What is happening in Iran? On the surface, the country has returned to normalcy. Demonstrations have become infrequent, and have been quickly dispersed. But underneath the calm, there is intense activity and the beginnings of a political opposition. In the past week, Mir Hossein Mousavi, the candidate who officially lost last month's presidential election, has announced his intention to create a "large-scale social movement" to oppose the government and press for a more open political system. Mohammad Khatami, the reformist former president, has called for a referendum on the government. Another powerful former president, Ali Akbar Hashemi Rafsanjani, has criticized the regime's handling of the election and post-election "crisis." All three have demanded the release of politicians and journalists imprisoned over the past month and held without charges. (Those prisoners include Maziar Bahari, NEWSWEEK's Tehran correspondent, a Canadian citizen, and an internationally recognized documentary filmmaker.) These are not dissidents in the wilderness. Between them, the three men have been at the pinnacle of power for most of the Islamic Republic's existence.

More striking has been the revolt of the clerics. Iran has only a score or so grand ayatollahs, the highest rank in the Shiite clerical order. Few have publicly supported President Mahmoud Ahmadinejad. At the same time, according to the indispensable Tehran Bureau Web site, six grand ayatollahs have publicly criticized the regime. Last week one of them issued a fatwa (a religious ruling) declaring that it was appropriate to boycott Ahmadinejad's inauguration as president. He also directly criticized the country's Supreme Leader, Ayatollah Ali Khamenei.

The clerics' actions highlight a shift in power in Iran away from the religious establishment and toward the military. Ahmadinejad represents this change, being a layman, a veteran of the Iran-Iraq War, and a man with close ties to the Revolutionary Guards, the parallel military created by Ayatollah Ruhollah Khomeini because he distrusted the shah's officer corps. While in office, Ahmadinejad has directed state funds away from the religious foundations dominated by clerics and toward the military and the Guards.


The tilt from mullahs to the military has been somewhat obscured by the role that Khamenei has played as part of both camps. He is, of course, a cleric, but he has always been close to the Revolutionary Guards and cultivated their support. Ahmadinejad, however, is clearly not of the clerical establishment. He's even defied Khamenei, his key backer, by initially refusing to withdraw his choice for first vice president despite the Supreme Leader's objections. While it is difficult to know exactly what the dispute between Khamenei and Ahmadinejad reflects, it is surely a sign of an increasingly divided ruling elite.

The hyperbole in America and Israel about apocalyptic mullahs with nukes missed the big story in Iran, which was that the mullahs were not apocalyptic, and they were fading in influence anyway. One might have said that the Islamic Republic of Iran is losing its distinct religious basis of power and becoming another Middle Eastern dictatorship—except that it now hosts an opposition movement that does not seem ready to quiet down.

What does this turmoil mean for Washington and the world's dealings with Iran? Obviously it makes negotiating with Tehran close to impossible right now. Any talks with Ahmadinejad would confer legitimacy on a regime that has lost it at home. And any gains agreed to in talks with a regime that is searching tactically for legitimacy might well prove to be temporary.

The best strategy is to do nothing. Hillary Clinton implied as much when she put off the question of negotiating with Iran. In fact, the ball is in Tehran's court anyway. In April, the West presented Iran with an offer of talks that is serious and generous. Let Khamenei and Ahmadinejad figure out how to respond, as they keep claiming they will. The West faces constraints, but they face many more.

Some argue that this allows Iran to inch closer to a bomb. But the best way to blunt that threat—which is still not imminent—has always been deterrence and containment, a policy that worked against Stalin and Mao and works against North Korea, a far more unstable and bizarre regime. Again, Secretary Clinton correctly outlined such a policy last week. (On being offered a nuclear umbrella, Israel criticized the United States, which is a sign of the current Israeli government's poor relations with Washington.)

Time is not on the current Iranian regime's side. Amid all this confusion, we have a clear answer to a crucial puzzle. We always wondered, are there moderates in Iran? Yes, it turns out—millions of them.

Zakaria is the editor of NEWSWEEK International.

India has long aspired to a role in redefining the global order. Ask why they deserve it, and most Indians will point to their nation's size, its rich culture and tradition, and its special legitimacy—the product of the nonviolent freedom struggle against British rule and India's triumph as a secular democracy.

