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Key Economic Data 
  2004 2003 2002 Ranking(2004)
Millions of US $ 96,100 82,300 73,300 44
GNI per capita
 US $ 600 520 480 160
Ranking is given out of 208 nations - (data from the World Bank)

Books on Pakistan

Update No: 063 - (26/04/11)

America’s friendliest enemy
In April Joint Chiefs of Staff Chairman Admiral Mullen explicitly accused the ISI of collaborating with some groups of Afghan Taliban in attacking US troops. In particular, he mentioned the Haqqani network as being closely linked to the ISI. When we consider that Mullen’s trip was meant to ease the tension between the US and Pakistan, such a statement acquires a particular significance. The Americans are losing patience and the Obama Administration is under pressure from Congress too, where accusations against Pakistan of playing a double game can now be heard. The Pakistani army, on the other hand, is angry at the scale of CIA operations within Pakistan and at the US reluctance to recognise a key role to Pakistan in any forthcoming negotiations in Afghanistan between government and opposition. The government is now demanding that the CIA dramatically reduces the number of its operatives inside Pakistan, in part to signal its displeasure but also to force greater cooperation in the future – the Americans will not be able to do it all alone anymore. The Pakistani’s government’s denunciations of the drone raids should not be taken too seriously, as it is well known that the government secretly backs the raids and only condemns them to appease public opinion. The Pakistani army, however, is a different matter: the problem are not the drone raids per se, but their targets, which sometimes do not coincide with the desires of the Pakistani officers. The Pakistanis dislike Gen. Petraeus’ military focus, and complain about the Americans leaving them in the dark about Washington’s intentions and refusing to share intelligence about the Taliban. The Americans, of course, do not trust the Pakistanis anymore and do not want to share information.

The Pakistanis have renewed their diplomatic effort to draw Afghan President Karzai towards their position. In April a delegation including Prime Minister Gailani, Army Chief of Staff Kayani and ISI Chief Pasha visited Kabul for high level meetings. Among the Pakistani demands for facilitating a settlement with the armed opposition to Karzai figure the request of capping the size of the Afghan Army to 100,000 men (it is planned to reach 250,000). Kayani has made of achieving a settlement in Afghanistan in line with Pakistan’s interest and under Pakistani hegemony his key aim.

Financial pressure
Pakistan failed to get the 6th tranche of the IMF US$11.3 billion loan released in April again. The tranche is blocked since May 2010 because Pakistan cannot meet the benchmarks required by the IMF. This failure also prevents the Pakistani government from negotiating more loans, which Pakistan needs to repay earlier loans. The government believes that it needs US$3.2 billion in the near future. Pakistan remains under scrutiny because of the rising inflation, the widening fiscal deficit, the fiscal exemptions and energy subsidies. The rising oil prices are now forcing the government to announce that fuel subsidies will have to be abandoned the coming summer and that consumers will have to bear the burden of the increased costs. The recent 13% increase in fuel prices had to be halved after protests and disagreements within the ruling coalition. Another factor which might lead to further tension is the high price of when and more in general foodstuffs. The government keeps the price of wheat high to please the farmers (including the big landlords who dominated the main party in the coalition), even if production is going up. The result is that the poorer strata of the population cannot afford to buy enough food even if production should be sufficient; malnutrition levels are going up. The price of wheat has almost trebled from 2008; consumer prices have increased 17.7% in the year to February.

Forecast 2011
It is not easy to be optimistic about Pakistan’s short term prognosis. The Zardari government is almost universally recognised as ineffective and corrupt, but significantly nobody seems to be willing to replace it: neither the army nor the parliamentary opposition. The reason seems to be that nobody seems to know how to tackle the multiple crises affecting Pakistan, which as a consequence get worse. The only path seems to be to follow the IMF’s advice, an unpopular one which opposition politicians prefer to leave to Zardari. Although the government seemed at the beginning of 2011 weaker and weaker, it is therefore impossible to predict whether it will fall in 2011: in a sense its weakness is its source of strength, its enemies think they can bring it down at any time, so they have no reason to hurry in doing that now.

