PAKISTAN'S FINANCIAL WOES - WAR ON TERROR ADDING FUEL TO FIRE

SYED FAZL-E-HAIDER (feedback@pgeconomist.com)
Feb 8 - 14, 2010

Strife-torn Pakistan has asked for investments and joint ventures from the Friends of Democratic Pakistan (FoDP) to help it counter militancy and urged the FoDP forum members to expedite their respective commitments and pledges made in Tokyo last year. Pakistan has suffered losses of over $35 billion since 9/11/2001 and the socio-political cost inflicted on it is immeasurable. Poor cash inflow of the funds pledged last year by FoDP and reluctance of United States to release the reimbursement under the Coalition Support Fund (CSF) has put the cash-strapped country in a difficult situation.

A Pakistan Investment & Public-Private Partnership Conference from the platform of the FoDP held on January 26 in Dubai. The conference was aimed at encouraging the private sector in the 23 member states of the group to invest in Pakistan, particularly in the sectors of energy, infrastructure, agriculture, health, and education.

In a statement at the FoDP conference in Dubai, the Foreign Minister Shah Mahmood Qureshi said poverty and socio-economic alienation were being exploited by terrorist outfits and their masterminds to lure young impressionable minds and recruit them as "foot soldiers" and suicide bombers. He said no strategy against terrorism could work unless it is all encompassing and said all efforts will come to naught if the root causes are not addressed.

Last year, Pakistan presented a nine-point economic stabilization plan covering fiscal stability, poverty alleviation, agriculture, industry and trade, training, energy, public-private partnerships, money markets and administrative reforms to donors at a friends of Pakistan group meeting in Tokyo, where almost 30 donor countries raised funds to help the country, which has emerged as real war theater in US-led anti-terror global campaign. The international donors pledged $5.28 billion in Tokyo to stabilize the poverty-stricken Pakistan, seen as a frontline state in the battle against Islamic extremism. The United States and Japan promised one billion dollars each, the European Union pledged 640 million dollars and Saudi Arabia had committed 700 million dollars to the fellow Muslim nation. Only Saudi Arabia has extended $300 million to Pakistan out of the total pledged amount of $700 million in donor conference held in Tokyo in April 2009.

With dampened external demand for its exports, an inflated import bill, and low investor confidence, the country needs additional assistance from the international community to restore economic stability, which is essential to fight poverty and militancy of Al Qaeda and Taliban in its restive northwestern tribal belt bordering Afghanistan. The country, where one third of population lives in poverty, claims to have lost $35 billion in the war on terror during last 7 to 8 years.

The country is currently at the center of the fight against Al-Qaeda under US strategy unveiled by President Barack Obama in March 2009. United States has spent 12.3 billion dollars since 2002 aiming to end the "terrorist threat" on Pakistan's border with Afghanistan but it has failed to eliminate the country's militant haven. The country's tribal areas are believed to be the hideout for al Qaeda and Taliban militants forced out of Afghanistan following the 2001 US military offensive. Critics in the US say that the previous administration of George W. Bush had thrown billions of taxpayer dollars down a rabbit hole.

Officials claim that Pakistan diverted huge resources from other sectors of economy to fight war on terror, which is why main social sectors of education, health, and projects to erase poverty remained neglected. The militancy caused closure of 22,000 industrial units in NWFP and Balochistan province. The country is in dire need of $4 billion for allocating maximum budgetary allocation for education and health, which will ultimately help erode the poverty. Pakistan is at present spending 1.5 percent of GDP on education while 0.5 to 0.6 percent of GDP on health, compared to India, which is spending 4 to 5 percent of GDP on health and education.

Poverty level in the country has risen to 40 percent, according to official estimate. Poverty surge is attributed to persistent high inflation and deterioration of the security environment drying up foreign inflows and constraining economic activity in the country.

Analysts believe that the poor and unemployed are more prone to join Taliban camp. Hence, the key to combating extremism and Talibanization in Pakistan's border areas with Afghanistan is to fight poverty through stabilizing the country's economy so that to create employment opportunities for the jobless.

Poverty level would increase in the coming days as dependence on IMF would hurt economy, ultimately pushing more and more people below the poverty line on a per capita income of less than a dollar a day, according to the experts. The Washington-based Fund released $1.2 billion in December as fourth tranche of the 23-month standby arrangement signed in November 2008.

Islamabad needs foreign investments to bolster its strife-torn economy. Foreign direct investment (FDI) into the country dropped 56.9 percent or to $1.01 billion from $2.35 billion a year earlier in the first six months of the fiscal year, ending June, according to the central bank. The FDI fell to $3.72 billion last fiscal year from $5.4 billion in the previous 12 months.

The government has decided to reduce the overall size of Public Sector Development Programme (PSDP) for the current fiscal year 2009-10 from Rs421 billion to Rs300 billion. In the federal budget 2009-10, the government had announced a development outlay of Rs646 billion, 54 per cent higher than the previous year's revised estimate of Rs419 billion. The size of the current year's PSDP size has already been reduced to Rs421billion. In the last fiscal year 2008-09, the government had also slashed Rs550 billion development program by Rs131 billion to Rs419 billion, which was further revised to Rs269 billion.

The country's exports have been on the decline over the last couple of years and local businessmen fear the trend may continue until restoration of peace so that foreign buyers could feel safe to visit Pakistan. During first six months of the current fiscal year (July-December), the combined exports of leather and leather products fell to $368 million from $488 million in the same period in a year-ago.

The Washington's policy of granting aid but denying direct free market access to the country's merchandise in the US would not be a real help to the people of Pakistan. The country actually needs trade to stabilize its economy, as financial aid is not a long-term solution to country's perennial economic problems. The export-oriented industries are facing difficulties in marketing due to the country's poor law and order situation, and the country's image, which affected the ability of local exporters and producers to meet the delivery deadlines. The local manufacturers forecast more industrial closures and job losses over the next one year.