How critical is US assistance?

http://www.dawn.com/2007/04/16/ebr3.htm

By Dr Ishrat Husain, former Governor State Bank of Pakistan

A SPATE of editorials, articles, columns and reports emanating from the United States in the last few months have argued that the US assistance to Pakistan should be made conditional upon the progress in the achievement of US's strategic goals in the region. These assertions echoed in the national media and the popular discourse in the country. This article tests the validity of these assertions with the help of empirical evidence and attempts to disentangle the myths from the reality.

The US economic and military assistance to Pakistan since September 11, 2001 has come in four main forms (a) debt relief (b) military assistance (c) economic assistance (d) emergency relief assistance. In addition, the US has been reimbursing in dollars the expenditures incurred by Pakistan in supplying logistics services to US troops in Afghanistan .

Although normally this reimbursement should not be considered part of any aid package, it has been so included in this analysis for comprehensiveness. If this broader definition of US assistance is accepted, then the next step is to calculate the quantum of this assistance.

In FY 2002, the US provided debt relief of $600 million and in FY 2003 used Economic Support Fund of $186 million to retire bilateral US debt of $1 billion.Between FY 2004-2007, the US has provided budgetary support of $800 million under Economic Support Fund. In addition it also funded   

(a) development assistance, (b) Child Survival and Health Programme and (c) PL 480 Title II in the amount of $530 million. The US is committed to further $600 million in FY 08 and FY 09 under economic assistance. Under Earthquake relief and reconstruction the US has provided $105 million and has committed to allocate an additional amount of $200 million for reconstruction in the AJK and NWFP.

The military assistance that has been received so far is approximately $900 million with further commitment of$600 million in the coming two years. Finally,the US has been reimbursing Pakistan at $80 million a month for the logistic services provided to the US troops in Afghanistan since 2002. This amount aggregates to $4.8 billion in all and is shown under the services account in the current account balance. This amount is in actual fact, payment for expenditures that Pakistan has been incurring out of its own resources in rupees and is not included in any standard definition of "aid". But we have included the reimbursements as aid in order to address the arguments raised by the proponents of " Pakistan dependent upon US" theory.

Table-1 presents an aggregate total picture of all these four types of US assistance since September 2001. The annual inflows during the last six years amount to approximately $1.75 billion from all types of US assistance - military, economic, and reimbursements for logistics support. Of these flows, the aid "“ military and economic accounts for $ 787 million etc annually. In order to examine the importance of these flows to Pakistan's economy and evaluate the dependence of our economy on US four key indicators are selected (a) US assistance as per cent total budgetary expenditure (b) US assistance as percent of total foreign exchange receipts (c) US assistance as per cent of total current account receipts and (d) US assistance as per cent of total valueof imports.. These indicators have been carefully chosen to see as to how much damage will accrue to our balance of payments and fiscal accounts if the US for one reason or the other abruptly decides to withdraw its assistance of all types.

The results of this analysis shown in Table II indicate that even under the worst case scenario of zero aid flows and no reimbursements for logistics services rendered to the US troops, the diminution in foreign exchange receipts or budgetary resources would be insignificant "” varying between 4.5 per cent of total foreign exchange receipts to 7.2 per cent of total budgetary expenditures. The other two indicators i.e. the proportions of total value of imports and current account receipts financed by U.S. assistance account for 6.4 per cent and 5.8 per cent respectively "” not worrisome amounts.

Some observers would argue that the World Bank and ADB assistance to Pakistan would also be reduced if the US takes action to suspend its financial aid. Although this assumption is open to question and debate but even if it is accepted at its face value, the total gross flows of foreign aid from all official bilateral and multilateral sources (excluding reimbursement for services) amount to 8.5 per cent of the country's foreign exchange receipts in 2006-07 and 10.8 per cent if the re-imbursement for services is included.

As a proportion of GDP, these gross flows from all sources work out to only three per cent. Using a more appropriate indicator i.e. net transfers on account of all foreign assistance, the impact is even more negligible "” only 1.1 per cent of GDP. Should these amounts raise any alarm bells when the country has already weathered much worse shocks of greater magnitudes in the past seven years.

