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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: 071 - (26/01/12)

Imran ascendant
On the political scene there is a sense that the charismatic and well connected Imran Khan, until recently not taken seriously as a political player, is beginning to attract a wider constituency, out of dissatisfaction with the corruption of the two main parties (PPP and PML-N), and thanks to his fiery anti-American rhetoric. Recently he has managed to attract large crowds to his rallies and observers estimate that in the event of elections he might raise his presence in the parliament from a single MP (himself) to about 20, becoming therefore a key coalition ally for either of the two main parties (most likely PML-N). It is not clear however to what extent Imran can transfer his growing popularity to his badly organised party. Interestingly Imran Khan has recently received an official invitation to China, usually reserved for heads of state. Imran Khan is closely supporting the move of the judiciary against President Zardari, while even the PML-N, which initiated the move, now has reservations against the growing intervention of the judiciary in politics – the PML-N certainly does not have a better record than PPP in terms of institutional and personal corruption.

PPP counter-attacks
The allegations of Zardari ‘plotting with the Americans’ against the Pakistani army have certainly mobilised nationalist opinion against him. However, after a moment of panic when the PPP seemed to believe that a military coup was imminent, the leaders of the party have regained some composure and are playing their cards in the reasonable assumption that the army has no appetite for taking power, at a time of economic crisis. The army is clearly trying to force Zardari and Gilani to resign; that would achieve its aims without a coup. Prime Minister Gilani counter-attacked however, sacking defence secretary Naeem Khalid Lodhi, a retired general still close to the military establishment. This move strengthens the PPP government’s hand against the army and might, in the view of some, even bring about the sacking of the chief of Inter-Services Intelligence Gen. Pasha. The PPP in other words seems to have decided to stand and fight rather than meekly bowing to the army’s will and be removed from power one way or another. The army is not as popular as it used to be, so the PPP’s choice might earn it back some lost popularity. Gilani openly accused Pasha and Chief of Staff Kayani of defying the constitution by violating procedures, in submitting a memo against the government to the judges investigating the allegations of conspiracy against the army.

Showing a tough face
In the midst of internal political turmoil, the Pakistani government has to show that it has not and it is not bowing to American interest. It signalled this in January by rejecting the request of US Special Envoy Marc Grossman to visit Pakistan. The Pakistani government appears now willing to again allow US supplies to cross its territory, after shutting it down following the killing of 24 Pakistani soldiers on the border, but is asking for the US to pay a fee for such shipments.

In reality several thousands of Pakistanis have been left jobless by the suspension of the supplies, at a time when Pakistan’s economy is struggling, more than perhaps is usual. The latest economic data show Pakistani GDP for the past year down to a mere 2.4% growth, due to the floods as well as to electricity shortages - and the slow down of the world economy. For the current year, the main concern is the widening current account deficit, which during the first half of the year reached US$2.15bn, which does not compare well with the US$8 billion surplus for the same period of the previous year. Foreign currency reserves have dipped to US$16.9 billion from US$18.3 over the last 6 months. The fiscal deficit for the first 6 months of the current year reached 2.6%, slightly less than the 2.9% of two semesters ago, but still more than economists would like to see.

Forecast 2012
GDP growth is expected to recover moderately during the on-going financial year, ending at 3.6-3.9%% depending on the forecaster, not much for a country neighbouring India and China and with a fast growing population. The government still thinks that it can achieve 4.2%, but few observers believe that this is do-able, the more so as the world economy is not expected to do very well either. The fiscal deficit is forecast at 4.7% this year, down from the 6.6% of GDP of the previous year, but still worryingly high for a country which struggle to collect 10% of GDP in taxes. It is also a revision upwards of the previous 4% forecast and many observers believe even 4% is not attainable, particularly given the forthcoming elections. Moreover, rising oil prices mean that the government will have to spend more in fuel subsidies, or increase prices and make itself even more unpopular. There are also several debt repayments due and external aid is not forthcoming.

