Zardari has made overtures to the US for funding and support, apparently hoping to strengthen his political position as well as to assist the country. On a visit to Washington in October, he described Islamic militants in Kashmir as terrorists, rather than maintaining the label 'freedom fighters'. This will have pleased the US government, but increased his unpopularity at home. Sharif, now a bitter opponent, is exploiting Zardari's US links but has offered no substantive solutions to Pakistan's problems.
Economic challenges
The economy experienced high growth from 1999 to 2007. But economic issues were almost totally neglected during 2007's political turmoil. As global prices rose steeply, Pakistan's mechanism for the automatic adjustment of prices of oil products was dropped. The heavy cost of food and fuel subsidies caused reserves to drop from about $14 billion in November 2007 to $4.3bn in late October 2008, enough to cover only two months of imports. The fiscal deficit rose to 7.5% of GDP, inflation to 25%, and the currency has depreciated by more than 20% since the start of the year. Foreign investment has dried up and investors have sought to withdraw their assets. International financial institutions estimate some $5bn of extra financing is needed immediately if a financial crisis is to be averted, and twice that amount over two years.
It was only in late summer 2008 that the economy started to be taken seriously and measures were taken to reduce subsidies. However, senior officials responsible for finance have been shuffled several times since the elections and there have been five ministers in a year. While the present finance team appear finally to recognise the magnitude of the problem and the need to address it, their experience dates from before the era of liberalisation. This arouses concern that they might seek to return to control regimes, which would further discourage external investment.
Meanwhile ordinary Pakistanis are seriously affected by food and fuel price rises, such as a 31% rise in electricity prices, and by lengthy power cuts.
In this context, Zardari asked the US for $100bn during his recent Washington visit. But the US's own economic challenges may jeopardise even the Biden–Lugar bill before Congress, which envisages a package of $15bn over ten years directed at the social sector. In any case, $10bn of US financial and other assistance since 2001 has not greatly stabilised the country: more than $8bn has been for security-related purposes connected to operations in Afghanistan and the FATA; some has gone towards debt relief; and less than $1bn has been allocated for other economic or social purposes. Meanwhile, $4.55bn worth of US military sales agreements were signed with Pakistan between 2002 and 2007, including big-ticket platforms more suited to conventional warfare. Such sales would reduce the already small proportion of government funding available for social development.
Although Zardari announced his opposition to any International Monetary Fund programme, it was announced on 15 November that Pakistan had asked the IMF for a $7.6bn loan. To try to avoid IMF loan conditions, Pakistan had pressed Saudi Arabia to defer payments for oil imports and hopes the Saudis might again forgive its debt. Visiting Beijing in October, Zardari also tried to secure funds from China, which built the Karakorum highway, developed the port of Gwadar and previously supplied nuclear-weapons technology and missiles. However, China proved unwilling to ease this latest crisis.
Wider effects
If Pakistan's security, political and economic situation were seriously to deteriorate, the army would no doubt step in again. It would, however, be very reluctant to do so having lost so much prestige during the nine years of Musharraf's rule. The challenges surrounding Pakistan are of direct relevance to other countries. The United Kingdom, for example, is concerned about links between the large British Pakistani community and sponsors of terrorism in the FATA. However, the broader implications of Pakistan's difficulties should not be exaggerated.
On present evidence, Pakistan is not in danger of becoming a militant Islamist state. Pushtun extremists are not representative of all Pushtun tribes, still less of other Pakistani communities. Nor, despite plausible concerns that some Pakistani authorities or associates are assisting the Afghan Taliban, is there evidence to suggest that fundamental Pakistani army structures have been weakened. Partly as a result of US mentoring, there are also sound arrangements for the security of Pakistan's nuclear arsenal.
These factors may be some comfort to Western leaders, but Pakistan's situation will continue to worry them in its own right and because of the adverse effects on their strategy in Afghanistan.