Ask for more detail on exactly how India should redefine the global system, however, and things get murkier. That's because, for much of its life, India's foreign policy has been about saying no—playing out a Gandhian boycott on the international stage. Throughout the Cold War, New Delhi refused to take sides, avoiding international pacts and steering clear of markets and trade, all of which it saw as skewed in favor of the powerful.

This approach was initially a product of India's economic and military weakness. Today, however, India is an economic powerhouse and, increasingly, a diplomatic one as well. The country's economic boom seems likely to continue, thanks to a high savings rate, strong investment, and a young population. The global crisis will temporarily slow India's rapid growth, but its economy is less export-dependent, and its financial system is more regulated than many, ensuring a quicker recovery. The country may not be poised to become a superpower, as some of its citizens like to imagine. But as its might expands—including military muscle (defense spending is up by a third this year)—New Delhi needs a clearer sense of how to use it.


Analysts like to lament the fact that India lacks a grand vision on the scale of Beijing's "peaceful rise" doctrine. But formulating a decisive strategy is much more difficult in an open democracy with many different definitions of the national interest. This lack of cohesion is not necessarily a disadvantage. It ensures that when India does finally get around to defining its world view, that will be after intense debate among its diverse social and economic groups, which should ensure that the new policy reflects something like the true will of the people—not just that of policy wonks in New Delhi. For a sense of how this process works, consider the bruising battle over confirmation of the U.S.-India Civilian Nuclear Agreement: what may have sounded like cacophony actually helped to refine the terms, ensuring that the final deal better reflected India's interests—for instance, by keeping several plants off-limits to inspectors.

Given the complex nature of Indian politics, it's too soon to say what any grand strategy will eventually look like. But one can get at least a sense of it from looking at the various external pressures it will have to account for. Here several facts are key. First, India is still home to the world's largest concentration of poor people. New Delhi is going to have to use its growing global clout to inject their interests into international debates. As India negotiates on agricultural terms of trade, access to energy, or climate change, this or any future government must push for greater equity—not by rejecting globalization, but by making it more inclusive.

Second, India finds itself in the world's most threatening regional environment, surrounded by unstable or authoritarian states: Nepal, Bangladesh, Burma, Sri Lanka, and, above all, Pakistan. To manage, New Delhi will need to balance toughness with magnanimity; unilaterally offering trade liberalization, for example, could help integrate the fractured region.

Finally, whatever policy India adopts will have to take into account Asia's two other great players: China and the United States. New Delhi is currently building strong ties with both Beijing and Washington by following the "Manmohan Singh doctrine," which stresses economic diplomacy and engagement. But this doesn't guarantee that relations with either country will be easy. India's bond with the U.S., though strong, will be seriously tested if India suffers another terrorist attack originating in Pakistan. As for China, Asia's other most dynamic economy and dominant civilization, the potential for conflict is greater. The two countries may share many interests on economics and trade, but experience shows how easily nationalism can trump such rational concerns.

India's emerging strategy should not try to balance these or other great powers. Instead, Delhi should use its diplomatic skills to strengthen its voice—in order to win permanent membership to the U.N. Security Council, for example. But India must also show the courage to venture into zones of conflict and meet threats with vigor. It is as a bridging power—between rich and poor, between the world's most powerful state (the U.S.) and its most populous one (China), and between the various religions that make up its own rich mosaic—that India can best define its new global identity.

Khilnani is the author of The Idea Of India and is The Starr Foundation Professor at Johns Hopkins’s School of Advanced International Studies in Washington, D.C.

A modest success against the Taliban in Malakand; now the battle must be taken to more powerful militants

LONG reviled for their reluctance to fight the Islamist militancy that they themselves helped unleash, Pakistan’s generals have a rare victory to boast of. In a three-month offensive against the Taliban in North-West Frontier Province (NWFP), the army has regained control of the lofty Malakand region, killing hundreds of militants. This has done less damage to civilian life and property than two previous, failed offensives in Malakand. The local Pushtuns, over 2m of whom were displaced by the fighting, are now returning home. They mostly support the army’s efforts.