The timing of the next elections remains uncertain. The government seems inclined to have them in autumn, the army would like them sooner as it would like to get rid of the PPP in power. The likely outcome of the elections will be a PML-N led coalition, with Imran Khan’s party as main partner; that will please the military, who have a soft spot for Imran, at least compared to the two main parties. Whether Imran and Nawaz Sharif (two big egos) can get along is however difficult to say. More importantly, would that make much of a difference for Pakistan? It would likely lead to better relations with Saudi Arabia and probably worsen relations with the US further. The relationship with China would of course remain steady, as political parties have a consensus on that.

Islamabad is in the process of negotiating an agreement with some of the militant TTP factions; the indications are that finally the army and the intelligence services have manage to break the TTP up and convince a substantial portion of it to make peace with the establishment, as well as refocusing their violent efforts on Afghanistan. Whether or not that will lead to an improvement of the situation in the tribal areas remains to be seen. In Baluchistan, the government has de facto conceded control of all but ‘useful Baluchistan’ (the main cities and the gas fields) to the nationalists, who do not seem to have the military strength of going further; this stalemate could therefore be expected to persist.

Forecast and summary 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 route which opposition politicians prefer to leave to Zardari. Although the government seemed at the beginning of 2011 to be 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 Gilani 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 Gilani. 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 Gilani 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 PML, 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 Steel. The government welcomes the dialogue with the opposition, because whatever decision will be taken will not be very popular, and it would like to spread the blame! The opposition however demands as a prize for its co-operation 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 ensure a quorum in the parliament)?

In July the governor of the Central Bank Shahid Kardar resigned over major differences with the cabinet, in particular concerning the failure of the government to reduce expenditure. The determination of Prime Minister Gilani to launch a public bank in Sindh, was also opposed by Kardar. This is a new hit at the credibility of a government which floats at very low levels of public support. The government also suffers because of the renewed power supply crisis; the blackouts are more and more frequent and last longer and longer. The power generation and supply sector is a mess, with 30% of the electricity produced still being stolen - not an environment where investing is an attractive proposition! People and businesses increasingly have to rely on electricity generated by small diesel generators, but that is a major additional cost and an inefficient way of producing power.

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.

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 loud 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 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 problems are not simply 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 any more and naturally do not want to share information, which will prejudice their planned operations.

Although Washington refrained from openly pointing out how the Pakistanis were clearly protecting bin Laden in the location where he was killed by an American raid, they hardly needed to elaborate on what was obvious. Nobody believed Pakistan’s denials and privately even top Pakistani officers admit that they were holding him under their protection, although with the qualification that they were ‘about to hand him over’, or were meaning to deliver him ‘at the right time’. However, if Washington believed that the Pakistanis would become more co-operative after bin Laden’s death, they seem to have been mistaken. If anything, the Pakistanis are more furious than ever. Even the raid against a base of the Pakistani Navy in Karachi, which seriously damaged the country’s strategic reconnaissance capability, is attributed by Army officers to an American conspiracy. The Pakistani government cannot simply change route, lest it faces a mutiny of the army. The fact that the Pakistanis even before the raid against bin Laden were trying to curtail CIA presence inside the country, is highly significant: the CIA was getting to know too much. On 23 May a raid on the Afghan border appears to have narrowly missed Mullah Omar. Although there is no confirmation of who carried it out, it seems to have been a combined CIA-US army operation, probably relying on intelligence sources managed by the CIA via Blackwater in North Waziristan. The Americans therefore would seem to have decided to spend the intelligence capital accumulated so far, given that they have to quit anyway. Perhaps there is also a political decision to confront the Pakistanis and operate without their authorisation. The Pakistanis have been calling several American bluffs, perhaps now it is Washington’s time to try the same.

