226157

9/21/2009 1:55:00 PM

09ISLAMABAD2290

Embassy Islamabad

CONFIDENTIAL

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C O N F I D E N T I A L ISLAMABAD 002290

E.O. 12958: DECL: 09/19/2034 TAGS: PGOV, PTER, PREL, ECON, EAID, ENRG, MOPS, PK, IN, AF

SUBJECT: ASSESSMENT OF PRESIDENT ZARDARI'S FIRST YEAR IN OFFICE

Classified By: Ambassador Anne W. Patterson. Reasons 1.4 b and d

1. (C) Summary: When Asif Ali Zardari took oath as Pakistan's President on September 9, 2008, he inherited a series of intersecting political, economic, and security crises for which the Pakistan Peoples Party (PPP)-led coalition government appeared ill-equipped. One year later, Zardari appears to have maneuvered comparatively skillfully to begin the long-term process of moving Pakistan out of these crises and towards a modicum of stability in all of these key areas. On the positive side, Zardari has managed to consolidate his own authority over the fractious PPP. He has maintained good relations with coalition allies and has built a broad-base of support for critical national policy issues including with the opposition. He has improved his relationship with the military establishment. He has initiated economic reforms in accordance with International Monetary Fund (IMF) requirements and has worked to increase donor confidence in and funding for the government. He has dealt with the security crisis and resulting humanitarian crisis in the Malakand Division. He has initiated key legal reforms in the Federally Administered Tribal Areas (FATA) and has laid the groundwork for more extensive government operations to clear terrorists from the FATA.

2. (C) Zardari, however, still has numerous challenges ahead of him, not least dealing with poor service delivery by government departments and addressing serious credible allegations that he and his government are corrupt, which is damaging his ability to succeed either domestically or internationally. He needs to increase government revenues, reduce popular subsidies in areas such as energy, and increase power generation and distribution capabilities. He will have to maintain control of the political process, keep the support of opposition political leaders for the democratic process even as they oppose his policies, and convince the military to stay out of the political arena. He will have to convince the military establishment to move decisively against Pakistan-based terrorist groups focused on Afghanistan and Kashmir and develop a coherent strategy for tackling growing extremism outside the North West Frontier Province (NWFP) and FATA. He will need to reinitiate serious dialogue with India that has been stalled since the November 2008 Mumbai attacks.

3. (C) While post recognizes the limited overall capacity within the PPP to tackle these issues, we continue to believe that Pakistan's political, economic, and security scenario would not benefit from a premature change in political leadership. Consistent international support for the programs and policies of President Zardari and the PPP-led coalition government, coupled with ongoing engagement with the political opposition to urge restraint and support on national issues, remains the best way to achieve our objectives in Pakistan. End Summary.

Consolidating Control of the PPP

4. (C) On September 9, 2008, Asif Ali Zardari finalized his ascension as principal leader of the Pakistan Peoples Party (PPP) with his election as President of Pakistan. Despite winning a plurality in the February 2008 national elections, the PPP remained beset with internal divisions and a lack of coherent vision and leadership in the aftermath of Benazir Bhutto's assassination. Zardari, who had taken over the party on Benazir's death, still feared challenges from within the party, despite having successfully engineered his own election as President and the election of his Prime Ministerial candidate Yousaf Raza Gilani.

5. (C) Since taking over as president, Zardari through a skillful carrot and stick approach has managed to consolidate his position within the party and marginalize, expel, or co-opt his most serious potential challengers. This has increased his scope for political decision-making, strengthened his hand and his Prime Minister's, and enabled him to deal on a more equal footing with coalition partners and his main opposition political rival Nawaz Sharif. As one dissident PPP member put it to post, Zardari has effectively ensured that so long as the PPP remains in government, there will be no internal challenges to Zardari's role or his policies. This is a major achievement for a political neophyte, who had little or no party base at the time of Benazir's murder.

6. (C) While Zardari has been successful within the leadership ranks of the PPP in consolidating his power, he has been far less effective in building support for himself or the government within the party's rank and file or within the public at large. Due in large part to security concerns, Zardari and his top ministers have eschewed the sort of egalitarian contact with party workers that was the hallmark of both Benazir Bhutto and her father, party founder Zulfiqar Ali Bhutto. This has disillusioned party workers and led to the widespread perception among party rank and file that Zardari and the government are out-of-touch with their needs. Ironically, Zardari's marginalization of key Benazir loyalists who had strong connections to the party base (Ch. Aitzaz Ahsan, Mumtaz Bhutto, Jehangir Badr), which were essential to ending leadership challenges, is further exacerbating this problem.