This worst possible case scenario ,although possible but not probable, will have a consequence in form of immediate drawdown of our foreign exchange reserves from $13.5 billion to $9.5 billion assuming that all current expenditures in foreign exchange are protected. In case this scenario materializes the policy makers will have to make necessary adjustment in our imports and other foreign exchange expenditures, take measures to attract larger volume of remittances and foreign direct investment and will access the international capital markets. We can be assured on the basis of the above "What if:" kind of analysis that under the highly improbable worst case scenario where the US along with all multilateral development banks withdraw its assistance of all types in one go, Pakistan's economy is unlikely to face any serious risk.

It is also less well known that the U.K Government provides much larger volume of economic assistance to Pakistan than the U.S does. The Department for International Development (DFID) of UK has raised its annual grant aid to Pakistan from £240 million ($480 million) to £480 million ($960 million). Most of this aid is targeted at education, health, social development i.e. largely on the development of the people.

Despite such hefty amounts involved - more than the entire U.S economic and military assistance - there are very little noises from the British Parliament or think tanks or even the influential media that Pakistan should be penalised "as it is not doing enough to help meet the British objectives in Afghanistan ". There is a sense of maturity in the U.K that recognises that these kinds of tactics in fact end up alienating and antagonising public opinion in the recipient countries rather than alter their behaviour. Ill will rather than goodwill is created against the donors if they continue to flaunt the stick they possess. A better way is to engage in dialogue, listen to and understand the perspectives and limitations of the recipient countries as to why there is divergence in the views of the two sides and what can be done to set things right.

There is no doubt that the government and the people of Pakistan do very much appreciate the financial and moral support demonstrated by the US government at the critical moment of Pakistan's economy. Several other collateral benefits accrued to the economy as a result of the U.S bilateral debt forgiveness, strict scrutiny of remittances through informal channels, the US EXIM Bank and OPIC's highly positive initiatives and the withdrawal of all different types of economic sanctions. U.S Administration played a helpful role in ensuring larger volume of concessional assistance to Pakistan through the IMF, World Bank and Asian Development Bank. The prompt and generous response to the Earthquake of October 2005 by the US government, private sector and non-governmental organisations left a very favorable impression in the minds of Pakistanis.

US is an important trading and investment partner of Pakistan and we should continue to remain friends with this superpower. The purpose of this analysis is not to show that we care little for our friendly relations or do not cherish friendship with the government or the people of the United States . As a matter of fact we should expand our relations with the United States in the areas of higher education, science and technology transfer, trade, investment and labour flows. We should also seek duty free market access for the products exported from the Reconstruction opportunity Zones (ROZs) in the tribal areas as part of our joint strategy to provide economic benefits to the three million population living on the porous border with Afghanistan . But the main argument of this analysis is that the pundits in the US who believe that they can use the leverage of US official aid to paralyze Pakistan 's economy are sadly mistaken as they have an exaggerated sense of the importance of these official flows. Any attempt to impose conditions that impinge upon the sovereignty of Pakistan or conflict with our own national interests can be resisted without creating a serious dislocation to our macro economic stability or growth prospects.

This analysis explodes the popularly held myth that Pakistan is so dependent on foreign assistance for its economic survival that pulling the plug would force it to yield under this pressure. These sages and their followers in Pakistan are well advised to seriously reconsider their basic premise. Successive governments in Pakistan since 1974 "“ whether military, democratically elected or interim- had successfully resisted all kinds of pressures placed upon them for discontinuing the nuclear programme under worse economic conditions than prevail today. The present and the future governments of any political persuasion would be able to meet the highly unlikely event i.e. abrupt withdrawal of U.S economic and military assistance of all types and forms with courage and fortitude because the capacity of the country to respond to this and other exogenous shocks has become much resilient in the recent years. During the last seven years Pakistan has successfully withstood the internal and external shocks of severe and prolonged drought, mobilization of Indian troops on the borders, terrorist attacks on foreign nationals, the war against terrorism in Afghanistan , and the oil price hike. None of these shocks, some of which are more severe than $750 million provided by the US has hurt the macroeconomic stability or growth. Oil import bill that went up by almost $2 billion in a single year was more devastating in nature but the economy grew at 6.6 per cent despite this shock.