However, Islamabad is not actually ready to dump the Americans for the Chinese as they have been hinting, mainly because the Chinese are not that interested in baling out a sinking ship… Prime Minister Gilani recently declared China as Pakistan’s best friend. Islamabad has now asked China to build a naval base in Baluchistan, no doubt another signal to Washington that Pakistan has alternative sources of support. China’s reassurances to Pakistan in May, that “no matter what changes might take place in the international landscape, China and Pakistan will remain for ever good neighbours, good friends, good partners and good brothers”, do not imply however that Beijing is about to open its coffers. The Congress is now calling for US$3 billion of aid to Pakistan to be withheld, but the Obama administration is against such a move, as that could be the coup de grace to US-Pakistani relations.

One thing is certain: Pakistan will need friends with wallets well stuffed. Following the latest meeting with the Pakistani authorities, the IMF has stated that Pakistan needs to expand its fiscal base. The general sales tax reform is also still waiting to be implemented and the IMF has given time until the end of September for that to happen.

The Americans and the Pakistanis continued trading blows in July. Washington arrested an alleged Pakistani agent, who reportedly was lobbying in favour of the cause of independent Kashmir, amongst other ways, by contributing illegally to the electoral campaigns of Congressmen and Senators. In the US Congress the hatred of Pakistan is reaching new heights; a Republican Congressman proposed an amendment which would have banned aid to Pakistan, but it was rejected 5 to 39 because the Democrats lined up behind the Administration. Still even Administration officials like Admiral Winnefeld now openly discuss how Pakistan uses proxy groups to pursue its aims in Afghanistan, mentioning the Haqqani network explicitly. Admiral Mullen accuses the Pakistani government of complicity in the assassination of journalist Saleem Shahzad. Secretary of Defense Panetta indicated that Al Zawahiri, the successor to Bin Laden, is hiding in Pakistani territory. All of this is obviously true, but even articulating it is taken as a terrible insult by the Pakistanis, particularly the army. The Republicans are now pushing to link civilian aid to Pakistani cooperation, for example by handing over Bin Laden's wives, but the Democratic majority in the Senate is aligned with the more realistic approach of the Administration. Secretary of State Clinton recently hinted from India, which she was visiting, that Pakistan supports terrorist groups and this should not be tolerated, something particularly painful for Islamabad to hear because it sounded like an endorsement of Indian views on this subject. Most importantly, the US suspended US$800 million of military aid to Pakistan. US$300 million of that money is reimbursement for operations carried out by the Pakistani army, so that the state budget will be affected directly and negatively.

The Pakistanis retaliate by hinting that the reduction in military aid will force them to abandon their deployment on the border with Afghanistan and therefore downgrade their counter-terrorist efforts. Pakistan has already expelled 100 US military advisers and is threatening to close the base from which the US drones were operating; recent drone strikes have been launched from Afghanistan. The Pakistani authorities claim that ISAF supplies travelling to Afghanistan have caused US$7 billion worth of damages to Pakistan's roads and reminds everyone of the 5,000 Pakistani soldiers and paramilitary who died fighting terrorism, as they say.

US-Pakistani relations showed no sign of recovering in August. The Americans now accuse the Pakistanis of showing to the Chinese parts of the helicopter which crashed on Pakistani soil during the Osama Bin Laden raid. The helicopter was built with a new 'stealth' technology and some parts survived a US attempt to destroy it. Commentators in the US again point out how Pakistan is not a trustworthy ally, even if the Pakistanis and the Chinese deny that any such access was ever given. Then US Joint Chiefs of Staff Admiral Mike Mullen missed Pakistan, during what is probably going to be his last official visit to the region (he is retiring soon). Mullen had met Pakistani Chief of Staff Kayani before his trip, so it is not clear that the Pakistanis will consider this a snub, but Mullen was within the Obama administration one of the softest on Pakistan. Within the Pakistani military establishment some believe that Mullen meant to express displeasure over Pakistan's refusal to backtrack on its decision of sending back American trainers. Others believe he was actually displeased about the Pakistani army's refusal to carry out a large scale operation in North Waziristan. Washington has long been insisting that such an operation is necessary if Pakistan has to show its good will, but the Pakistanis continue to drag their feet. They are now arguing that they could bring the Haqqani faction within the Taliban, which is based in North Waziristan, to the negotiating table and that therefore a military operation would be counter-productive. At least the US ambassador to Pakistan, Grossman, recently stated that the US does not contemplate any peace process in Afghanistan without Pakistani participation. Reports of meetings between US diplomats and Taliban representatives in Qatar and Germany have irritated the Pakistanis, who see this as an attempt to bypass them and reach a direct deal with the Taliban.

