ECONOMY-PAKISTAN: Little Applause for Rewards to Frontline State

By IPS Correspondents Reprint | | Print |

Analysis - Nadeem Iqbal

ISLAMABAD, Nov 12 2001 (IPS) - Pakistan is asking itself the tough question of whether the U.S.-led western generosity in rewarding it for being a frontline state in the ‘war on terrorism’ could end its economic woes.

This did not happen in the eighties, when the cash reward of around 50 billion U.S. dollars to Pakistan for fighting the West’s war against communism and to boot out occupying Soviet forces from Afghanistan could not prevent a major chunk of the country’s population from falling prey to acute poverty.

After the withdrawal of Soviet troops from Afghanistan in 1988, the aid was stopped and the economy declined.

Pakistan’s overdependence on aid subsequently weakened the economy. It could not generate enough income from exports, since no efforts were made to use aid to nurture export-intensive industries. It also took away the tax culture from the country.

In the nineties, debt conveniently replaced aid.

Official statistics estimate that at present, per capita debt exceeds per capita income. Every Pakistani carries a debt burden of about 29,000 rupees (480 U.S. dollars) a year against his annual earnings of only 25,000 rupees (415 dollars).

A total of 33.50 percent of Pakistan’s 144 million people live in acute poverty. Social safety nets of just less than one percent of GDP is available to this population.

Today, Pakistan’s role in the ‘war against terrorism’ and the attacks against Afghanistan have given it economic dividends, ranging from the lifting of economic sanctions from the United States and Japan, talk of rescheduling debt, agreements on new assistance funds and trade concessions from industrialised countries.

These are part of what the government of President Pervez Musharraf hopes will make clear a major benefit of Pakistan’s alliance with the west, and turn around an economy that has been in the doldrums.

But a look at the economic rewards Pakistan has reaped in the wake of the changed geopolitical situation after Sep. 11 is not without its risks, not least because the war has affected economic confidence and because some officials believe Islamabad ought to get more substantial benefits than what it has been getting.

In an interview, Federal Commerce Minister Razzaq Dawood said that although economic sanctions have been removed from Pakistan and it is the first time since 1990 that the country is not under any U.S. sanctions, the war is still taking a heavy toll on the economy.

He said that it was “very difficult” to quantify the benefits Pakistan is going to get, since the government is discussing debt relief with many countries.

But he added that in the end, “there is no substitute to good governance and good management and we will ensure that the benefits must trickle down to the poor.”

Now that Pakistan has once again become the ‘darling of the west’, the fear is that the new ‘aid for peace’ packages may undo the government’s efforts to bring in financial discipline by expanding the tax net, increasing country’s exports, attracting more foreign investment and freezing defence expenditure for at least three years to make it proportionate to spending on the social sector.

Government officials’ priority is to get Pakistan’s external debt, which as of Sep. 30 stood at 37 billion U.S. dollars, completely written off. This debt was accumulated over a decade.

Under another scenario, official quarters are anticipating a four-pronged package that seeks full access to markets of the U.S. and European countries, sizable external debt relief other than normal rescheduling, support of the multilateral agencies and new bilateral loans when it moves ahead with its cooperation in the retaliation against Afghanistan.

But there are worries that despite these prospects, the war in Afghanistan has complicated Pakistan’s economic crisis.

Government estimates show that Pakistan’s economy is going to suffer a loss of two to three billion dollars due to the conflict. Exports have already fallen by 30 percent and revenues by 20 percent due to lower imports.

In an Oct. 30 report, the State Bank of Pakistan cautioned: “Pakistan’s decision to support the U.S.-led coalition against Afghanistan and its frontline status has significantly enhanced the country’s vulnerability to additional risks.”

Likewise, “costs such as increase in freight rates and the imposition of war-risk insurance has increased the cost of imports and make Pakistani exports more expensive,” it explained. “In addition, cancellation of air cargo flights by foreign airlines has disrupted trade flows.”

“The continuous influx of Afghan refugees has added further pressure on country’s limited resources and infrastructure”, it said.

Dawood said: “We are not going for only aid. I would prefer trade. Only through getting more market access in the developed world we can accelerate factories work and could generate more jobs.”

“This could only be done through greater trade and greater production, which could only come through greater market access,” he said.

He said that Pakistan has clinched big trade concessions from the EU. Few expected that the negotiations going on since March between Pakistan’s commerce ministry and EU trade commissioner Pascal Lamy would lead to a recent agreement that would boost Islamabad’s exports – and translate into additional annual earnings of 400 million dollars.

EU governments have agreed to a 15 percent increase in the country’s textile quota, besides allowing duty-free access to its products from Jan.1, 2002.

Khushnud Ali, a representative of the textile industry, has remarked that the deal places Pakistan at a status better than an EU member.

But some officials urge caution, since only pledges have been made so far. A senior officer in the finance ministry remarked to IPS that around two months after Sep. 11 and more than one month since the U.S.-led attacks in Afghanistan, Pakistan has not been able to get all the economic packages it desires.

Still, the removal of most layers of U.S. sanctions have already cleared the way for Pakistan to get economic help from the United States and international financial institutions, where Washington enjoys decisive influence.

So far, the United States has announced one billion dollar assistance, Britain has written off 40 million dollar loans, while Canada has converted Pakistan’s 300 million dollar loans into development funding through a swap.

The Asian Development Bank has increased its original planned assistance of 626 million dollars for 2001 to 950 million. The United Arab Emirates has given loans of 260 million dollars on concessional rates.

The United States and its allies have committed 800 million dollars in cash grants, still to be disbursed to Pakistan. In addition, they pledged to 600 million dollars for Afghans displaced by the October attacks by U.S. and British forces.

For its part, Japan, the biggest bilateral lender to Pakistan with 5.03 billion dollars, has said it is unable to write off Pakistan’s loans due to constitutional hitches. But it is likely to resume its assistance, which had averaged around 500 million dollars until Tokyo imposed sanctions on Islamabad after 1998 nuclear tests.

The International Monetary Fund and World Bank are also expected to approve a billion dollar medium-term loan to Pakistan from their poverty reduction and growth facility (PRGF) by late December and by January next year, respectively.

But all this is considered too little by the Pakistan government, because it wants the complete write-off of loans — the same reward Egypt got for cooperating in the U.S.-led operation to get Kuwait liberated from Iraq in early nineties.

Sartaj Aziz, foreign finance minister, expressed dismay over the one billion dollar relief package announced by President George W Bush on Sunday, saying a write-off of Pakistan’s foreign debt could provide “much-needed relief to our economy”.

So far, he said, the amount of debt hat has been waived is not more than 1.5 billion dollars.

ECONOMY-PAKISTAN: Little Applause for Rewards to Frontline State

By IPS Correspondents Reprint | | Print |

Analysis - Nadeem Iqbal

ISLAMABAD, Nov 12 2001 (IPS) - Pakistan is asking itself the tough question of whether the U.S.-led western generosity in rewarding it for being a frontline state in the ‘war on terrorism’ could end its economic woes.
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