Summary: Relations with Washington are improving as Islamabad appears more cooperative in easing the Americans way out of Afghanistan. The IMF has agreed to a higher loan than expected, contributing decisively to avert a Pakistani default in the coming months. But Sharif is struggling to keep the army under control and renewed border clashes with India endanger the only strategy which could allow the Pakistani economy to take off, that is a full pacification with the eastern neighbour.
Sharif woos IMF
After initially agreeing to a US$5.3 billion loan to Pakistan (Islamabad had asked US$7.2 billion), the IMF decided to raise its loan to US$6.6 billion, conditional on fiscal reforms being implemented. So far the Pakistani government cut electricity subsidies and started chasing up tax evaders. Although Nawaz Sharif has been more successful than expected with the IMF, the worry in Pakistan remains that the ruling elite might once again fall in the trap of relying on foreign borrowing to fill the gap in public finances. With foreign debt at over US$50 billion already, half of the state budget is already funded with foreign loans and with just 2% of the population paying any tax, the path is clearly unsustainable. Most tax revenue comes from the oil and mobile telephone sectors. There is now pressure on the government to tackle the issues of loss making state run enterprises, which altogether are costing to the country 500 billion rupees annually. The IMF’s generosity was the result of pressure from Washington and might in part be a reward for Pakistan’s greater collaboration in trying to open up negotiations with the Afghan Taliban.
Saudi Arabia too is coming to Pakistan’s succour: the Saudi Islamic Development Bank Group Ltd pledged a US$997 million credit line and a $200 million trade facility for Pakistan to buy petroleum products. In this way Islamabad should be saved from a default: it has now only US$5 billion in reserves left, which would last only for five weeks.
Thaw with Washington, but without forgetting China
As a reward for growing Pakistani collaboration, the White House seems open to a deal over drone strikes inside Pakistani territory. In fact in recent months US drone strikes in Pakistan have declined considerably, probably a result of deliberate restraint. Nawaz Sharif has also a reputation of being genuinely keen on pacification with India, in the hope of allowing trade between the two countries to grow many fold from the current US$2.35 billion (already up on 2011 when it was US$1.94 billion), but on this front he has so far been far less successful, as the Pakistani army is opposed to any opening and has made its views clear by stoking up tension on the Indian border. The renewed violence could well get much worse as militant groups are believed to be getting ready to redeploy away from the Afghan border towards Kashmir once again.
In the meanwhile Sharif is also intent on strengthening the ties with China. In July he visited China and signed several economic agreements, which will bring more Chinese investment to Pakistan. Trade between the two countries already reached US$12 billion last year. Sharif remains also committed to his policy of appeasement with Pakistan’s militants and proposes peace talks, which have proven controversial in the past.
The riddle of the army
President Zardari is due to be replaced soon by a new president, as his term ends in September. Prime Minister Sharif seems to be pushing for Sartaj Aziz, a political ally and experienced minister of the economy. But the real hurdle for Sharif will be the nomination of the new Chief of Staff of the army in November. Sharif still retains the Defence Ministry for himself, in an attempt to show his determination to keep the army under control. The names being circulated for the November appointment include Lt Gen Rashad Mahmood, currently chief of general staff; Lt Gen Tariw Khan, known for being in favour of better...
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