Will Washington's new, more aggressive tactics work, where trying to win Pakistan's heart has not? The army is under pressure from society perhaps like never before: recently the Supreme Court ordered the withdrawal of a general after his men were demonstrated to have killed an unarmed youth. This is something unimaginable in Pakistan even a few months ago. Perhaps this will help the Americans, who do not want for the time being, to drop their support for Pakistan altogether. Admiral Mullen has stated that cutting off all aid to Pakistan would only make things worse.

The Americans continued to up their pressure on Pakistan in the latter part of the year, in particular with regard to the Haqqani network in Waziristan. In September Admiral Mullen has openly accused the Pakistanis of extending their support to the Haqqanis and the Pakistani authorities have reacted angrily to the accusations. Many believe that the Pakistani services have even engineered the attack on the US embassy in Kabul in September and that the same services are campaigning to shut down the channels of communication that the Americans had succeeded in opening with the Taliban (or some of them). The Pakistani refusal to take on the Haqqanis is however for the first time eliciting strong criticism in some of the Pakistani media, which point out how the country is on the verge of economic collapse and cannot afford to irritate Washington. The mood within the business class is sombre and some observers expect a capital flight to start soon. Panetta and some voices in the senate argue now that the US should not balk at military strikes inside Pakistan, particularly in North Waziristan and aimed directly at the Haqqanis.

Secretary of State Clinton’s visit to Pakistan in October took place amid low expectations of a diplomatic breakthrough. In Kabul before moving on to Pakistan, Clinton warned that she would put heavy pressure on Pakistan to start cracking down on the Haqqani network, which Washington openly accuses the Pakistani army of supporting. The attack on the US Embassy in Kabul in September, widely attributed to the Haqqani network, was read like the Pakistani army’s response to US pressure. Washington hopes that the threat to curtail US military aid to Pakistan would force the Pakistanis to start delivering. In case the Embassy attack was not a message strong enough, Pakistani army chief General Kayani told a parliamentary defence committee in October that Pakistan no longer needs US military aid. In Pakistan some now fear that the Americans might intervene unilaterally in North Waziristan, because of some military build-up on the Afghan side of the border. Among the hypotheses ventilated by the Pakistani press are a large scale bombing campaign of the region where the Haqqanis are based. Kayani dismissed such fears by claiming that Pakistan is neither Iraq nor Afghanistan, as it is a nuclear power. Some advisers to President Obama now advocate starting to consider Pakistan as an hostile country and no longer an undisciplined ally, although Clinton is still saying that Washington has no choice but to seek cooperation with Pakistan. At present, about 35% of NATO’s supplies to Afghanistan still travel through Pakistan. Efforts to re-route the supplies, together with the beginning of the withdrawal of the troops, will bring that percentage close to nil within a year or less. At that point a strategic shift from Washington would be easier.

The Pakistanis have renewed their diplomatic effort to draw Afghan President Karzai towards their position. In April a delegation including Prime Minister Gilani, 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, figures the request of capping the size of the Afghan Army at 100,000 men (it is planned to reach 250,000). Kayani has made the achieving of a settlement in Afghanistan in line with Pakistan’s interest and under Pakistani hegemony, his key aim.

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 from the US for the armed forces, has according to US intelligence sources 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 at 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.