The Gailani government was once again on the verge of collapse in January, as another coalition partner quit the ruling coalition. The MQM officially quit over the inability of the government to tackle the rising prices of fuel; the party holds 25 seats in the parliament and is decisive in retaining a majority for Gailani. The government had decided to raise the price of fuel by 9% as a result of an increase in international fuel prices, but the move immediately proved very unpopular. Consumer prices as a whole rose 15.5% in 2010, putting a lot of pressure on the poorest (largest) strata of the population. Negotiations started after the MQM quit and it was not long before the government rescinded its decision to raise the price of fuel; then the MQM decided to re-join the government. The opposition PML-N tried to benefit from the situation, presenting itself as a reasonable opposition which negotiated with the government to convince it to abolish the price increase. In reality the opposition was not likely to call for a no confidence vote, since in that case it would have needed to prove that it had a majority of its own. The PML-N would probably have struggled to gather the smaller parties around itself and even if successful, it would then have needed to form a government in the middle of a very difficult economic situation. The issue of how to pay for the growing cost of fuel remains of course unaddressed. The American government and the IMF protested against the decision to reverse the price increase; the economists, including some who until recently were advising the government, are also disappointed with the move and see it as a further indication that the ever weaker government is no longer able to take rational economic decisions, one of its few selling points until the end of 2010. The budget deficit will increase by 0.2-0.3 percentage points as a result of this decision; the budget deficit for the current financial year if projected by some analysts as high as 8%.
In February the Gailani cabinet resigned in order to allow a major overhaul of its own structure, from one of the largest governments of the world (54 ministers) to a more modest 22-members cabinet. Many observers have judged this a cosmetic move meant to distract attention from the failure of the government to implement more serious reforms; the Pakistani public does not seem impressed either. The key ministers are still all there, except for Foreign Minister Qureshi. Another populist measure that the government has been discussing with the opposition PML-N is a 25% cut in the salaries of government officials working in grade 17 or above. The salaries had just been increased by 50% in the 2010-11 budget. On most other issues government and opposition remain divided. Nawaz Sharif and the PML-N are opposed to the introduction of the planned general sales tax, insisting instead that the government should cut expenditure and curb corruption.

On the internal political front the two branches of the MPL, PML-N and PML-Q (the pro-Musharraf faction) are trying to form an alliance for the future parliamentary elections. This is a very opportunistic move, as the two parties were bitterly at odds when Musharraf was still around. With him going, however, the PML-Q had nowhere to go. The Islamic parties, sensing the weakness of the government, are once again trying to come together to contest the next elections as a coalition. The assassination in March of Pakistan's minorities affairs minister, Shahbaz Bhatti was another blow to the government and once again exposed its inability to contain the wave of terrorism shaking the country. Quite the contrary, the government responded to the murder by announcing that it has no intention of reviewing the blasphemy laws, against which Bhatti had been campaigning. In the FATA, the government is struggling to maintain the support of the various tribal militias which sprang up to contain the Taliban; feeling neglected by Islamabad and forced to take the brunt of the Taliban’s attacks, some of these militias are now threatening to drop out.

One of the consequences of the rift over the fuel prices has been the postponement of a decision over the planned sales tax. Opposition to the new tax is also strong and the MQM is opposed to it too. Still the government is under international pressure to get out of the impasse somehow, if for no other reason that it needs the next tranche of the IMF US$11 billion loan to be released. Government and opposition are negotiating a reform programme, which the PML-N insists should be focused on a 30% budget cut. On the table are the restructuring of state-owned money-losing companies and a new price mechanism for electricity and gas. Among the best known companies that face restructuring are Pakistani Airlines and Pakistan Steels. The government welcomes the dialogue with the opposition, because whatever decision will be taken will not be very popular, and it wishes to spread the blame. The opposition however demands as a prize for its cooperation the ouster of corrupt politicians, a concession which could fragment the ruling coalition even further. One wonders how far that could go (and still be able to find a quorum in the parliament)?

