Pakistan turns to indebted West



By Nadeem Iqbal

14th November, 2001.

ISLAMABAD - Pakistan is asking itself the tough question of whether the United States-led Western generosity in rewarding it for being a frontline state could end its economic woes.

This did not happen in the 1980s when the cash reward of about US$50 billion to Pakistan for helping 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 1989, the aid 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 1990s, debt 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) a year against his annual earnings of only 25,000 rupees.

A total of 33.5 percent of Pakistan's 144 million people live in acute poverty. Social safety nets of just less than 1 percent of GDP are available to the population. Real gross domestic product (GDP) grew 1.3 percent in fiscal year (FY) 1996-97; 4.3 percent in FY 1997-98; 3.1 percent in FY 1998-99 and 3.9 percent in FY 1999-2000; and 2.6 percent against a target of 4.5 percent during FY 2000-01, which is insufficient to reduce poverty and unemployment.

Today, Pakistan's role in 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 industrialized countries. These are part of what the government of President General Pervez Musharraf hopes will make clear a major benefit of Pakistan's alliance with the West, and turn around an economy that is in the doldrums.

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

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 US 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 exports, attracting more foreign investment and freezing defense expenditure for at least three years to make it proportionate to spending on the social sector.

A government priority is to have Pakistan's external debt, which as of September 30 stood at $37 billion, completely written off. This debt has been accumulated over a decade.

Under another scenario, official quarters are anticipating a four-pronged package that seeks full access to the markets of the US and European countries, sizable external debt relief other than normal rescheduling, support of the multilateral agencies and new bilateral loans.

But there are concerns that despite these prospects, the war in Afghanistan has complicated Pakistan's economic crisis. Government estimates show that the economy will suffer a loss of $2 billion to $3 billion due to the conflict. Exports have already fallen by 30 percent and revenues by 20 percent due to lower imports.

In an October 30 report, the State Bank of Pakistan cautioned, "Pakistan's decision to support the US-led coalition against Afghanistan and its frontline status has significantly enhanced the country's vulnerability to additional risks." Likewise, "costs such as increases 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," the report said.

However, as of Tuesday, with the exception of British Airways, Turkish Airlines and Air France, all carriers had lifted the war-risk surcharge imposed on exports from Pakistan. Airlines that have withdrawn the levy include Pakistan International Airlines, AI-Saudia, Lufthansa, SQ of Singapore, Emirates, Swiss Air and Cathay Pacific. Shipping lines have also reduced freight costs from Pakistan to Europe from $70 to $100 per 40-foot container in the wake of 20 percent reduction in war risk surcharges last week. An expected reduction in freight is also expected later this week. Exporters reported that all air shipments to Europe and the US are moving swiftly, but there is problem in air lifting of export consignments to the Far East destination because there are no direct flights, except that of PIA.

Commenting on the outlook for the economy, Dawood said, "We are not going for only aid. I would prefer trade. Only through getting more market access in the developed world can we 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 added that Pakistan had clinched big trade concessions from the European Union. 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 will increase Islamabad's exports - and translate into additional annual earnings of $400 million. EU governments have agreed to a 15 percent increase in the country's textile quota, besides allowing duty-free access to its products from January 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 said that about two months after September 11 and more than one month since the US-led attacks in Afghanistan, Pakistan has not been able to receive all the economic packages it desires.

Still, the removal of most layers of US sanctions have already cleared the way for Pakistan to get economic help from Washington and international financial institutions, where the US enjoys decisive influence. So far, the United States has announced $1 billion in assistance, Britain has written off $40 million in loans, while Canada has converted Pakistan's $300 million in loans into development funding through a swap.

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

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

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

The International Monetary Fund and World Bank are also expected to approve a $1 billion medium-term loan to Pakistan from their poverty reduction and growth facility (PRGF) by late December and by January of 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 that Egypt received for cooperating in the US-led operation to liberate Kuwait from Iraq in early 1990s.

Foreign Minister Sartaj Aziz has expressed dismay over the $1 billion 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 the economy. To date, he said, the amount of debt that had been waived was no more than $1.5 billion.