Key political risks to watch in Pakistan

Pakistan8217;s government and military have appeared paralysed since the killing of bin Laden and the violence that has followed,and overall the environment is extremely hostile to foreign investors.

Here is a summary of key risks to watch in Pakistan:

INTERNAL SECURITY

Random violence and targeted killings continue to shake the southern port city of Karachi,Pakistan8217;s key financial hub.

The situation has escalated. Almost 900 people have been killed in political and sectarian violence this year,and July was an especially bloody month.

The violence and instability are a huge deterrent to foreign investment. Investors are particularly sensitive to attacks in Karachi,home to key financial markets and the central bank.

The frequency of attacks by militant groups fell during Ramadan,but a blast in Balochistan on Aug. 14 was claimed by the Balochistan Liberation Tigers,an emerging outfit. A suicide bombing in the Khyber tribal region on Aug. 20 killed at least 47 people.

Pakistan8217;s military has yet to launch an operation against militants in the North Waziristan tribal area,something for which the United States has repeatedly called. The army8217;s powerful chief General Ashfaq Kayani has,though,indicated it is ready to tackle the upsurge in violence in Karachi.

What to watch:Further attacks by militants. The assaults on high-profile military facilities have shown the continued ability of Taliban fighters to attack even protected targets.

POLITICAL VIOLENCE,GOVERNMENT WEAKNESS

The military,long seen as a powerful,and at times stabilising,force in Pakistan,has been ridiculed after a Taliban siege on the PNS Mehran naval air base in Karachi in May,which killed 10 members of the security forces.

Political leaders,many of whom are seen as incompetent and corrupt,have offered little guidance. President Asif Ali Zardari8217;s government is weak,prone to splits,has limited control over the military and has failed to tackle corruption or reform the economy. Serious problems formulating and implementing policy will continue to deter investment.

What to watch: Any operation in North Waziristan,a major sanctuary for the Haqqani network which is linked to al Qaeda. Its success is not assured and militant retaliation is likely to be bloody.

Attacks on politicians,and alliances forming between Islamist parties to challenge the government.

EXTERNAL SECURITY

A border incursion by a NATO helicopter and a series of drone strikes soon after the bin Laden raid show the United States is unlikely to stop its attacks on militants thought to be hiding in Pakistan. Islamabad privately accepts the programme of US drone strikes,but publicly condemns them.

Relations between Afghanistan and Pakistan have faltered,with cross-border attacks reported by both sides.

Tension between the neighbours has been heightened by whispering from some Afghan lawmakers that Pakistan8217;s spy agency,the Inter-services Intelligence ISI,was behind recent assassinations in Afghanistan,something Pakistan vehemently denied.

Relations with India have also been shaken by the killing of bin Laden,with some Indian commentators questioning Pakistan8217;s ability and will to contain militant activity.

What to watch:Drone attacks. Any drone attack that results in high civilian deaths could further damage the US-Pakistan relationship.

Attacks in India. An attack with Pakistani fingerprints could spark serious confrontation.

ECONOMIC REFORM AND INFRASTRUCTURE

Pakistan8217;s economy is propped up by an 11 billion loan programme from the International Monetary Fund IMF,as well as aid from donors including the United States.

Pakistan negotiated a nine-month extension to the IMF programme,until Sept. 30,that would spread out the last two payments of approximately 3 billion of the original loan. This reflects the IMF8217;s general tolerance of Pakistan8217;s regular slippage on fiscal goals.

What to watch: Status of IMF loan disbursements. Pakistan expected the last two payments,worth more than 3 billion,to land by the end of 2010. A delay in implementing tax reform meant payments have stalled,as Pakistan faces a serious financial crunch from flood damage and declining foreign aid.

Those payments are expected by Sept. 30,unless the government abandons the current programme and enters into a new one.

The IMF has delayed the payment of the sixth trance since August 2010 because of patchy implementation of fiscal reforms. IMF and government officials were due to meet in July but that was delayed,and no new date has been announced.

KEY DATES:

Eid 8211; expected to fall around August 31 8211; September 1

Sept 2 8211; Summit between Tajikistan,Afghanistan,Russia and Pakistan

Sept 11 8211; 10th anniversary of the 9/11 attacks on the United States; possibility of increased violence.

Sept 23-27 8211; General debate of the 66th session of the U.N. general assembly in New York; Prime minister Yusuf Gilani expected to attend

End of September 8211; Monetary policy announced