This success is not hard to fathom. The Taliban’s takeover in Malakand caused an outcry not just in Washington, DC, but also in Pakistan’s own media. Many blamed it on the army, which had made several truces with the militants in Malakand. Thus goaded, the top brass launched an unusually serious attack. Having previously failed to control Swat, the Taliban’s regional base, with a division, the generals sent in three divisions. Rather than allowing the militants to withdraw in good order, this time they chased them into Malakand’s hills.

There is much to celebrate in this, not least a hope that it will boost army morale. Over the course of a hapless six-year campaign in north-western Pakistan, the ideological aversion many Pakistani soldiers initially felt to killing their Muslim compatriots has often ceded to despair at their poor progress. Some 1,900 Pakistani troops have been killed and hundreds taken hostage, as the Taliban’s influence spread. It is therefore crucial that the army’s recent advances are not reversed. The generals seem to appreciate this. The troops are supposed to remain in Malakand for a year, while the local police force is retrained and enlarged. That is asking a lot of NWFP’s government, which must also swiftly restore refugees to their homes and rebuild shattered infrastructure. But if it fails, grievances will fester that the Taliban might well exploit.

The tougher forms of Taliban
Having done well in Malakand, the army should now be expected to put up a stiffer fight elsewhere—starting with a more hostile quarter, the semi-autonomous tribal agency of South Waziristan. On public demand, it is plotting a renewed campaign against the Pakistani Taliban’s supreme leader, Baitullah Mehsud, who has his fief there. This is overdue. Mr Mehsud is chiefly responsible for the suicide-blasts that have ripped through Pakistan’s main cities in recent years, terrorising Pakistanis and banishing foreign investors. Eliminating him may be hard; with the backing of his bellicose tribe, in remote terrain, Mr Mehsud is a more formidable militant than those in Swat. Yet, for the first time, it seems likely to happen.

This is welcome. But it is too soon to speak of a watershed in Pakistan’s faltering campaign against militancy. Success in South Waziristan, which Pakistan only notionally administers, would look much more modest than that in Malakand. To protect its supply-lines there, for example, the army may have to buy support from two other Taliban commanders. And having dealt with Mr Mehsud, in what would in effect be a joint operation with his Taliban rivals, the army may well intend to withdraw from South Waziristan. That would be wrong. If Pakistan is serious about defeating the Taliban, the tribal areas must be somewhat tamed.

With rough control over the tribal areas, the army could do a better job of quelling jihadist raids into Afghanistan. Several Pakistani militant leaders dedicate their forces chiefly to such jaunts—including the pair the army is allegedly courting in Waziristan. The army has not made much effort to stop them. The ostensible excuse—that it is unable to do so—looks less tenable now it has some military successes against the Taliban. But there remains a suspicion that some generals want Afghanistan’s government to fail. Recent moaning that the American-led surge in Afghanistan may drive militants over the border suggests that at best many are loth to help their neighbour.

How shortsighted. If, as Pakistan’s commanders also like to complain, their Taliban insurgency is largely a consequence of the jihad next-door, it is in their interest to try harder to help NATO and the Afghan government to end it. That would really be a watershed.

PAKISTAN is one of the few countries in the world that enjoys more macroeconomic stability today than it did on September 14th, the day before the bankruptcy of Lehman Brothers turned the world upside down. In those prelapsarian days Pakistan’s currency was tumbling; its foreign-exchange reserves covered barely two months of imports; and the cost of insuring its sovereign debt against default was almost 1,000 basis points (10%). Worst of all, the IMF had landed in Islamabad.

In the months since, Pakistan’s government has in effect conceded the Swat valley, a picturesque tourist spot, to the Taliban. It has suffered savage terrorist attacks on a police academy and the visiting Sri Lankan cricket team. It has also handed the political initiative to its rivals in the opposition party. But despite all this turmoil, it has found some macroeconomic steel.

In April the IMF released the second tranche of the $7.6 billion loan it offered Pakistan in November. The government’s reserves were above target; its fiscal deficit was below; and its borrowing from the central bank was contained. Pakistan has also raised electricity tariffs and reduced energy subsidies, despite popular protests. Indeed, its levy on oil products has become a big contributor to the public coffers. Emboldened by the drop in inflation, on April 20th the new central-bank governor even cut interest rates for the first time in six years.