7. (C) In addition, Zardari has failed to reactivate effectively the PPP patronage networks through which party loyalists were traditionally rewarded free-of-cost with jobs, contracts, and favors. Instead, a pay-for-favor mentality appears to be operating throughout the government. This is further alienating party loyalists who feel these favors should be given based on loyalty not on payment.

Building Popular Support and Improving Governance

8. (C) Zardari has been equally unable to shift his and the government's perception with the general public. His and the government's approval ratings consistently remain below 25 percent. Zardari's reputation for corruption, which was with him when he took office, has yet to dissipate, while corruption allegations continue to swirl around key ministers and advisors. A large part of the problem appears to be the government's inability to develop and implement programs to improve service delivery. Part of these governance problems are a natural result of the PPP's extended absence from government and its resulting lack of ties with the bureaucracy. However, Zardari's reluctance, despite numerous promises, to remove non-performing ministers or those viewed by the public as highly corrupt is exacerbating the problem. Zardari's decision to remove the incompetent and corrupt Petroleum Minister was a positive step, but the lack of follow-through in a thorough restructuring and down-sizing of the cabinet is disappointing.

Improving Relations with the Opposition and the Establishment

9. (C) Despite his and his government's lack of popularity, Zardari has been largely successful in building political support for his signature policy initiative, the decision to move militarily against extremists in Malakand Division and to a lesser extent in the FATA. Zardari has maintained solid support within his coalition government for this policy and has effectively reached out to the main opposition party -- the Pakistan Muslim League - Nawaz to obtain their, albeit at times quiet, support. Zardari's organization of the All Parties Conference that resulted in a show of political support for the government's policies was a masterful piece of political work.

10. (C) Similarly his outreach to the PML-N through Prime Minister Gilani has opened a channel of communication that had previously been noticeably lacking. While periodic political fights between the PPP and PML-N have erupted over the last year -- most noticeably during the Lawyer's Long March, -- these have generally been prompted by ill-considered PPP attempts to increase political leverage over the PML-N. Zardari's ability to manage these admittedly self-created crises and to convince Nawaz to maintain tacit support for the government has been a major achievement, given the historically contentious relationship between the parties and the abysmal state of inter-party relations in September 2008 when Zardari was elected over Nawaz's strong objections.

11. (C) Although not without its problems, Zardari's ability to manage his relationship with the military and intelligence establishment has been a major achievement. In September 2008, Zardari was viewed with considerable skepticism. Early government missteps, particularly a July 2008 attempt to bring the Inter-Services Intelligence Division (ISI) under the Interior Ministry's control, had drastically undercut his credibility. Zardari's own reputation for corruption and the consistently poor service delivery of the government have garnered concern from the Chief of Army Staff and other senior military officers. Despite these problems, Zardari has managed to create and/or maintain the impression within the military's top leadership (1) that he does not pose a threat to their core interests, (2) that he is a better partner than PML-N leader Nawaz Sharif, and (3) that military involvement in government should be kept to a minimum. Zardari's decisions not to prosecute former President Pervez Musharraf and his decision to allow the military to run the Malakand operation with minimal political interference have reinforced these perceptions.

Strengthening Democracy

12. (C) After nearly ten years of military intervention in and management of politics, Zardari inherited a state in September 2008 with incredibly weak democratic institutions and popular demands for greater judicial independence and integrity, enhanced government transparency, and greater parliamentary oversight of government actions. Zardari's coalition partners were demanding greater provincial autonomy and had divergent positions on the future of local government. Above all of this, lingered Nawaz Sharif's repeated demands for full implementation of the Charter of Democracy, an agreement signed by the late Benazir Bhutto with questionable applicability in the midst of Pakistan's security, economic, and governance crises.

13. (C) Zardari has been unable to resolve satisfactorily many of these issues but at the same time, he has been able to keep them from diverting his attention from his core interest of countering extremism. If Pakistan's nascent democratic transition is to survive over the long-term, however, Zardari will in the coming months need to assure progress on the basket of Constitutional reforms being considered in the Parliament. Progress will need to include greater power sharing between the Presidency and the Prime Ministership and a viable system of local government. It must also include some form of enhanced provincial autonomy that satisfies the nationalistic sentiments in Pakistan's smaller provinces and enhanced consultation with the Parliament on government policies. Perhaps most importantly such reforms must redress the imbalance of power between the executive and the judiciary that was created during the Lawyer's Movement.