The Pakistani government holds great hopes in Chinese investment in the Pakistani economy as a way out of the crisis; in particular it claims that China will invest US$11 billion in the power generation sector in the near future. Chinese companies already have a lot of experience in Pakistan and have been among the few who invested in the Pakistani energy sector, so Islamabad’s hope is not fully unfounded. For all its bravado, however, the Pakistani government is now back to negotiating with the International Monetary Fund for a rescue package. The conditions which the IMF will seek to impose are going to be similar to those already imposed in the past: create the conditions for the approval of the Reformed General Sales Tax (RGST), eliminate power sector subsidies and sack excess manpower from state owned enterprises such as Railways, PIA, Pakistan Steel Mills, power distribution companies. The reopening of negotiations with the IMF appears to have been dictated by a faster than expected depletion of foreign currency reserves in recent months. The Pakistani government had been expecting a depletion of such reserves at the rate of US$1.5-2 a year, but in fact they fell by US$1.4 billion in just the last three months, creating a potentially unmanageable situation. The high oil prices contribute to the Pakistani malaise and to the newly found willingness of the government to humiliate itself in front of the IMF.

The fact that the Pakistani Railways have reached collapse did not appear to bother the ruling elite much; after all the trains in Pakistan are only used by the lower and lower-middle classes. Now however Pakistani International Airlines (PIA) is increasingly in the eye of the storm for mismanagement. The cancellation of flights on security grounds, yet often due to poor maintenance, is an indicator of a growing difficulty to keep the PIA running. A PIA collapse would have a much greater impact on the elite.

In terms of internal politics, the main current issue in August was the continuously escalating violence in Karachi, the economic heart of Pakistan. The Mujahir extremists are trying to ethnically cleanse the recently established Pashtun minority. The turmoil has led the business community to invoke the intervention of the army. They say that the violence is crippling the economy, with many shops closed and industries seriously hampered. Karachi alone accounts for 79% of Pakistan's customs revenue, 44% of tax collection and 58% of sales tax and is absolutely crucial to the economic viability of the Pakistani state.

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.

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 wheat and more in general foodstuffs. The government keeps the price of wheat high to please the farmers (including the big landlords who dominate 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.

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.

The next electoral campaign is going to be a particularly difficult one for the PPP government, amongst other things because of the recent floods which have hit Sindh, the main stronghold of the PPP. The fact is that the rival MQM, traditionally based among Mujahirs, has tried to make inroads among the Sindhi population by assisting those caught in the floods, while the PPP stood and watched, might deliver additional damage to the Bhutto’s party. The Sindhi nationalist parties are also reportedly on the rise.

The government seems less interested in reforms than ever; the priority now is getting ready for the next elections. The power sector, which is the weakest point of the whole economy, serves the PPP’s electoral campaign as a source of party workers and any reform would disrupt the ability of the government to recruit. The government is now reportedly considering starting to print money to plug the hole left by the end of the IMF programme, with the certain result of unleashing inflation. The government is also reported to have plans to abandon the idea of entrusting the electricity tariffs to a regulator, because in that case the government would no longer be able to manipulate tariffs for electoral purposes.

Finance Minister Shaikh announced in June a new budget, aimed at reducing the deficit to 4% of GDP, from the current 5.7%. While these figures might not seem horrifyingly high by world standards, Pakistan's tax take is one of the lowest in the world. Shaikh stated that the government is going to crack down on fiscal evasion, that is the 2.3 million of Pakistanis out of 3.8 million who should be paying tax. The government hopes that with this budget and these promises the IMF will release the US$3 billion loan which is now suspended; critics however point out that the government is still resisting the idea of taxing the wealthy landowning class, who as is noted above dominate the main political parties, preferring instead to hit the business and middle classes.