The worry is that Pakistan has achieved stability without growth. In other emerging markets, the new, crowd-pleasing IMF has advocated counter-cyclical policies to combat the ill effects of global contraction. But Pakistan has committed itself to narrowing its fiscal deficit to 562 billion rupees ($7 billion), or 4.3% of GDP, by June. This target was set in October before the full horror of the world economic crisis had become apparent. Given the subsequent slowdown, the government’s revenue aims seem aspirational rather than feasible.

The danger was that the government would meet its target by cutting infrastructure spending, thereby undermining the country’s growth prospects. But Pakistan has one invaluable asset that is not quoted on its balance-sheet. It scares the rest of the world. Thus on April 17th a group of 31 countries, called the Friends of Pakistan, met in Tokyo and offered an extra $5.3 billion of friendliness over the next two years. Though the government is precarious enough to arrest the world’s attention, it is still—just—credible enough to earn its financial backing.

MORE than 40,000 people this week fled the Swat valley in north-west Pakistan, as an onslaught against Taliban militants intensified. The provincial government issued a warning that a further 500,000, out of a population of 1.5m, might follow, though the Taliban have blocked roads with rocks and trees. Pakistan’s army, which fought in Swat from 2007 until it struck peace in February, says it will now finish off the Taliban in the valley.

The peace deal has been unravelling since the Taliban last month moved from Swat into the districts of Lower Dir and Buner, 100km (63 miles) from Islamabad, the capital. The army attacked them, after senior American officials voiced their alarm at its “abdication” to the Taliban. Under the peace agreement, covering Malakand division, which includes Swat, the government is to implement Islamic law in the district. But Sufi Mohammed, an Islamist intermediary for the Taliban, did not like the government’s version of sharia.

The Taliban call the government and army American stooges. On May 3rd militants beheaded two government officials in Swat, in revenge for the killing of two Taliban commanders in Dir and Buner. The next day they ambushed an army convoy in Swat. Gunfire rang out in the main city, Mingora, where armed Taliban reappeared on the streets. On May 6th Pakistani helicopter-gunships and ground troops attacked the Taliban in the valley.

Officials claim that by setting up sharia courts they have drawn local support away from the Taliban. Even if true, that support could be easily lost. In its previous campaigns in Swat, the army’s use of mortars and aircraft killed scores of civilians.

The army claims to have killed over 30 militants in Swat and 100 in Buner. It plans to clear a route through Dir to Swat, where the fighting could be tougher. Militants have recruited young men, broadcast anti-government propaganda, dug trenches and laid mines throughout Mingora.

The army continues, for political reasons, to rely on the paramilitary Frontier Corps, drawn mainly from the local population, rather than regular soldiers. It is unclear whether it plans a sustained operation, or whether, after demonstrating its seriousness of purpose to its American ally, it will reinstate the peace deal.

The offensive in Swat came as Barack Obama and his Pakistani and Afghan counterparts, Asif Zardari and Hamid Karzai, met in Washington on May 6th. American officials had raised concerns about the security of Pakistan’s nuclear arsenal, as well as its zeal for fighting the Taliban. Mr Obama called the talks “extraordinarily productive”. But America’s dialogue with Pakistan seems to have changed little since the former military ruler, Pervez Musharraf, reluctantly signed up to George Bush’s “war on terror” in 2001. America demands a greater effort against the militants and pours in aid to encourage it. Pakistan responds that its past sacrifices are under-appreciated and future efforts will be redoubled; and takes the money.

The worsening wars in Afghanistan and Pakistan

AFP
FOR America, Pakistan and Afghanistan can no longer be treated as separate foreign-policy issues. Quick to realise this, President Barack Obama appointed Richard Holbrooke, a senior diplomat, as his envoy to both countries—“AfPak”, as they are becoming known. And on Wednesday May 6th he held a summit in Washington, DC, with their two presidents, Hamid Karzai of Afghanistan and Asif Zardari of Pakistan.

His two guests do indeed face two similar and linked problems. One is to fight a worsening Taliban insurgency. Afghanistan’s is fuelled by militants fleeing to safe havens across the border in Pakistan’s semi-autonomous tribal areas. From there, the “Pakistani Taliban” are also extending their influence into Pakistan proper.