Dealing with Militancy and Local Extremism

14. (C) In addition to the serious terrorism problem in NWFP and FATA, Zardari inherited in September 2008 a long-standing militant independence movement in southern and central Balochistan. The movement had been exacerbated by Musharraf's decision to respond militarily to Baloch tribal leaders' armed demands for increased fiscal and political independence and fed by the death in combat with the military of Baloch independence icon Nawab Akbar Bugti. At the time Zardari took office, a tentative stalemate between security forces and Baloch tribal elements existed in the region of Dera Bugti -- which had been the heart of the conflict -- while Baloch independence forces continued to carry out terrorist attacks on government infrastructure and security forces throughout the province. Despite tremendous hopes from Baloch leaders, Zardari has not made progress in resolving the conflict. His government's focus on perceived Indian support for the independence movement ignores the core domestic reasons for the crisis and has little hope of resolving Baloch demands for economic development and provincial control of resources that underpin the insurgency.

15. (C) Similarly, Zardari has been unsuccessful in finding ways to prevent and combat growing extremist influence in southern Punjab, northern Sindh, Pakhtoon communities in Karachi, and northern Balochistan. Islamic extremist groups, operating in the guise of charitable organizations, have replaced the inept local governments and traditional leaders in large parts of these areas as the primary deliverers of social services. While the Benazir Income Support Scheme is a good initial start to building a social safety net to displace such extremist groups, President Zardari must work more closely with provincial governments to strengthen local service delivery and law enforcement in order to eliminate such growing extremism.

Improving Regional Relationships

16. (C) Former President Musharraf had made substantial progress in improving relations with India through the back-channel, although India placed these discussions on-hold as Musharraf's control over government began to sink with the March 2007 dismissal of Chief Justice Iftikhar Chaudhry. Zardari came to office ideologically committed to building on the progress made by Musharraf, a commitment symbolized by the October 2008 resumption of Kashmir trade across the Line of Control. Unfortunately, his well-intentioned efforts to signal a desire to improve Indo-Pak relations, as with his off-the-cuff comments to Indian journalists suggesting he would support a "no first use" nuclear policy, were seen as evidence of his naivete and the Mumbai terrorist attacks placed further improvements on-hold. While Zardari has been at the forefront of promising investigation and prosecution of Mumbai suspects in Pakistan, he has fought an uphill battle within the Pakistani security establishment to hold senior Lashkar-e-Tayyaba leaders accountable and to shut-down the activities of Jamaat-ud-Dawa, its charitable arm. Zardari, however, has repeatedly signaled his intention to resume the bilateral dialogue and the recent decision to offer increased autonomy to Gilgit-Baltistan was meant to signal his flexibility on dealing with Kashmir. Zardari remains concerned, however, with growing Indian influence in Afghanistan. While Zardari has a vastly better relationship with Afghan President Karzai than Musharraf and has shown a willingness to move forward on issues such as Afghan Transit Trade and border control cooperation, he shares the establishment's concerns that Afghanistan may be slipping into the Indian orbit of influence.

Improving Macro-Economic Management

17. (C) Though GDP growth fell from 4.1 percent to 2 percent during Zardari,s first year in office, his administration took a number of important steps to place Pakistan on a more stable macroeconomic footing. Under Zardari, Pakistan,s foreign reserves increased from $4.9 to $10.9 billion. The fiscal deficit was reduced from 7.4 to 5.3 percent as a number of subsidies, most importantly on petroleum products, were phased out. However, Pakistan still missed its IMF-mandated fiscal deficit target of 4.3 percent. Relative fiscal prudence and higher interest rates brought inflation down from 25 to 10 percent and shored up the depreciating rupee.

Weathering the Global Economic Slow-Down

18. (C) Pakistan,s economy fared reasonably well given the exigencies of the global financial crisis and world economic slowdown. Banks, well-capitalized and insulated from global markets, weathered the storm, though there was a marked increase in non-performing loans especially amongst small and medium sized enterprises. Exports fell 21.8 percent year-on-year due to the global slowdown. Pakistan,s textile industry, which accounts for well over 60 percent of Pakistan,s exports, continues to struggle. Unable to compete on cost in the lower end of the market with producers such as Bangladesh, the sector has been unable to move effectively into higher value-added lines. Zardari's Textile Policy proscribes subsidies and interventions to keep the textile sector afloat but does not encourage the structural reforms necessary to ensure its long-term viability.

Need to Increase Revenue

19. (C) With a tax to GDP ratio hovering at 9 percent, Pakistan has one of the lowest rates of revenue collection in the world. Only 1 percent of Pakistanis pay income tax, leaving the GOP dependent on import tariffs to raise funds. In cooperation with the IFIs, the Zardari administration is working to phase in a value-added tax (VAT) to close the revenue gap. Official remittances have increased over 20 percent, as the successful crackdown on illegal money changers has funneled remittances through the central bank. The Minister of Finance has termed this growing inflow as his "insurance policy" against potential shocks to Pakistan,s external sector.

