Pakistan: Living on the Edge

Pakistanis watch the New Year fireworks

Worsening political turmoil and an unraveling economy cloud prospects for Pakistan’s stability in the year ahead. When the ruling coalition led by President Asif Zardari lost the support of two key allies the country plunged into a fresh political crisis. The defections left the government well short of a parliamentary majority and struggling to avert a collapse.

The more important question this raised was not if a minority government would survive, but if it did, would such a feeble administration be able to govern. The danger of political paralysis looms at a time when the country needs decisive leadership to deal with pressing problems. A lame-duck administration preoccupied by the politics of survival is unlikely to be able to address a gathering economic crisis that poses the most serious threat to the nation’s stability.

The government led by the Pakistan People’s Party (PPP) may well survive by default as none of the parties in Parliament are keen on early elections, due in 2013. Even the government’s most bitter political foes have not sought to force a vote of a confidence. This would inevitably result in a stalemate, as no party would be able to command a majority to form the government. This means that for now the PPP may hang on to power but with its tenuous position rendering it more dysfunctional.

The sense of drift that characterized the government in 2010 is liable to be more pronounced in coming months – a dangerous prospect in the face of mounting security and economic challenges, crippling power shortages and growing public discontent.

The economic outlook worsened further at year end when the country’s programwith the IMF went off track due to lack of compliance with agreed performance criteria, including the commitment to raise revenue. Widening macroeconomic imbalances have heightened the risk of an economic breakdown in the absence of prompt corrective measures.

The country’s economic woes were compounded in 2010 by the worst floods in living memory that deluged large swathes of the country and caused large-scale displacement and destruction. Millions were affected by the calamity at a time when the country was struggling to cope with an unprecedented security crisis fuelled by nine years of inconclusive war in Afghanistan.

2010 saw unrelenting terrorist attacks across the country even if the year did not turn out to be as deadly as 2009, when violence hit a record high. Although military operations during 2009 put the militants under pressure and drove them out of their strongholds in Swat and South Waziristan, it remained unclear whether these gains could endure.
There was patchy progress on that count as problems were encountered during 2010 in transitioning from the ‘clear and hold’ phase to ‘build and transfer’. That the army remained engaged in operations of varying intensity in six of Pakistan’s seven tribal agencies underlined that the battle against militancy would neither be quick nor easy especially as the protracted war in Afghanistan continued to complicate Pakistan’s efforts.

As the New Year began it was a deteriorating economy rather than the militant threat that posed the most proximate danger to the country’s stability. The most consequential decision the government may have taken in that regard was not to move ahead on its declared intention to reform the General Sales Tax. The lack of any sustained official effort to mobilize wider support to overcome resistance from opposition parties stalled the reform effort.

Missing targets the government set to institute the tax and implement other promised policy reforms rendered the IMF programme inoperative. The Fund then withheld $3.5 billion of its $11.3 loan package for Pakistan.

With the budget deficit already exceeding the official target of 4.7 per cent of GDP for fiscal year 2010/11 this could now rise to 7 or 8 per cent. With no more spending cuts envisaged, failure to mobilize domestic resources heightens the possibility of funding the widening budgetary gap by more bank borrowing.

Already at a record high, government borrowing from the central bank to finance a higher fiscal deficit will mean printing more currency notes. This will put the country on a slippery slope in an already explosive inflationary environment.

With the economy precariously poised between escalating inflation and sagging growth, the question that 2011 poses is whether Pakistan’s leaders can transcend the country’s fractious politics and boldly address the problems that threaten the nation’s future.

Dr. Maleeha Lodhi is a former Pakistani Ambassador to the United States. This piece is part of the Atlantic Council web forum “South Asia in 2011,”  a collection of contributors’ reflections on events in the greater South Asia region in 2010 as well as their predictions for the year ahead.

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