U.S. war on militancy hits Pakistan economy-Zardari

ISLAMABAD (Reuters) - The U.S. regional campaign against militancy and the violence it has provoked in Pakistan have almost crippled its economy, President Asif Ali Zardari told an American envoy on Friday.

Pakistan, facing both U.S. pressure to help fight militants in Afghanistan and its own Taliban insurgency, said on Friday there was no confirmation on the fate of the Pakistan Taliban leader, who was targeted in a U.S. drone aircraft attack.

One Taliban official said Hakimullah Mehsud was wounded in the neck in the missile strike on Thursday.

Drone attacks are one source of friction between the United States and Pakistan, which Washington sees as a crucial front-line ally in its war against militancy.

Pakistani officials say the drones are a violation of its sovereignty, even though they have killed high-profile al Qaeda and Taliban figures who want to topple Zardari's government.

Zardari expressed his concerns over the consequences of the U.S. war against militancy in the region on Pakistan in a meeting in Lahore with U.S. Special Representative for Afghanistan and Pakistan Richard Holbrooke.

"Pakistan's industrial growth and export potential had been severely restricted, first because the region was a theatre of war against the rival ideology in the past," a statement from Zardari's office quoted him as saying.

"And secondly due to rising militancy in the country as a consequence of the first."

MORE INSTABILITY

Critics say the U.S. war against al Qaeda and Taliban in Afghanistan, which includes drone strikes along the border with Pakistan, has created more militant violence and instability.

Attacks by pilotless drones have increased since a suicide bomber double agent killed seven CIA operatives at a U.S. base in Afghanistan on December 30.

Ten days after the attack -- the second worst in CIA history -- Hakimullah Mehsud appeared sitting beside the bomber in a farewell video, creating the impression that his Taliban movement had become a bigger force to be reckoned with.

Zardari told Holbrooke the war on militancy had cost Pakistan $35 billion (21.5 billion pounds) in the last eight years and "has almost paralysed Pakistan's economy."

He said Washington was behind on payments under the coalition support fund (CSF), which pays Pakistan for its efforts in helping in the fight against militancy.

U.S. officials say red tape, and problems in obtaining visas for U.S. auditors to Pakistan, has slowed the process.

According to official figures, the U.S. has given Pakistan $15.4 billion since 2002, about two-thirds security-related and the rest economic aid.

Pakistan's economy is in virtual recession. Worries over the Taliban insurgency and chronic power shortages have also put off investors.

Tension between Islamabad and Washington has come out into the open in the last few weeks, complicating Zardari's challenges.

Pakistan has repeatedly criticised tighter security measures which effect Pakistanis travelling through U.S. airports following a botched Christmas Day bombing attempt on an American airliner.

The U.S. embassy has accused Pakistan of taking provocative action and making false allegations against U.S. personnel. U.S. officials say Pakistan is also stalling their visa applications.

(Editing by Robert Birsel and Sanjeev Miglani)

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