapter 2 - SWOT Analysis

Pakistan Political SWOT

Pakistan Security SWOT

Pakistan Defence Industry SWOT

Pakistan Economic SWOT

Pakistan Business Environment SWOT

Chapter 3 - Political Overview

Domestic Political Outlook

Tough Times For President

Musharraf Feeling The Heat

External Political Outlook

Suspicions Are Rife

Sri Lanka War: Regional Implications

Pakistan's Interests

Pipeline: Solution With Risks

Chapter 4 - Security Risk Analysis

BMI’s Security Ratings

Risk Ratings

Table: Regional Security Ratings

Table: State Terrorism Vulnerability Index

Regional Security: North And South-West Asia Q406

Overview

Inter-State Conflicts

Internal Conflicts

Pakistan Conflict Risk

Pakistan Terrorism Risk

Physical Safety Risk

Chapter 5 - Security Overview

Internal Security Situation

Insurgency

External Security Situation

Border Disputes

Afghanistan

Kashmir

Pakistan-India Relations

Pakistan-US Relations

Pakistan-China Relations

Chapter 6 - Military Structure & Defence Industry

Armed Forces

Military Relationships

Deployments and Exercises

Table: Pakistan Developments

Weapons Of Mass Destruction

Table: Pakistan's Nuclear-Capable Ballistic Missile Arsenal

Nuclear Developments

Table: Exports from Pakistan

Market Overview

Arms Trade Overview

Imports

Exports

Industry Trends & Developments

Procurement Trends & Developments

Table: Pakistan Acquisitions

Chapter 7 - Industry Forecast Scenario

Table: Pakistan Defence Sector – Historical Data & Forecasts

Key Risks To BMI’s Forecast Scenario

Chapter 8 - Macroeconomic Forecast

Resilient Economy

Table: GDP And Population

Chapter 9 - Competitive Landscape

Table: Key Players – Pakistan Defence Sector

Chapter 10 - Company Profiles

Pakistan Ordnance Factories

Heavy Industries Taxila

Pakistan Aeronautical Complex

Dr A Q Khan Laboratories

Air Weapons Complex

Chapter 11 - BMI Forecast Modelling

How We Generate Our Industry Forecasts

Defence Industry

Sources

Chapter 12 - Appendix A: Risk Ratings Methodology

Conflict Risk Methodology

Terrorism Risk Methodology

Physical Safety Risk Methodology

Overall Risk Rating

State Vulnerability Index Methodology

Competitive Landscape for Asia Defence & Security: Sample of  
Companies Ranked

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Rankings and Competitive Landscapes by production and sales; market share and change on previous year; number of employees, ownership structure and year established. Also includes analysis of company expansion, export and investment strategies.

Network of Defence & Security Sources

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BMI's Asian Defence & Security Reports are based on an extensive network of multilateral organisations, government departments, automotive industry associations, chambers of commerce and company reports. Information sources include: