Summary
Pakistan's moribund economy may actually benefit from the war on terrorism as Islamabad reaps economic rewards for its support of U.S. military strikes against Afghanistan. This will help Pakistani President Pervez Musharraf secure domestic stability and begin to reverse a decade of economic decline.
Analysis
Pakistani Finance Minister Shaukat Aziz began a two-week visit to Washington on Oct. 6. Aziz is seeking support from the U.S. government and multilateral organizations for Pakistan's struggling economy.
His trip is certain to be a fruitful one, as Washington will heap rewards on Islamabad -- from direct aid to debt relief to improved trade access -- in return for continued support of American military action against Afghanistan. Other unforeseen factors, such as a flood of repatriations into Pakistan and a strengthening currency, should have short-term economic benefits. President Pervez Musharraf will use this economic assistance and cash windfall to help foster stability and support for his government.
Western support comes at an opportune time for Pakistan, which faces a worsening fiscal situation and the looming threat of debt default. Even more important, the assistance will help Musharraf, whose government is the only one in the world to recognize Afghanistan's Taliban regime, bolster support from citizens loudly opposed to the U.S. military campaign next door. Washington and the rest of the coalition recognize the precarious situation of their most vital regional ally in the ongoing military operation and will take great pains to support Musharraf.
Pakistan's economy, isolated by sanctions and hampered by social unrest and corruption, has been deteriorating for the past decade. The Far Eastern Economic Review (FEER) reported that the number of people living in poverty has doubled during the past 10 years. GDP per capita fell from just over $500 per year in 1995 to an estimated $375 this year, the Financial Times reported. In terms of purchasing power, Pakistan is on par with Laos and Equatorial Guinea. Meanwhile, foreign investment has plummeted, partly because of U.S. economic sanctions imposed in 1997 and 1998 and general perceptions of instability.
Fiscal deterioration has accompanied economic decline. Debt service obligations on Pakistan's $37 billion foreign debt make up more than half of government expenditures and are expected to cost about $3 billion a year through 2004, Dow Jones Newswire reported. With only $2 billion in foreign reserves and a projected $2 billion financing gap for the fiscal year ending June 2002, according to Finance Ministry estimates, Islamabad was already at risk of debt default.
The situation appeared to worsen after Sept. 11, when Afghanistan became ground zero for the war on terrorism. Suddenly, shippers of products from Pakistan were incurring some of the highest freight and insurance costs in the world. The textile industry -- which accounts for 85 percent of exports, according to FEER, and is the largest non-agricultural employer in Pakistan -- is the biggest concern. Products suddenly became less competitive on global markets, and nervous customers began canceling orders, the Wall Street Journal reported.
This is a setback for Musharraf's efforts to improve Pakistan's image and inject new life into the economy. Musharraf had begun clamping down on Muslim extremists even before Sept. 11, hoping to stabilize the country, promote foreign investment and reintegrate Pakistan into the global economy. He has now extended that crackdown -- detaining three top Muslim clerics for three months, according to the Associated Press -- in response to violent anti-American protests in Quetta, Pakistan, following the first U.S. military strikes on Afghanistan.
The global importance of Musharraf's domestic struggle has now increased exponentially. As a result, the West will do whatever it can to support and expand Pakistan's current government and its economy.
Anti-terrorism coalition partners have already given a green light to some timely direct aid, including $600 million from the United States to help meet government expenses, $40 million from Japan and $20 million from the European Union. More direct aid is very likely.
Perhaps more important, Washington and Tokyo agreed in late September to reschedule $1 billion in debt owed to the Paris Club. The United States also agreed independently to reschedule $379 million of the $3.6 billion in bilateral debt due from Pakistan, and Canada basically forgave $285 million in an early October debt swap, the Financial Times reported. The U.S. agreement was already being negotiated before Sept. 11, however, and Islamabad is seeking even greater debt relief. Again, this is almost assured.
Islamabad is also likely to receive large trade concessions from Washington. Pakistan's commerce minister wants quotas and tariffs on Pakistani textile exports reduced. This, along with Washington's decision to drop trade sanctions, will boost exports and bring Pakistan back into the global economic mainstream.
Serendipitously, Pakistan graduated Sept. 30 from its first-ever IMF program, a one-year $596 million loan. Pakistan is now seeking a new three-year IMF loan valued at $2.5 billion to $3 billion to further meet its fiscal needs, according to Finance Ministry sources cited by AP. Given the circumstances, Pakistan is a shoo-in for this loan.
Finally, Pakistan has benefited from a curious influx of hard currency. The rupee, which had depreciated almost 30 percent in the 12 months preceding Sept. 11, has since appreciated by almost 6 percent on the open market, according to the Financial Times. It appears Pakistani nationals living abroad began repatriating large amounts of the estimated $40 billion to $60 billion in overseas assets following the suicide hijackings in order to avoid investigations into the source of funds and possible tax implications. The repatriations also could stem from concerns that governments would target and freeze Pakistani bank accounts.
[What's up with this? This is probably all the foriegn aid they ever got, heroin money, and maybe Osama's. Anybody know of a list of the 130, or whatever, people and orgs targeted by the govmint search for terrorism money? Would they bother Pakistan during this courtship? How many got phone calls from DC warning them to move their money I wonder. Or maybe the Pakistanis just assumed they were in big trouble, being a hot-bed of extremism and all, and they were totally shocked when their country ended up being the US's new best friend. Again. Some people probably find the current situation downright amusing.]
Though a stronger rupee could hurt exports, the government will benefit from increased tax revenues on repatriated funds and an improved foreign exchange position. Islamabad will be able to spend less to meet its debt obligations, and a stronger rupee should allow the central bank to lower interest rates.
Musharraf and his government will likely use their newfound wealth for two main purposes: to fend off a debt default and to funnel funds to strategic points needed to strengthen Musharraf's position -- namely to causes supported by important figures in the military, the business community and moderate religious leaders. Improved trade ties and lower interest rates will gain Musharraf valuable support in the business community.
In the longer term, Washington, Tokyo and Brussels hope Musharraf's economic strategy will pay off by curtailing Islamic fundamentalism within Pakistan. Chronic unemployment and general economic dissatisfaction create fertile recruiting ground for radical Islamic groups. Their message that the West has fostered social and economic injustice in Muslim countries resounds in unstable economies.
So far, Musharraf's administration has been able to keep a fairly tight grip on strong Islamic fundamentalist sentiments within its borders. The president may now have more tools -- carrots rather than sticks alone -- to appease various forces that could otherwise raise Pakistan's internal temperature to the boiling point.
Can anybody tell me where I can find a detailed history of US economic aid to various countries, over decades?