The second problem is America. Both Mr Karzai and Mr Zardari have been staunch American allies. And both pay a price for it in their standing at home. Mr Karzai was in Washington as news emerged of what may have been the most serious unintended slaughter yet of Afghan civilians by American forces, after air strikes in Farah province on Monday. Hundreds of protesters, chanting “Death to America!”, were reported to have taken to the streets there on Thursday.

Mr Zardari has courted similar unpopularity by tolerating (despite his government’s public protests) American unmanned air strikes on targets in Pakistan. And many in Pakistan will see this week’s offensive against the Taliban in the Swat valley in North-West Frontier Province as an American-ordained onslaught on fellow Pakistani Muslims.

The government signed a peace deal with the Taliban in Swat in February, and even seemed ready to countenance the Taliban’s expansion last month into the neighbouring districts of Buner and Lower Dir. Only when American officials complained in loud, alarmist tones about this “abdication” to the Taliban, even voicing fears about the security of Pakistan’s nuclear arsenal, did the offensive begin.

If it intensifies, as Pakistan's prime minister, Yousaf Raza Gilani, threatened on Thursday, and, as expected, tens of thousands more civilians are forced to flee their homes, Mr Zardari is likely to face even more popular anger. If, on the other hand, as has happened in the past, the offensive proves short-lived and the Pakistani government swiftly reverts to patching up peace deals with local militants, American exasperation will mount.

In fact, neither president has America’s full confidence. George Bush saw Mr Karzai as a friend. The new administration regards him as a disappointing leader who has done far too little to rid his government of corruption, and to distance himself from thuggish local strongmen.

This week Mr Karzai registered himself as a candidate for re-election as president in August, and dismayed his foreign allies by naming a civil-war era warlord, Mohammad Fahim, as one of his running-mates. But, with the opposition melting away, Mr Karzai shows every sign of defying the apparent unpopularity of his government, and winning re-election.

The Obama administration, which at one time seemed to harbour hopes of seeing a less tainted replacement, will have to live with him. The same goes for Mr Zardari, whose reputation is even worse, and whose grip on his own country appears tenuous.

After their meeting, Mr Obama understandably refrained from lavishing praise on his guests, confining his expressions of support to the democratic process that has produced them as leaders. He called the talks “extraordinarily productive”.

But America’s dialogue with Pakistan seems to have changed little since the former military ruler, Pervez Musharraf, reluctantly signed up to George Bush’s “war on terror” in 2001. America demands a greater effort against the militants and pours in aid to encourage it. Pakistan responds that its past sacrifices are under-appreciated and future efforts will be redoubled; and takes the money.

Similarly, the dialogue with Afghanistan remains stuck in the old tramlines. America urges Mr Karzai to clean up his government’s act, to help earn popular support for the war with the Taliban. The Afghan government retorts that the war will never be popular as long as foreign forces keep killing civilians.

At least, however, the third side of this triangle, relations between Afghanistan and Pakistan, seems on a better footing. Mr Karzai seems able to talk to Mr Zardari. Being in the same room as Mr Musharraf was a trial.

Pricked by America, Pakistan's army takes the fight to Mullah Fazalullah

AFP
WHETHER Pakistan’s army now intends to crush the Taliban, as America hopes, is unclear. But its latest offensive against a Taliban chieftain in North-West Frontier Province (NWFP), launched last week in response to unprecedented public goading by America, looks painfully serious.

Over 360,000 people have fled NWFP’s Swat valley, where the army is pounding well-entrenched Taliban militants from the air. According to the army, this takes the number of war-displaced in north-western Pakistan to some 1.3m. Some of these fresh fugitives arriving to hastily pitched, UN-provisioned camps, say that many civilians have been killed in the bombing in Swat. Others say that the Taliban, who control large parts of NWFP’s Malakand region, which includes Swat, have mined routes out of the valley and are forcing civilians to remain, for future use as human shields.

On Monday May 11th Pakistan’s interior minister, Rehman Malik, said that 700 militants had been killed in the five-day operation, which tore up a controversial ceasefire deal between the government and Taliban in Malakand, agreed in February. The army, which denies killing many civilians in Swat, says it is now preparing a heavy ground-attack to follow the bombing. An army spokesman promises that this would, if necessary, involve house-to-house combat in Mingora, Swat’s biggest city and the Taliban’s local stronghold.

