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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.  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

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