Pakistan's long-documented governance deficiency continues to aid the endurance of Islamist militancy. On April 5 2011, a report delivered to the US Congress described Pakistan’s military operation against insurgents in the northwest as lacking structure and lacking a capacity to hold areas that have been cleared of insurgents.
At a meeting on May 1 2011, Pakistan’s Senate Standing Committee on Defence described the Pakistan Air Force as obsolete and aged, and asked the government for essential funding to upgrade and rejuvenate the Pakistan Air Force (PAF).
Ilyas Kashmiri, an al-Qaeda commander and one of Pakistan's most senior insurgents, was killed in a US drone attack on South Waziristan in early June 2011. He was on the ‘most wanted’ list and has been blamed for organising attacks in Afghanistan and India, as well as in Pakistan.
The US military announced on May 25 2011 its plan to pull some of its troops out of Pakistan at the request of Pakistan’s government. The formal request came amid tensions over the unilateral raid by US Navy SEALs against al-Qaeda leader Osama bin Laden on May 2 in the Pakistani city of Abbottabad. Even before the US operation against bin Laden, Pakistan-US diplomatic relations had been souring.
Joint intelligence operations between Pakistan and the US have been put on hold since late-January2011. Relations started becoming worse after a series of diplomatic disputes, including a massive drone strike in March, as well as the case of US CIA operative Raymond Davis, charged with shooting and killing two armed men in Pakistan on January 27. The US' continued drone strikes in the Federally Administered Tribal Areas along Pakistan's northwest border with Afghanistan continue to cause widespread resentment.
Militant violence continues in Karachi. A raid on May 22-23 2011 by Pakistani Taliban militants on the Pakistan Naval Station Mehran naval aviation base in Karachi demonstrated how even secure military facilities can no longer be considered safe. As PNS Mehran is only 24km away from Masroor air base, which is believed to store nuclear weapons, there are concerns that militants could attempt to seize warheads in a future raid.
NATO chief Anders Fogh Rasmussen said that even though he was confident that Pakistan's nuclear arsenal is safe and well-protected, it is still a matter of serious concern. On February 25 2011, Dr Abdul Qadeer Khan claimed that Pakistan’s nuclear programme had been ‘running without any break’ for the past 10 years, and that this includes uranium enrichment activities. He said that the material produced could be incorporated into nuclear weapons at any time. He said that nuclear material is stored in a ‘highly secured system which has been improved gradually’.
India’s defence minister M M Pallam Raju said on June 4 2011 that if there were another terrorist attack in India that was linked to Pakistan’s security groups, then India would likely retaliate.
In June 2011, the Auditor General described a series of significant financial irregularities in the accounts of Pakistan Ordnance Factories (POF) – the largest armaments complex in Pakistan.
Pakistan is in a position to purchase weapons made in China at reduced prices, due to the special relationship between the two countries. In May 2011, Pakistani Prime Minister Yousuf Raza Gilani acknowledged China's support for Pakistan and described China as his country's true friend amid tensions with the US. Further, Gilani also pledged Pakistan's support to China at all times. Economically, Pakistan's development is already closely linked to China.
Pakistan's manufacturing sector is showing signs of a solid rebound, placing upside risk to our end- FY2010/11 real GDP growth forecast of 1.5%. Three short-term headwinds could hold manufacturing growth back – high inflation, high interest rates and energy shortages. However, over the long term the sector looks promising given Pakistan's strategic location, favourable demographics and sustained push for better international market access.

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Executive Summary 5
SWOT Analysis 7
Pakistan Security SWOT . 7
Pakistan Defence Industry SWOT . 8
Pakistan Political SWOT 9
Pakistan Economic SWOT 10
Pakistan Business Environment SWOT . 11
Global Political Outlook 12
Japan After The Quake . 13
Global Hotspots: Libya, Iran, Afghanistan, Korea . 14
Wild Cards To Watch 18
South Asia Security Overview 20
Security Risk Ratings . 34
BMI’s Security Ratings . 34
Table: Asia Pacific Regional Security Ratings 34
Table: Asia Pacific State Vulnerability To Terrorism Index . 35
City Terrorism Rating . 35
Table: BMI’s Asia City Terrorism Index . 36
Political Overview 38
Domestic Politics 38
Foreign Politics 42
Long-Term Political Outlook 47
Table: Scenario Matrix – Evolution Of State 51
Table: Scenario Matrix – Centrifugal Versus Centripetal Forces 51
Security Overview . 52
Internal Security Situation 52
Insurgency 52
Need For Police Reform . 55
External Security Situation . 55
Border Disputes 56
Afghanistan . 56
Kashmir 56
Siachen Glacier Region 56
Armed Forces And Government Spending . 57
Armed Forces . 57
Deployments And Exercises 58
Table: Pakistan’s Deployments. 58
Weapons Of Mass Destruction 59
Table: Pakistan’s Nuclear-Capable Ballistic Missile Arsenal . 60
Nuclear Developments 61
Table: Exports From Pakistan 62
Market Overview 63
Arms Trade Overview . 64
Industry Trends And Developments 65
Procurement Trends And Developments . 67
Industry Forecast Scenario . 69
Armed Forces . 69
Table: Pakistan’s Defence Personnel, 2000-2008 (‘000, unless otherwise stated) 69
Table: Manpower Available For Military Services, 2008-2015 (aged 16-49, unless otherwise stated) . 69
Defence Expenditure . 69
Table: Pakistan’s Defence Expenditure, 2008-2015 . 70
Table: Pakistan’s Defence Expenditure – Changing Of GDP, 2008-2015 (US$mn) 71
Table: Pakistan’s Defence Exports, 2008-2015 (US$mn) . 71
Table: Pakistan’s Defence Imports, 2008-2015 (US$mn) . 72
Table: Pakistan’s Defence Trade Balance, 2008-2015 (US$mn) . 73
Key Risks To BMI’s Forecast Scenario . 73
Macroeconomic Outlook . 74
Table: Pakistan - Economic Activity . 77
Company Profiles 78
Air Weapons Complex 78
Dr AQ Khan Laboratories 79
Heavy Industries Taxila 80
Pakistan Aeronautical Complex 82
Pakistan Ordnance Factories . 83
BMI Methodology 85
How We Generate Our Industry Forecasts . 85
Defence Industry . 85
City Terrorism Rating . 86
Table: Methodology 88
Sources . 89
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