Ad hoc external assistance


By Jawaid Bokhari

22nd October, 2001.

The outlook for the nature and the level of G-7 financial assistance is not clear when seen in the context of needs and expectations arising out Pakistan's support to US against Talibans.

No doubt, small grants have been extended by the West for balance of payments(BOP) support and relief for Afghan refugees. The assistance, made on ad hoc basis, appears to be intended for damage control, as an ongoing process, on the basis of updated assessment.

A head of a security house says: "The hard numbers announced by donors are not impressive at all. It appears that they are just paying for their bills."

It is an emergency aid. It is the initial response to tackle emerging problems arising out the influx of Afghan refugees and loss of the export earnings. Finance Minister Shaukat Aziz says that three areas would be particularly hit: investment, exports and revenue. It would mean more pressure on balance of payments and mounting budget deficit.

President George W. Bush enhanced the initial grant of $50 to $100 million immediately after the visit of Secretary Collins Powell to Pakistan early this week. This coincided with an offer of another $15 million by the UK as humanitarian assistance for Afghan refugees in addition to $16 million announced earlier.

Other contributions include: Japan $40 million, China 10 million yuan, EU 20 million euro. The World Bank has estimated a loss of one billion dollars which may go up, if the war is prolonged.

The emergency aid is being followed up by liberalization of trade by the EU including more access to European markets. The EU has decided to allow 15 per cent increase in textile quota and a package of trade and tariff concessions estimated to yield benefit of one billion dollars over a four-year period. The concessions would be effective from January next year. Economists are not sure about the anticipated benefits. Faced with deepening global recession, the industralized states" are struggling with their own problems." How much capacity they have to bail us out is not known, says a leading economist.

Commerce Minister Razzak Dawood has estimated that exports may shrink by $1-1.5 billion as a result of the impact of September 11 attack on New York and events following it. His main concern is that there are no import and export orders.

The EU concessions may help offset a part of the adverse impact of war risk premium levied on insurance tariff and shipping freight. Although Pakistan is outside the theatre of war, the risk perceptions of the foreigners is having an adverse impact on investment and foreign trade. The premium charged is exorbitant and will make export uncompetitive. Pakistan's exports are volume driven, priced cheap and are not value-added goods with high margins. Any small increase in costs hurt their competitiveness. If one were to go by statements of trade and industry, the future of our foreign trade is bleak.

There is some expectation that international agencies would buy food and relief goods from Pakistan. The CBR has therefore allowed zero-rating of sales tax on the supplies made by registered persons against international tenders floated by these relief agencies.

Whether Pakistan would be able to boost its exports remains an open question in view of the recession in industrial economies that have many elements to prolong the recession into a depression.

Washington has not responded as quickly as the EU to Pakistan's request for greater access to the US market. The US textile manufacturers are turning to protectionism to sustain their market share in face of a deepening recession.

The US textile industry has opposed grant of broad new areas to Pakistani textile goods into the US market, as it says , it would cripple the domestic industry. The US administration is likely to provide duty-free entry for hand-knotted and hand-hooked flooring.That would be worth $100 million dollar and acceptable to the industry.

USA is Pakistan's largest export market. And US news reports indicated earlier, President George Bush represents American companies that cater to domestic market unlike former President Clinton who was supported by US multinationals with global reach.Before Sept 11 assault on the United States, Bush was more inward looking and less outward looking. The US administration may find it difficult to get big concessions from a constituency whose interests it is expected to uphold.

The multi-layer sanctions have been lifted by the US Congress facilitating bilateral military and economic assistance to Pakistan. The US multinationals are unlikely to have a fresh look on Pakistan as long as the security risks that they perceive from a fall out of an attack on Afghanistan, exists. The waiver on sanctions is more of a symbolic gesture unless US is willing to provide huge funds.Press reports indicate that the US is considering financial assistance of $600 million dollars which have neither been confirmed nor denied by the US officials.

While Japanese Prime Minister Koizumi has assured President Musharraf of financial support, he has not acceded to the request for debt write-off. Japanese officials say he told the Pakistani president that "our basic instance is that a debt waiver is not desirable." The Japanese are only echoing the thinking of Washington and major share-holders of the IFIs.

IMF officials say that, "the plan for sometime has been to move on towards a PRFG. Admitting that Pakistan's debt situation is a significant consideration. "The IMF director of external affairs, Mr. Thomas Dawson added: "PRFG would be necessary for another Paris Club operations." The debt write-off may have to come outside the Paris Club,on a bilateral basis, by donors as has been in case of Jordan.

Finance Minister Shaukat Aziz told a news conference on Thursday in Islamabad that "it is imperative that the debt burden is lessened by the international community through a meaningful debt relief package". There is limitation to the amount of soft loans that Pakistan can borrow. Huge loans can only postpone the day of reckoning. It is the big fiscal space provided by debt write-off that can kickstart the economy.

Pakistan has $ 12 billion bilateral debt and $15.5 billion multilateral debt. Islamabad is now finalizing a financial package in line with the wishes of the donors. The first write-off has come from the UK of the amount of $84 million, to be effective in two phases.

When Egypt extended support to the USA in the 1991 Gulf War, half of its debts were written off and its support was not that crucial with Saudi Arabia and other Arab states solidly behind Washington. Pakistan has emerged as a strategic US supporter in its assault on Afghanistan which is the focus of American global strategy to contain terrorism. And the fight against terrorism, to quote Chris Patten, "will shape the century we live in."

Prior to September 11, says a financial analyst, Pakistan and the IMF were discussing a $15 billion balance of support package for a three year period. The package included exceptional financing through long term debt rescheduling, The PRGF and other the IFI assistance and included privatization proceeds. Now the situation warrants adjustment costs linked to current environment and the opportunity that it offers.

Fears are also being expressed that Pakistan should not end up selling long term strategic interests for short term gains. They recall the heavy price that Pakistan had to pay for its support to the US in the 1979 Afghan war.

After the Sept 11 attack on America, the world has changed. It has entered into a new era. The problem of global terrorism has been put in perspective. The vision that would shape the the century is blurred.

It is a common vision shared by all active participants of the campaign against terror that can bring success. The war has to be fought by political, diplomatic, economic and least and last of all, by military means.In the changed world, the traditional approach would not work.

If Pakistan and the US do not share a common vision that could spur trade and economic co-operation to unprecedented levels, the country's economy may face the risk of further destablization. The current US attack on Afghanistan is raising security risks for business and tends to divide a nation's people as the bombing prolongs.

Pakistan's support to Afghan war against the Russians was backed by a national consensus. Now, there is support for fight against terrorism but opposition to bombing of Kabul and Kandhar.