The main worry of the Pakistani elite is however not the struggling economy, but the increasingly restless army. Chief of Staff Kayani, once the country's strongman, is losing the support of his officers. Even the Corps commanders seem to be turning against him; reportedly they met recently to discuss his removal. Although they decided not to proceed for the moment, the very fact that they were discussing such a coup is a major development nonetheless. The army is effectively between two fires. The terrorist campaign is getting more and more daring and the army, which unwittingly accused the Indians of supporting the extremists, is now getting discredited because it is apparent that it cannot protect the country from its enemies, despite taking a huge and growing share of government expenditure. Pakistan has sacrificed everything else (from state education to power generation) to feeding a large and well-equipped army, which is now failing in its mission. The army is therefore becoming very unpopular in Pakistan's streets. The ‘last straw’ in public outrage was the assassination of journalist Saleem Shehzad, who published a book critical of the country's security services. The press once highly respectful, is now openly critical of the army, sometimes even mocking it.

Despite rising remittances and a weak dollar, the Pakistani rupee continues to lose ground against the US currency; in August is reached as low as 87 to a dollar. The government is desperate to raise the funding it needs for urgent infrastructural projects and is now ventilating the hypothesis of an Infrastructure Development Levy to raise US$1.2 billion for the building of a gas pipeline from Iran. It is also considering to raise US$300 from a consortium of local banks. Pakistan desperately need to produce more power. The government is also discussing the TAPI project with Turkmenistan and a project of importing liquified gas, but none of these is moving ahead fast enough. The government is also trying to send a signal that the debts owed by the state to the power generation companies; the cabinet has ordered the relevant ministries to pay the first Rs25 billion to be paid out soon. If the long-standing debts are effectively cleared, the power generation companies might be in a better position to increase production to capacity levels. The total amount owed is estimated at between Rs300-400 billion.

The violence in Karachi is having obvious effects on the economy: foreign investment in Pakistan fell 77% in the first two months of the 2011/12 fiscal year. The tax-GDP ratio is in decline again and stands at 9.5%, as the government has lost interest in the IMF as a source of funding, while inflation is now around 14%. There have now been cases of trains stopping on the tracks for lack of fuel: Pakistan Railways is on the verge of financial collapse, not even Pakistan State Oil will supply diesel to it! The government has been transferring money to Pakistan Railways to keep it going, but the money has mostly been spent for salaries and little has been left for repairing the trains and buying fuel. Now the government is trying to make some money by blackmail: recently it approached the US authorities, aware of their upset at Pakistani negotiations with the Iranians over a gas pipeline connecting the two countries. It proposed that Pakistan abandon the deal with the Iranians, in exchange for an American offer of a deal for the production of nuclear energy similar to that enjoyed by India. The Americans, who initially seemed to have had a muted reaction to the announcement of the Irano-Pakistani deal, are now threatening sanctions against Pakistan if the deal goes ahead.

On the other hand there is more and more turmoil within the army, where opposition to cooperation with the Americans is reaching new heights. The Corps commanders have now to show that they are receptive to the rage of the junior and middle officers. Evidence of collaboration of armed force officers with the terrorists is mounting; some decisive action was taken when officers were arrested in June for collaborating with Hizb-ut-Tahrir, one of many extremist Islamist organisations operating in the country. There is no evidence the Hizb-ut-Tahrir was involved in any specific act of violence and the move seems aimed at showing that the army is taking action, while at the same time safeguarding its own powerful radical Islamist networks within the armed forces. In a concession to the angry officer corps, the army has blocked food and water supplies to US drone bases in Pakistan. Of symbolic value is the arrest of several individuals, accused of having collaborated with the Americans in tracking down Osama bin Laden. Now many wonder what could happen if an anti-American coup actually takes place, or if in a more likely scenario, Chief of Staff Kayani himself is at some point forced to go as far as demanding a complete cessation of drone attacks inside Pakistan. The Pakistanis do have the leverage to impose such a change, if they chose to: 70% of supplies to ISAF in Afghanistan still come through Pakistan. When they blocked supplies to Afghanistan in Torkham last autumn for 11 days, it was panic in NATO. Although potentially the northern route through Russia and Central Asia could replace the Pakistani route, surely the Russians would demand major political concessions for this.

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