20. (C) The IMF,s 25-month, $11.3 billion Stand By Arrangement, agreed to in November 2008 and augmented in August 2009 has proven critical in stabilizing the economy. In April 2009, donor nations pledged over $5.25 billion over the next two years to support the social safety net and provide the GOP with additional fiscal breathing room. Even with these interventions, the IMF forecasts economic growth only reaching 3 percent in 2009-2010, just barely outpacing Pakistan,s population estimated growth rate of 2.5 percent.

Energy

21. (C) Pakistan,s ailing power sector has drained the government treasury, impeded industrial development, and led to rioting across Pakistan. At its height this summer, the gap between power supply and demand reached 5,000 Mw with many areas suffering upwards of 12-18 hours without power due to load shedding. Under an agreement with the Asian Development Bank and World Bank, the GOP agreed to remove $4.6 billion in inter-corporate and bank debt from the sector and raise energy tariffs to cover costs. Under significant political pressure, Zardari backed away from raising tariffs 17 percent in June 2009 and agreed to a revised plan with the IFIs, whereby the GOP promised to raise tariffs in three phased increases, beginning with 6 percent on October 1.

Sustained Engagement in the FATA

22. (C) In September 2008, the Pakistan government had no sustained operations ongoing against terrorists and extremists based in the FATA. The military offensive in this region had degenerated to a series of quick tactical skirmishes that were doing little either to dismantle terrorist/extremists groups or extend the writ of the Pakistani state. What the Frontier Corps found in Bajaur, in the form of well-entrenched, organized militant presence, galvanized the military, with government support, to take a determined stand. In the Bajaur operation, which remains ongoing, the Frontier Corps made an unprecedented commitment to clear militants from within the agency and to expand its operations outwards to follow militants as they attempted to retreat and reestablish themselves in the neighboring Mohmand, Orakzai, and most recently Khyber agencies. While the Bajaur operation has repeatedly illustrated the Pakistan military's inexperience in carrying out counter-insurgency operations and has been replete with mistakes, including failure in the initial days to plan for and respond to civilian displacement, it has marked a turning point in the government's willingness to engage in sustained operations in the FATA and laid the groundwork for an extension of more robust civilian governance and development projects in the area.

23. (C) Sustained military engagement with militants in northern FATA, where groups were seen as posing a direct threat to settled areas around Peshawar, has not been matched over the last year with similar operations in southern FATA, particularly the Waziristans. Attempts to address the threat posed by the late-Baitullah Mehsud's Tehrik-e-Taliban Pakistan (TTP) took the traditional path of short duration skirmishes and brought the government into alliance with Commander Nazir, whose network, in addition to challenging Baitullah for supremacy in South Waziristan, was engaged in cross-border attacks against ISAF forces in Afghanistan. In the wake of Baitullah's death, the military has adopted a strategy to seal South Waziristan to allow the leadership struggle for control of the TTP to play itself out. The military has been contemplating a sustained South Waziristan operation as a next step in pacifying the FATA.

24. (C) Despite these successes, Zardari has not/not succeeded in fully changing the orientation of the Pakistan military. While COAS Kiyani ordered the quiet transfer of three divisions of troops from the Indian border to support counter-insurgency operations in FATA and NWFP, Zardari has not been able to convince the military to launch sustained operations against groups focused principally on cross-border attacks into Afghanistan such as the Haqqani network and Gulbuddin Hakmateyar. Zardari will need to step up efforts, and build public consensus, to convince the Pakistan military establishment that its long-standing policy of dividing terrorist/extremist groups into threats and assets has failed and that equal attention must be paid to dismantling the Haqqani and Hakmateyar networks. Post believes that continued USG engagement with the Pakistan military can help change this orientation.

Responding to the Malakand Insurgency

25. (C) The expansion of militant activities into the Malakand Division and the resulting erosion of the writ of the state caught the government by surprise earlier this year. During the first several months of his tenure, President Zardari was unable to articulate and implement a coherent strategy for dealing with the threat posed by TTP, TNSM, and other Pakistan-focused groups, attempting to pass responsibility first to the military and then to the NWFP civilian government. Zardari ultimately allowed himself to be persuaded to adopt an ANP/military strategy of negotiation with the TNSM, through the intermediary of Sufi Mohammad, that resulted in a tenuous and quickly broken peace deal.

