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O 211355Z SEP 09
FM AMEMBASSY ISLAMABAD
TO SECSTATE WASHDC IMMEDIATE 4958
THE WHITE HOUSE WASHINGTON DC IMMEDIATE
INFO NSC WASHINGTON DC IMMEDIATE
AMEMBASSY KABUL 
AMEMBASSY NEW DELHI 
AMEMBASSY LONDON 
AMCONSUL KARACHI 
AMCONSUL LAHORE 
AMCONSUL PESHAWAR 
SECDEF WASHINGTON DC
CIA WASHINGTON DC
JOINT STAFF WASHINGTON DC
CDR USCENTCOM MACDILL AFB FL
USCENTCOM INTEL CEN MACDILL AFB FL

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...

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