Islamabad’s relations with Washington will likely continue to fluctuate in 2011; Washington knows what the Pakistanis are doing in Afghanistan, it is very upset but cannot figure out how to convince the Pakistanis to downsize their ambitions there. Now Washington says that it does not necessarily plan to leave Afghanistan in 2014 or 2015 (but few in Pakistan or elsewhere believe that the Americans will not disengage). The Pakistani army is more and more upset with the Americans, because they do not want to play its game, but at least in the short term, Pakistan needs the US as much as the US need Pakistan. The difference is that the Pakistani military are infinitely more at ease with playing and living in a permanent state of ‘brinkmanship,’ than are American politicians.

In March yet another drone strike caused many civilian casualties in North Waziristan: Army Chief of Staff (and increasingly Pakistan’s strongman) Kayani was particularly furious about the raid, whether because it killed many civilians as he stated, or because he saw the incident as an opportunity to embarrass Washington and perhaps force them to reduce their drone operations. Kayani has been consolidating his position at the top of the army for some time, moving his protégés into key positions. Pakistan’s protégés among the Afghan insurgents are already moving out of North Waziristan to neighbouring agencies, but the US ability to deny to the insurgents the ground of North Waziristan, is a serious hindrance for the Taliban. Moreover, embarrassing Washington also allows Kayani to build a strong position for any future need to reject American demands to expand the area of drone operations. The Pakistanis even boycotted an important security meeting with Americans and Afghans in protest.

If Pakistan as a country and as a state has been treading on difficult ground for quite some time and its future is uncertain, it has at least one achievement to show: virtually unlimited funding for the armed forces has according to US intelligence source turned Pakistan into the world’s fifth military nuclear power, after the US, Russia, China and France and ahead of Britain and India. Pakistan reportedly has now more than 100 atomic bombs, thanks to a 40% increase over just the last two years, that is a time when the economy was on the verge of sinking.

The IMF forecasts GDP growth slowing to 2.8% in 2011, down from an estimated 4.8% in 2010. Considering that 2010 can hardly be considered a good year for Pakistan, the forecast is not encouraging. Recovering from the floods will take time; in 2010 Pakistan benefited from low oil prices, but the trend has been inverted and in 2011 Pakistan will as usual suffer from high oil prices. Newly rising food prices could add to turmoil.

In less than three years, the per capita debt burden of Pakistanis has increased by 170%, as the government has been trying to keep the economy afloat, through borrowing and spending. As a result, debt servicing is five times as big as the ever shrinking development budget; total liabilities have reached US$117 billion, about half of them with internal creditors and the rest with international creditors. The depreciation of the Pakistani rupee contributed to compound the problem. The main concern of the government seems now to keep borrowing; the US$ 11.3 billion loan suspended by the IMF in July 2010 because the government had failed to implement the general sales tax and other reforms is the object of a diplomatic effort to convince Washington to intercede with the IMF, and have the loan reinstated. The government is essentially unable to contain its spending, but has not given in to a key IMF demand of strengthening the role of the Central Bank. Bank officials attribute the rising inflation, now around 15%, to government borrowing. The Bank repeatedly increased the rates in order to discourage borrowing, but the patronage-oriented instincts of the Pakistani political class are too strong to be fought with these measures.

Carrying out reforms in Pakistan is not easy, as demonstrated recently by the resignation of Pakistani Airlines’ chief executive, following protests and strikes by the airline’s staff. His plan to share routes with Turkish airlines would have helped in reducing the losses, but the personnel feared job losses and pay cuts. Essentially, the Pakistani political class hopes that somehow the country will stabilise again, reach a new equilibrium with a mixture of external help, luck and adjustment by the population itself. The partial recovery of the rupee in recent weeks (now at an eight month high against the dollar) eases for example the situation, at least a little bit. The rupee has been strengthening on the basis of a recovery of foreign currency reserves and of an increase in remittances from Pakistani workers abroad. Still, the latest GDP growth forecast for the year ending June 2011 is 2.5%, down from the previous 4.5% forecast.

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