26. (C) The militants' failure to adhere to the peace deal and their decision to attempt to extend control from Swat into other parts of the Malakand Division paved the way for a sustained military response. While many feared that the military's response would simply push the militants back into Swat and the status quo ante, COAS Kayani, with strong support from Zardari, capitalized on domestic and international public anger at the militants' expanded activities to launch a full-scale military campaign to push the militants out of the entire Malakand Division. The resulting operation has cleared much of the division of militant activity, although some sizable pockets of resistance still exist. The government is in the process of reextending its writ to these areas.

27. (C) The Malakand Division operation showed a demonstrable improvement in counter-insurgency operations on the part of the government from the earlier Bajaur operation. Unlike in the initial Bajaur operation, the government took seriously its responsibility to protect civilians caught in or displaced by the conflict. The military facilitated the delivery of assistance both to those who remained in the area, to the extent possible, and to those who fled from the conflict. The military enabled international aid agencies to establish emergency services for those displaced from the conflict, and due in large part to these efforts, a major humanitarian crisis was successfully averted. As residents are returning to the Malakand Division, they are finding that in most areas, the military was successful in avoiding large-scale collateral damage. In addition, the government has taken the lead in designing and securing donor support for a major Malakand reconstruction program.

Improving Counter-Insurgency Capability

28. (C) On taking office in September 2008, President Zardari inherited a military that saw counter-insurgency operations as near the bottom of its priorities. Over the past year, this has noticeably changed. The military has begun to embrace training in this area, as evidenced by the decision, after many false starts, to allow Frontier Corps training by the U.S. military to proceed. Similarly, Pakistan has begun to direct a significantly increased portion of its Foreign Military Financing (FMF) cases towards the procurement of counter-insurgency related equipment, including ammunition for operations in the FATA and NWFP and an expanded helicopter fleet. On the intelligence side, Pakistan has begun to accept intelligence, surveillance, and reconnaissance support from the U.S. military for COIN operations. In addition, it has initiated a strengthening of that cooperative relationship through the establishment of intelligence fusion centers at the headquarters of Frontier Corps and the 11th Corps and we expect at additional sites, including GHQ and the 12th Corps in Balochistan. This enhanced capacity to share real-time intelligence with units engaged in counter-insurgency operations is a significant step forward for the Pakistan military.

Border Coordination

29. (C) The inauguration of a Border Coordination Center near the Khyber Pass in March 2008 offered the Pakistan government an infrastructure on which it could build to improve military-to-military coordination across the Afghan border. Since that time, we have seen a demonstrable increase in the level of operational cooperation between U.S. and Afghan units in RC-East and their Pakistani counterparts. Pakistani forces are increasingly using deconfliction processes to coordinate indirect and direct fire with ISAF/Coalition elements in response to enemy activity in the border areas. In recent months, there have been several incidents in which Afghan, Coalition, and Pakistani forces shared information about militants crossing the border, and one serious incident of cross border fire, which was defused without a major public relations debacle. We are also increasingly seeing Pakistani officials communicating directly with their Afghan counterparts, instead of through U.S. forces. In addition, we are seeing the beginnings of combined operational planning. In July 2009, Pakistani forces and U.S. military in Pakistan coordinated with Coalition and Afghan forces from RC-South to execute Operation OUBA I, a "hammer-and-anvil" maneuver in the vicinity of Bahram Chah. These are significant improvements over a relatively short period of time, and they offer a promising glimpse of what cross-border cooperation can look like if we can sustain and expand this level of engagement.

30. (C) Comment: One year into his five-year tenure, President Asif Ali Zardari has made some progress in dealing with the political, economic, and security crises that he inherited on assuming office after a protracted period of military rule. The initial year of President Zardari's rule can correctly be seen principally as one of stabilization in which he has successfully shifted public and political opinion on his signature issue -- combating terrorism and extremism. On the practical front, Zardari's support for the operations against terrorists, who had taken control of the Malakand Division, and the government's handling of the resulting humanitarian crisis were generally a success. His efforts to build international donor support both for economic stabilization of Pakistan and for reconstruction and development assistance in the country's ongoing fight against extremism must also receive high marks. While Zardari has achieved less than he (and we) had hoped in relations with India, combating cross-border extremist and terrorist groups, addressing the country's power crisis, consolidating democracy, and ending the Baloch militancy, his overall progress to date should be given a passing mark. Whatever challenges Zardari still faces -- and he has many of them -- Pakistan and American interests would not, at this juncture, be served by a change in political leadership or an early election. End Comment. PATTERSON