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Key political risks to watch in Pakistan

Pakistan’s government lost its parliamentary majority on Jan. 2 after a key coalition partner, the Muttahida Qaumi Movement (MQM), announced it would go into opposition, plunging the country vital for US efforts to pacify Afghanistan into a deep political crisis.

Following is a summary of key political risks to watch in Pakistan:

Government crisis

The MQM’s withdrawal means that if fractured opposition parties close ranks, they would be able to force a no-confidence vote on Prime Minister Yusuf Raza Gilani in parliament.
If the crisis deepens, an early election may be called.
The MQM pullout came after Jamiat-e-Ulema-e-Islam (JUI), a pro-Taliban religious party, quit the coalition last month after Gilani sacked one of its ministers.
The political paralysis will make it even harder for Pakistani leaders to tackle a wide array of problems frustrating millions of Pakistanis — from corruption to poverty to suicide bombings carried out by Taliban militants.
What to watch:
·Whether the government can bring the MQM back on board. To achieve this, President Asif Ali Zardari may have to take decisive steps such as the dismissal of his close aide and Sindh province’s home minister, Zulfiqar Mirza, a vocal critic of the MQM, which dominates politics in Pakistan’s financial capital and biggest city Karachi. A deal may be possible given divisions between the MQM and the main opposition party, led by former prime minister Nawaz Sharif.
·Whether the prime minister quits. Differences between Zardari and Gilani have raised speculation that the prime minister is becoming vulnerable. Some analysts say Gilani may opt to resign instead of facing a confidence vote, which may encourage some of the disgruntled former allies to rejoin the government.
·Whether opposition opts for a no-confidence vote. With the MQM sitting the opposition, the government clearly loses its majority in the National Assembly. The opposition could now press ahead with a no-confidence vote against the prime minister in parliament. Much will depend on Sharif’s Pakistan Muslim League (PML-N). Sharif is one of Pakistan’s most popular politicians, but he does not enjoy good ties with most political parties and the chances of the opposition forming a new ruling alliance are slim. The ruling Pakistan People’s Party (PPP) may try to lure some of the other, smaller opposition parties into its fold to regain a majority, but that looks unlikely. Therefore, a call for early elections is likely.
·Pakistan’s latest political storm could further weigh on investment in a country that relies on an $11 billion IMF loan agreed in 2008 to help its fragile economy. It will also make it even harder to reach agreement on a new reformed general sales tax (RGST), a key condition for future IMF loan disbursements.

Impact of the 2010 floods

Pakistan’s floods displaced millions of people and destroyed crops and livestock. The government has estimated direct loss to the economy of almost $10 billion. But the longer term consequences also pose major risks for investors in the region and for geopolitical stability.
The government’s response was widely condemned as inadequate, and this was compounded by the fact that Zardari left the country during a critical period in the unfolding catastrophe for a visit to Europe that included a helicopter trip to inspect his French chateau. Popular anger with the government continues to grow, with the lack of basic services in the rural areas a source of great frustration. The military is seen as having provided a much more organised and efficient response, and the crisis has certainly strengthened the hand of the Pakistani armed forces in their perennial power struggle with civilian politicians.
What to watch:
·Political fallout. The damage to Zardari’s government isn’t over and winter is here. With millions still homeless, how badly will Zardari be damaged by popular anger at the government’s response to the crisis? Will it allow the military even more autonomy from civilian control?
·Economic impact. Growth was forecast at 4.5 percent for the current fiscal year, but because of the floods the central bank cut it to between 2 percent and 3 percent.
·Security implications. To what extent will the misery, dislocation and anti-government anger caused by the floods allow extremist groups to gather strength?

Internal security

Large swathes of Pakistan remain outside government control, run by the Taliban and tribal leaders. Last years military campaign to roll back Taliban territorial gains saw some successes, but insurgents have shown they can launch major attacks in urban, industrial and commercial centres with relative impunity. The US troop surge in Afghanistan could also cause more instability in Pakistan’s border regions.
What to watch:
·Ability of militants to launch attacks. Several assaults on military facilities in particular have shown the continued ability of Taliban militants to attack even protected targets. There is no sign of a sustained improvement in security despite offensives against the Taliban. Pakistan’s markets have long grown accustomed to the level of violence and bomb attacks will not have a significant short-run impact on prices unless key government or military leaders are killed. Investors are more sensitive to attacks in Karachi, the commercial hub and home to the main financial markets, the central bank and the main port, but several recent bomb attacks did not spark heavy selling. However, investment will be deterred by continued instability, with negative implications for long-term growth.
·Safety of Pakistan’s nuclear arsenal. Pakistan’s poor record of preventing attacks on even secure military targets has raised concern that militants could penetrate a nuclear facility. Analysts say while there is minimal risk insurgents could get their hands on a nuclear missile, a potential danger is that they could steal some fissile material which could be used to build a dirty bomb. This scenario would unsettle markets not just in Pakistan but also in India.

External security

Relations with India have entered an uncertain phase. Summer talks between the countries’ foreign ministers produced no progress and may even have moved relations backwards. Unrest in areas of Kashmir under Indian rule has raised tensions.
Washington has been trying with some success to persuade Pakistan to focus on the Taliban threat within its borders rather than the perceived external threat from India. But with many groups in Pakistan still sworn to launch more attacks in India, particularly over disputed Kashmir, there is constant risk of another sudden chill in relations. With two nuclear-armed powers facing off, there is also the risk an accident or misunderstanding escalates into major conflict.
Relations with Afghanistan could also be better. President Hamid Karzai called for NATO attacks on Taliban sanctuaries in Pakistan after the release of tens of thousands of classified US military reports by the website WikiLeaks that appeared to implicate Pakistan’s spy agency, Inter-Services Intelligence, in supporting the Afghan Taliban. Pakistan reacted with denials and fury.
What to watch:
·Attacks in India. Any attack with Pakistani fingerprints could spark a serious confrontation, pushing down markets on both sides of the border.
·Any progress on talks. India has been reluctant to broaden the agenda to problems such as Kashmir until more is done in Pakistan to deal with those behind the Mumbai attacks.
 

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