One of the most difficult initiatives for individuals as much as states is to change their policy framework in the face of unpalatable facts. Yet in a moment of crisis, survival sometimes depends on reformulating policy. Such a moment is at hand for Pakistan. During US Senate hearings on 22nd September, the US Secretary of Defense, Leon Panetta and Chairman of the Joint Chiefs of Staff, Admiral Mike Mullen, made crystal clear the situation that Pakistan is now faced with, in the sphere of national security: There should be no surprise if the US takes military action against the Haqqani network. The way the government of Pakistan together with the military establishment responds to this situation will shape Pakistan’s future economic, political and security architecture. Let us briefly examine the context in which hard choices will now have to be made.

Pakistan of course has promptly issued a denial that any link exists between the military and the Haqqani network. However US actions are likely to flow from their perceptions and not those of the Pakistan government. Three key elements of the US view of the matter emerged during the Senate hearings. The US is convinced that: (i) The Haqqani network is a “veritable arm of Pakistan’s Inter Services Intelligence…” as Admiral Mullen was reported to have said. (ii) The Haqqani network with ISI support planned and successfully executed the September 13 attack on the US embassy in Kabul and ISAF headquarters. (iii) The US regards the Haqqani network based in Waziristan as the “foremost threat to US and Coalition forces in Afghanistan” as Senator Carl Levin is reported to have observed.

The US military strategy holds that they reserve the right to take action against non-state terrorist organizations located in any country, if such organizations pose a threat to US security. In view of this military doctrine and the conception that the Haqqani network constitutes a “foremost threat”, US military action in North Waziristan is a distinct possibility.

Equally important, given the stated US position that the Haqqani terrorist group is linked to Pakistan’s military apparatus, the US could well mount a graduated set of pressures on Pakistan across the whole spectrum: economic, political and military. It may therefore be helpful to consider the economic and political consequences of what many believe is Pakistan’s policy of strategic ambiguity, in its war against terrorism: running with the hare and hunting with the hounds. 

Pakistan’s economy is in the grip of stagflation with a protracted recession combined with double digit inflation. Over one-third of the population is living below the poverty line and the majority is deprived of basic services. The situation has been worsened with the floods in Sindh. Yet the fiscal space of the government is so tight that it is unable to take initiatives to ameliorate the situation with public expenditures on the necessary scale.

If Pakistan chooses the path of confrontation with the US it could mean stoppage of aid from the Western world in general as it closes ranks to pressurize Pakistan. This could mean a loss of about US$ 4.78 billion annually in foreign assistance, with distress repatriation of capital abroad. This could bring Pakistan’s reserves position (currently at US$ 17.6 billion) to a crisis situation whereby inflation could feed off exchange rate depreciation, quickly bringing three digit inflation rates to an already distressed population. The balance of payments crisis could paralyze the economy with critical shortages of key commodities such as fuel, cooking oil, fertilizer and hence food.