The death toll of both civilians and military personal as a result of these attacks has reached thousands, causing a general sense of despair.

Economic activity, however, was not particularly restricted as a result of the unrest, as the areas directly affected by the military reprisals were in the tribal belt on the border with Afghanistan or in the North Western part of the country. Most economic production and trade takes place in Punjab and Sindh where 80 per cent of the country’s population lives and works. Macroeconomic stabilisation remained on track. The stand-by program agreed with the IMF in November 2009 was augmented and implemented without a hiatus. External account imbalances declined significantly and foreign exchange reserves reached a comfortable level. This boosted business confidence as capital outflows almost halted and workers’ remittances reached an all time high. After a long period of increase, inflation slowed, while fiscal deficit remained manageable. Exports fell for the second year in a row because of the lower foreign demand.

Political energies in and outside the Parliament were mostly devoted to debate over the Kerry-Lugar Bill approved by the U.S. Congress. The bill committed US$7.5 billion in aid to Pakistan over a five year period, but was controversial because of the perceived intrusive conditions attached to the bill. The mode of delivery of the assistance was also heavily scrutinised as most of the allocations by USAID in the past have been spent on remunerating the U.S. based contractors and consultants executing the projects. The Government of Pakistan is keen that these allocations should be channeled to support the Government’s own priority development projects in the fields of education, health, and other social services.

Relations with India remained tense, and despite public overtures at Sharm-al-Shaikh, where the two Prime Ministers met, the situation has not improved. Officials of both Governments frequently voice allegations that their neighbor is guilty of covert involvement in their internal affairs. It was expected that sweeping victory of the Congress-led alliance at the Indian elections would reduce tensions, but this hasn’t happened so far.

2010 will be a year full of challenges on security, political and economic fronts. The current indications are that the security situation will further degrade as militants continue to retaliate against the success of the Army operations in South Waziristan. The surge in U.S. troops in Afghanistan will create further complications by pushing the Taliban into the border regions of Pakistan. The fiscal outlook does not appear very promising as the expenditures on Army operations and internal security measures will put a lot of strain on the budget. The commitments made by the Friends of Pakistan at Tokyo have not yet translated into actual disbursements, further widening the gap between resources and expenditures. GDP growth in 2009-10 is projected around 2.5-3 per cent – the third year in a row of low growth. Inflation will be lower than 2009 but still about 10-12 per cent. Export growth will remain sluggish but workers’ remittances will continue to rise. Overall, the economy is unlikely to get back to the trajectory attained in 2002-07 period.

Some constitutional changes that will rebalance the powers between the President and the Prime Minister are expected to take place in 2010. If successfully implemented, they will help reduce the political uncertainty and instability in Pakistan and strengthen its democracy. Greater autonomy to Balochistan in managing their affairs, as a part of the Constitutional package, will also lower the temperatures in the most backward region of the country.

This is part of the special feature: 2009 in review and the year ahead.

Ishrat Husain is Dean and Director of the Institute of Business Administration, Karachi. Dr Husain was formerly Governor of the State Bank of Pakistan, and prior to that, the director for Central Asian Republics at the World Bank. At the World Bank he was also Chief Economist for Africa and Chief Economist for the East Asian and the Pacific region.