That would be a first in Pakistan’s often half-hearted war with the militants who rule much of its north-west. In the region’s semi-autonomous tribal areas, which form a scarcely-policed border with Afghanistan, the army has oscillated between bombing the militants and making peace deals with them. This has given the Pakistani Taliban, a loose conglomeration of Islamist warlords, named after their Afghan confreres, the run of most of the area.

In Swat, a more thickly populated and economically developed part of NWFP, the army had attempted the same strategy. It ended a brutal four-month assault there in February, in which several hundred civilians were allegedly killed, after drafting a ceasefire agreement with associates of the local Taliban chieftain, Mullah Fazalullah. This agreement, which was approved by President Asif Zardari last month, would have led to the introduction of Islamic law in Malakand. But instead of laying down their arms, as the agreement stipulated they must, Mr Fazalullah’s men used the ceasefire as an opportunity to expand their control.

A Taliban takeover of Buner, a district of Malakand adjoining Swat, last month provoked President Barack Obama's administration to give warning of a creeping Taliban takeover of Pakistan. The current operation in Swat was announced last week, the day after Mr Zardari met Mr Obama in Washington. Pakistan’s army, which had been reluctant to resume fighting in Swat, is now promising to rout Mr Fazalullah’s men and restore the government’s sway there. There are also reports that it is planning a similar offensive in South Waziristan, the most radicalised of the tribal areas, against the Pakistani Taliban’s chief, Baitullah Mehsud.

To explain its many battlefield setbacks in the north-west, Pakistan’s army has often been accused of playing a double game, to protect militant leaders whom it has previously sponsored to fight in Afghanistan and Indian-held Kashmir. If there is little evidence for this claim, the army is clearly reluctant to lose many men or inflict great casualties in a war that few Pakistanis support. According to a survey conducted in March and released by the International Republican Institute on Monday, 80% of Pakistanis supported the ceasefire agreement in Swat. Yet the army now claims, with enthusiastic support from the country’s English-language media and from America, that Pakistani opinion has recently shifted against the Taliban.

As evidence for this it cites widespread revulsion inspired by a video, broadcast on television, showing a teenage girl being flogged by the Taliban. The militants' takeover of Buner, a district only 100km (62 miles) from Islamabad, was also considered an affront by many Pakistanis. So was a speech by the government’s main Islamist interlocutor in Malakand, an ageing fundamentalist named Sufi Muhammad, in which he denounced democracy and Pakistan’s constitution as unIslamic.

There does seem to have been a mood-change in Pakistan. The country’s dominant Urdu-language media, which is mostly anti-American and sometimes sympathetic to the Taliban, has offered little condemnation of the army’s campaign in Swat. Alas, it seems unlikely that this may continue, as the civilian death-toll rises. That would make life difficult for Pakistan’s generals. But under such American pressure, it seems they will have to stay on the offensive in Swat, at least for a bit.

Taking on Islamist militants exacts a terrible human toll

Getty Images
IMPATIENTLY awaited and enthusiastically cheered on by its American allies, the offensive by Pakistan’s army against Taliban fighters in the Swat valley in North-West Frontier Province (NWFP) is understandably less welcome to the thousands uprooted by the fighting. Many of those sheltering among the rows of white tents at Jalala camp in Takht Bhai, in Mardan district, think the operation was necessary. But there is also anger and mistrust, and many agree with Umer Rachman, a shopkeeper from Mingora, Swat’s main city, that the army relies too much on mortars and air power, killing civilians. He himself had helped bury five, killed by shelling in the city centre, in a single grave.

A recent survey by the International Republican Institute, an American NGO, found that 69% of Pakistanis thought that al-Qaeda and the Taliban operating in Pakistan were “a serious problem”, and 45% supported the army’s fight against them in NWFP and the tribal areas. That support, however, is fragile.

Like other camps built for refugees from Swat, Jalala has too few trees to offer more than sparse shade from the summer sun, and is full to capacity. But the stream of refugees from Swat, Buner and Dir is unrelenting. Many make the journey on foot, as lorry drivers are scared to transport them. Some new arrivals find the camp too crowded and move on to others in Swabi.

