PAKISTAN'S ECONOMY, TERROR WAR & US AID

SYED FAZL-E-HAIDER
Jan 05 - 18, 2009

Some US lawmakers are reportedly persuading the incoming Obama administration to stop $15 billion US aid package to Pakistan and after the inauguration of the new president Barack Obama on January 20, a resolution is likely to be moved in the US Congress, strongly condemning Mumbai attacks and urging lawmakers to stop military assistance to Pakistan.

The 10-year aid package already proposes to attach US military assistance to the country to its performance in the war against terror, authorizing the US administration to stop the aid if it finds that Islamabad was not doing enough to fight terrorism. Mumbai attack has made the Obama administration's agenda for south Asia more difficult after India has raised accusing fingers at Pakistan. The analysts however believe that the country's strategic importance mainly on 'war on terror' would have due weightage in formulation of US foreign policy under new Obama administration and the cash-strapped country can obtain economic support from the US by presenting a realistic report on terror war losses before the next US administration.

More cash from international community is linked to the country's frontline role in war on terror under the new US strategy, which demands of Islamabad to pay less attention to India and more to the al-Qaida and Taliban fighters in its northwestern tribal areas. Mumbai attacks and India's accusation against Pakistan is likely to complicate things for the country to secure the much needed help from the donors after IMF's bail out, according to some analysts. The country still risks defaulting on its debt despite receiving funding from the IMF, according to the chief financial officer of the World Bank's investment agency. Pakistan needs more than $20 billion to cover its current account deficit for the current and the next fiscal years and to make debt repayments, according to the IMF. Pakistan's gross external financing requirement for the current fiscal year, which ends on June 30, 2009, is $13.4 billion while its gross external financing requirement for the next financial year, which ends on June 30, 2010, is estimated at $12.2 billion. The money is needed to cover the current account deficit for both fiscal years and the maturing short-term debt and the amortization on long- and medium-term debt, according to Juan Carlos Di Tata, IMF's senior adviser for the Middle East and Central Asia.

Pakistan is currently in financial chaos, which may allow terrorists to deepen their roots in the nuclear armed country with a frontline role in the global war on terror. A protracted financial crisis could threaten the very survival of friendly governments in Pakistan and the Middle East because Western nations will be forced to cut spending on defense, intelligence and foreign aid, according to a report published in Washington Post last month. "Experts are particularly worried about Pakistan, which since September has seen its national currency devalued and its hard-currency reserves nearly wiped out", the report said citing unnamed US government officials and private analysts.

Pakistan economy is virtually under attack from Taliban-led militancy. As the fight against extremists in tribal areas near Afghanistan border has been intensified by the present coalition government, the country has witnessed a series of suicide attacks including the deadly Marriott hotel suicide attack in September that claimed at least 60 lives in Islamabad. Capital flight through illegal transfer of US dollar from across the country brought the economy under immense pressure of borrowing and devaluation of the rupee. The country's NWFP province, from where highest capital flight is taking place, is most adversely affected by Taliban-led militancy. The deteriorating law and order situation in the NWFP province has not only stopped investment in the province but caused flight of foreign investment, according to local currency dealers. On the request of the central bank, the government has launched a massive countrywide crackdown on exchange companies suspected of smuggling, illegal transfer and monopolization of US dollar and arrested at least four money changers

Islamabad is compiling data on the impact of "war on terror' on Pakistan economy. In a major diplomatic move to present full picture of terror war losses before the incoming US government, Pakistan has prepared a comprehensive report on the negative impact of US-led "war on terror" on its economy, trade, commerce and tourism to obtain maximum economic support from the US. During his visit to US last month, President Asif Ali Zardari had stressed the need for a new dialogue on US-led war on terror with the incoming Obama administration in Washington and asked for Democrats' support for passage of the Biden-Lugar legislation that will triple US economic assistance for the south Asian country to $1.5 billion annually for a decade.

Pakistan's economy has suffered a loss of Rs 2.1 trillion during the ongoing US-led war on terror, according to the figures recently released by Finance Division. As a result of being a partner in the international counter terrorism campaign, Pakistan is currently facing major challenges including growing fiscal and current account deficits; rising inflation; growth deterioration; and depleting foreign exchange reserves, according to the draft Poverty Reduction Strategy Paper (PRSP) II of the finance ministry issued last week. The estimated costs include both direct (actually spent) and indirect including loss of exports, foreign investment, privatization, industrial output, tax collection, etc being a frontline state in the war on terror.

The anti-terrorist campaign, which began as a result of the unfortunate 9/11 event in the United States in 2001, over-strained Pakistan's budget as allocation for law enforcement agencies had to be increased significantly. This resulted in erosion of resources for the development projects all over Pakistan, particularly the tribal areas and NWFP province in addition to human sufferings and resettlement costs. Pakistan's participation in the anti-terrorism campaign has led to the massive unemployment in the affected regions.

Frequent bombings, worsening law and order situation and displacement of the local population have taken a toll on the socio-economic fabric of the country

The document said that Pakistan's participation in the international campaign has led to an excessive increase in the country's credit risk, which has in turn made borrowing from the market extremely expensive. The country's sovereign bonds have under-performed due to increased law and order concerns amongst other reasons including domestic political and economic stability. Since the start of anti-terrorism campaign, an overall sense of uncertainty has prevailed in the country which contributed to capital flight, as well as slowed down domestic economic activity, making foreign investors jittery.

As a key US ally, Pakistan had committed in 2001 for providing logistical support and intelligence sharing when the US-led anti-terror world coalition attacked Afghanistan to destroy Al-Qaida bases after 9/11 attacks on the US. Bush administration fully supported General Pervez Musharraf-led-Pakistan as a staunch ally in the "war on terror" during the past five years. Former Musharraf administration had allowed US forces to travel up to six miles across the border if they were in "hot pursuit" of fighters chased from inside Afghanistan. The country has so far received $7 billion assistance from the US for playing frontline role in war on terror since 2002.

"Mr Obama would not follow the policies of the Bush administration, quoted Daily Dawn citing Marvin Weinbaum, the Washington-based South Asia analyst. The European Union's Foreign Policy Chief Javier Solana called upon the new US administration to rethink its war on terror strategy by taking Pakistan on board. "Without engaging Pakistan in an effective manner, it would be very difficult to resolve the issues in Afghanistan", said Solana speaking at gathering on the Middle East situation in Brussels in November 2008.