Pakistan counts the cost of war
by Syed Fazl-e-Haider
QUETTA, Pakistan - Cash-strapped Pakistan is heading toward another serious
balance of payments crisis in the new fiscal year starting from July 1, as the
"war on terror" takes its toll on the economy and widens the fiscal deficit.
The cost of war has increased manifold since May, when the government launched
major military operations against Taliban insurgents in the northwest. The
government has projected a budget deficit of 4.9% for 2009-10, against the 4.6%
target agreed with the International Monetary Fund (IMF). The main reason for
the deficit is rising expenditure on debt servicing and huge allocations for
defense and law and order.
The outstanding $1.2 billion in aid the United States has pledged to its
frontline South Asian ally is another major reason behind the financial crisis
Pakistan faces. Local analysts have estimated the
operational cost of war-related expenditures, such as logistics and keeping
garrisons in northwestern tribal areas, at over $1 billion per year.
The country is unlikely to meet its budget deficit targets due to weak growth
and high government spending on the fight against the Taliban. Defense and debt
servicing costs may exceed estimates in the new fiscal year, resulting in a cut
in development spending, according to experts.
Last November, a $7.6 billion bailout by the IMF saved Pakistan from a balance
of payments crisis. Though debt inflows support the country's balance of
payments position, and help finance current account deficits, they inevitably
oblige the nation to make potentially destabilizing payments in the future.
For the new fiscal year, the budget deficit - at 722.5 billion rupees (US$8.9
billion) - is estimated to be about 24% higher than last year's estimate of 582
billion rupees. As a percentage of GDP, the budget deficit will rise slightly
to 4.9% against 4.3% during the current year. While the government hopes to
receive more than $4 billion assistance from friendly countries and
multilateral donors during the new fiscal year, it has also taken different
revenue measures, including phasing out electricity subsidies, to reduce the
budget deficit.
Islamabad has also asked the IMF for a $4 billion stand-by loan to finance the
yawning budget gap that looms should multilateral donors fail to release the
pledged amount. Shaukat Tarin, an advisor to Prime Minister Syed Yousaf Raza
Gillian, has indicated that the country has lined up the IMF loan in case there
is any delay in the funds pledged by Friends of Democratic Pakistan nations.
Pakistan is the world's biggest recipient of US aid. The US House of
Representatives on June 12 approved tripling aid to about $1.5 billion per year
for five years to help combat extremism through development. Under the
Coalition Support Fund, the US reimburses Pakistan for any terrorism-related
operations, particularly those undertaken by the army and air force.
Pakistani authorities have received $447 million from the US since September
2008, leaving a balance of over $1 billion. "There was no delay in payment
until March 2008. However, the process has been made cumbersome over minute
details about expenditures," reported the daily newspaper Dawn.
Given the worsening security situation, experts fear defense and debt servicing
costs will continue to rise, forcing the government to slash development
spending and rely on foreign funding to meet its financial needs and
obligations. The country has increased defense spending by 15.3% to 342.9
billion rupees for the next fiscal year starting from July 1, compared with
296.07 billion rupees last year.
The government plans to meet the budget deficit from external resources and
from funds coming in to help internally displaced persons (IDs). The government
has allocated 50 billion rupees in next year's fiscal year budget for the
rehabilitation of the hundreds of thousands of IDs forced by conflict out of
Swat and Alaskan Division in North-West Frontier Province.
Critics say the government's budget is too reliant on uncertain funds, as no
one can be sure that the nations will live up to their pledges. Friendly
countries did not fully live up to their pledge of $4 billion after a
devastating earthquake of 2005.
"Pakistan needs a robust assistance package so that we can deliver for the
people and defeat the militants," President Asif Ali Zardari wrote in an
article recently published in the Washington Post. He noted that the Barack
Obama administration had recognized that only an economically viable Pakistan
could contain the threat of terrorism.
Experts believe the government will ultimately resort to borrowing money
domestically, putting pressure on interest rates. In this scenario, the central
bank would be unable to reduce the discount rate, creating a high interest
environment that would have an adverse impact on investment and growth.
Total external debt increased to $50.1 billion by the end of March 2009,
compared to $46.3 billion at the end of June 2008, registering an increase of
$3.8 billion or 8.2%, according to the official Economic Survey for 2008-09.
The global slowdown hampered non-debt creating inflows like foreign direct
investment (FDI) and constricted the availability of non-debt creating inflows.
Therefore, the government had to resort to multilateral and bilateral sources
for its financing requirements, adding to the stock of outstanding external
debt.
In relative terms, external debt liability as a percentage of GDP increased
from 28.1% at the end of June 2008 to 30.2% by March 2009 - an increase of
2.1%. This is the highest-ever rise in a single year for almost a decade.
Pakistan's external debt stock may rise to around 32.5% of GDP during
2008-2011, due to a significant increase in external financing from official
creditors, according to a recent report by the IMF.
The report projects debt service as a ratio of exports of goods and receipts to
increase to 20% under the baseline scenario. Combined shocks to growth, current
account and depreciation could vault the end-period debt stock to around 45% of
GDP, significantly higher than under the baseline scenario.
Syed Fazl-e-Haider, sfazlehaider05@yahoo.com, is a Quetta-based
development analyst in Pakistan. He is the author of six books, including The
Economic Development of Balochistan, published in May 2004.
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