A senior military official claims about 800,000 civilians have fled the latest fighting. Relief agencies put the number between 240,000 and 400,000. They are joining about 500,000 displaced by earlier fighting in NWFP. However an official from a relief agency claims that the numbers of refugees have been exaggerated. Among the charities that have set up relief camps is Jamaat-ud-Dawa, an Islamic group that is in theory banned, as a front for the terrorists of Lashkar-e-Taiba.

The offensive began in earnest on May 8th, when Pakistani aircraft bombed Taliban positions in Swat. The previous day Yusuf Raza Gilani, the prime minister, had ordered the army to “eliminate” terrorists. The president, Asif Zardari, who was visiting Washington, vowed that the operation would last until “normalcy” had returned to Swat. The interior minister, Rehman Malik, then claimed that up to 700 Taliban militants had been killed in the fighting. A military spokesman said 29 soldiers had been killed and 77 wounded but could give no number for civilians killed. The army says 12,000 of its troops are pitted against 5,000 militants from a disparate mix of rival groups. It fears that if the Swat operation is not concluded quickly these groups may unite under the central leadership of al-Qaeda and the Taliban.

On May 12th elite commandos flew by helicopter into the Peochar valley, which runs north-west of the main valley, to conduct search-and-destroy operations in the area housing a local Taliban headquarters. An army spokesman claims the militants are on the run. But in Mingora the Taliban still rule the roost, standing eyeball to eyeball with soldiers holed up in government buildings. On May 10th the Taliban executed Zahid Khan, imam of the town’s main mosque, because he had objected to their stockpiling arms and laying landmines.

It was only in February that the government called off a ham-fisted four-month operation in Swat, and signed a ceasefire agreement with associates of the local Taliban’s most prominent leader, Mullah Fazalullah. Under the agreement, sharia law was to be adopted in Malakand district, to which Swat belongs. But instead of laying down their arms in Swat, the Taliban took over the adjacent district of Buner.

The army has now taken them on. But it has still to show that it can hold the territory it conquers in Swat, let alone in the Taliban’s heartland in the semi-autonomous tribal areas. Reports suggest that the army is planning a massive stepping-up of military operations against the Taliban there next month.

The most likely first target is the head of the Pakistani Taliban, Baitullah Mehsud, whose stronghold is in South Waziristan. The army has launched previous operations there. But Western critics claimed they were half-hearted and always ended in peace deals with militants. Now, however, General David Petraeus, the head of America’s Central Command, has rightly asserted that there is a “degree of unanimity” among Pakistan’s civilian and military leaders about the necessity of fighting the Taliban. Indeed, on May 12th members of the National Assembly, including the main conservative opposition party of Nawaz Sharif, backed the operation in Swat, though one religious party, Jamiat Ulema-e-Islam-Fazl, a government ally, protested.

Still sceptical over the Pakistani army’s seriousness about eliminating the Taliban, Western analysts see its willingness to take on more powerful commanders as a gauge. One is Jalaluddin Haqqani, whose fighters battle Western forces in Afghanistan, and whom many senior Pakistani officers see as a useful asset through whom Pakistan can retain influence there. Tackling him would provoke a bloody backlash of suicide bombers. Another doubt is the durability of the government, a weak one led by an unpopular president in Mr Zardari. America is trying to bolster it by coaxing Mr Sharif into a power-sharing agreement. But, like previous American attempts to micromanage Pakistani politics, this one is probably doomed to fail.

Pakistan's economy remains in bad shape, despite emergency help from the IMF


Pakistan has averted an economic crisis, at least in the short term, thanks primarily to the disbursement of emergency financing from the IMF. In recent weeks several macroeconomic data releases have shown that the economy has stabilised. However, the Economist Intelligence Unit believes that the government's goal of improving economic stability will be severely compromised not only by the unfavourable international economic environment but also by a range of domestic factors.

Less than a year ago, Pakistan faced a balance-of-payments crisis and runaway inflation. The IMF stepped in, offering a US$7.6bn emergency financing package in late 2008 that forestalled an economic meltdown. According to the organisation, progress since then has been good overall. In the first formal review of Pakistan's arrangement with the IMF, in February, the Fund asserted that "the initial success in stabilising the economy augurs well for the future, despite the risks associated with the deterioration in the global economy". An IMF report in late June confirmed this relatively optimistic assessment.

