Crises surround Pakistan government's 1st 100 days

By Simon Cameron-Moore - Analysis

ISLAMABAD (Reuters) - For a world hoping democracy will provide the stability nuclear-armed Pakistan needs to save it from Islamist militants and chaos, the first 100 days of the new civilian government haven't been very reassuring.

The transition, after eight years of military-led rule under President Pervez Musharraf, an important U.S. ally in its war on terrorism, is happening at the worst of times.

Asif Ali Zardari is struggling to fill the void left by the assassination in December of his wife, the charismatic two-time prime minister Benazir Bhutto, whose party won the election in February and took the reins of government on March 29.

There are fears within their Pakistan People's Party (PPP) that Zardari has chosen a losing path in a three-way power struggle with Musharraf and old rival Nawaz Sharif, the prime minister Musharraf overthrew.

Although Musharraf has so far resisted calls for his resignation, he could quit in coming months, just as the Bush presidency that has helped prop him up draws to a close.

Once that happens, most analysts reckon the last vestiges of a post-election alliance between Zardari and Sharif will disappear and Pakistan will enter a fresh phase of instability.

"It is distracting the government from focusing on some grave challenges, the economic challenges, but mostly this challenge from pro-Taliban militants," said Lisa Curtis, a South Asia analyst at the Heritage Foundation in Washington.

IN A MISERABLE STATE

Militants have extended influence over large swathes of the northwest, alarming Western allies suffering rising casualty rates in Afghanistan due to the flow of fighters from Pakistan.

The West is also uneasy with the new government seeking peace deals with militants, due to fears al Qaeda is plotting attacks in Europe and North America from sanctuaries in Pakistan.

But there is speculation a crackdown on militants in the Khyber tribal region on the outskirts of the northwestern city of Peshawar could be a forerunner to stronger action against more dangerous factions in Waziristan and Swat.

General Ashfaq Kayani, who replaced Musharraf as army chief last November, apprised civilian leaders of the scale of the militant threat, and pledged to take orders from them, while keeping authority to determine the type and size of force used.

The politicians will have to weigh risks of provoking another wave of suicide attacks by militants whose bombers killed hundreds of people across Pakistan after the army stormed Islamabad's Red Mosque to crush an armed movement last July.

Urgent action is also needed to steer Pakistan's fast growing economy away from the rocks, and the government is seeking to borrow billions from allies and multilateral lenders.

Inflation is running at over 20 percent, the rupee is at all-time lows, currency reserves are rapidly dwindling, and the stock market is in intensive care with a ban on short selling and a daily limit set to allow it to fall no more than 1 percent.