Among other signs of progress, the fiscal situation has improved, the currency's rate of depreciation has slowed and inflation has eased. The Pakistan government's latest Economic Survey put the fiscal deficit in the fiscal year 2008/09 (July-June) at a provisional 4.3% of GDP. The fiscal gap had been considerably higher than this in the first half of the fiscal year, and it was only a sharp reduction in development spending following Pakistan's acceptance of IMF funding that allowed the government to bring the deficit under control. After depreciating by 13.7% against the US dollar in 2008, the Pakistan rupee's rate of depreciation slowed following the finalisation of the IMF assistance package amid rising investor confidence.

Inflationary risks have also abated. Year-on-year consumer price inflation fell to 13.1% in June, from 17.2% in April. Inflation has been on a declining trend since November 2008 and will continue to slow. It has not fallen nearly as rapidly as in many other Asian countries, and remains very high. Nevertheless, weaker domestic demand and lower commodity prices will ensure that inflation does not return to the record levels that it reached last year, while reduced government borrowing from the central bank will also reduce inflationary pressures. We expect the annual average inflation rate to fall sharply from 20.3% in 2008 to 12% in 2009, and improving economic stability in 2010 should see inflation moderate further, to 5.5%, in that year.

Three risks
Despite these signs of progress, multiple risks remain. The first is that fiscal discipline will unravel. The government's recently unveiled budget for 2009/10 included plans to increase defence spending by 10%, public order and safety spending by 27%, and education spending by 28%. In addition, spending on the Public Sector Development Programme, the flagship development programme, will soar by 54% from its level in 2008/09. As a result, we believe that further fiscal consolidation will be impossible, particularly given the environment of slowing economic growth. In May the IMF relaxed its target for government revenue in 2009/10, and revised its target for Pakistan's fiscal deficit in that year to 4.6% of GDP, from a previous goal of 3.4%. The Fund argued that the less stringent target would provide fiscal space and boost economic growth. However, we expect the deficit to widen to 5.1% of GDP in 2009/10.

A second risk is that the fiscal squeeze, coupled with the impact of the global recession, will stifle growth. The global financial crisis has provoked a liquidity crunch in Pakistan. Investment, previously a crucial driver of economic expansion, is set to grow by only 1.7% in 2009/10. This compares with annual average growth of 15.7% during the boom years of 2004/05-2006/07. Meanwhile, the government's need to contain the fiscal deficit means that public consumption growth also will be significantly curtailed. Although private consumption growth will provide support to the economy, we estimate that real GDP will grow by just 2.8% in 2009/10, down from 3.7% in 2008/09. GDP growth will accelerate to 4.4% in 2010/11, driven largely by a resumption in investment as financial constraints ease.

Lastly, Pakistan's economy is threatened by the deterioration of the security situation. In large swathes of the country, the battle against the Islamist insurgency has escalated almost to the point of civil war, with the Pakistani army having launched large-scale offensives against the local offshoot of the militant fundamentalist Taliban movement. With the threat to national security in the foreground, issues of economic management are often put on the back-burner. Moreover, while many analysts are doubtful that the anti-militant campaign will be decisively won, it will certainly be extremely costly. In addition to direct military costs, the government will spend over US$600m this year to provide relief, security and reconstruction efforts for the 2.5m Pakistanis displaced by ongoing battles. The recent budget also included a bonus of one month's salary for troops fighting the Taliban, an additional 15% allowance for all government employees, and a 15% increase in pensions for retired civil servants and military personnel.

Outlook
As these persistent risks suggest, Pakistan may have averted a crisis, but its economic stability remains tenuous. The country will continue to need generous dollops of loans and aid. Talks are currently under way between government officials and IMF representatives about the release of a third tranche, worth US$875m, of the emergency funding package. Pakistan's acceptance of IMF assistance has simplified the task of the government and the central bank to a degree, in the sense that these institutions will lose a considerable amount of autonomy in economic policymaking. However, the government will continue to protest against some IMF directives, such as unpopular increases in electricity prices, torn between its need to restore economic stability and its fears for its political survival.