October 8, 2001
Despite making great strides in all manners of civilisation, the basic human instincts have remained almost unaltered in the history of mankind. The principle of might is right is still very much valid, though rules of the game have been refined. In the olden times, weaklings were made to perish. Now, they are penalised or rewarded according to the bidding of power centres. The story of sanctions on Pakistan fits, rather crudely, in the standard behavioural pattern. Sanctions were slapped at different times for acts of omission and commission with the result that Pakistan was one of the most sanctioned country up to 23rd September, 2001. The US imposed sanctions in 1998, following five nuclear tests carried out by India and six tit-for-tat tests carried out by Pakistan on May 28 and May 30. The plea of Pakistan that the country was forced into the situation fell on deaf ears. At that time, two kinds of sanctions were already in place: the 1977 Symington Amendment sanctions which had gone into effect in 1987 and the 1986 Pressler Amendment sanctions which were imposed in 1990 after the then-US President refused to certify that Pakistan was not in possession of nuclear weapons. The strangulation was almost complete with the "democracy" sanctions imposed in October, 1999 after the Nawaz Sharif government was toppled in a military coup. However, during all this period, care was taken to ensure, through IMF bail-out packages and rescheduling, that the economy managed to survive and the country did not default, at least in a strictly technical sense.
Standards of judgement have changed dramatically after the September 11 events in USA and Pakistan found itself on the right side of the fence by extending whole-hearted support to the anti-terrorism cause. This was not a small risk for the country for obvious reasons and US felt obliged to compensate for the "principled" stand. Displaying unusual speed, the Bush administration lifted all kinds of sections on 23rd September except those imposed under democracy strictures. Restrictions under Democracy Section 508 cover foreign military finance, military educational training, and aid from Trade and Development Agency, Overseas Private Investment Corporation and Economic Support Fund. Even these are likely to be eased. Speaking after the rescheduling signing ceremony of $ 379 million debt, Wendy Chamberlin, US ambassador to Pakistan said that her country was looking very seriously at section 508, relating to sanctions imposed on Pakistan after the October, 1999 military coup but it would be handled in a different way by the legislature.
Finance Minister Shaukat Aziz was a little bit cautious in dilating on the impact of waiving of sanctions. According to him, now the US could vote in our support in the multilateral institutions like the World Bank, IMF and ADBP. Private sector in Pakistan could secure soft-term credits from the Exim Bank of America to import machinery and equipment from the United States. Also, two investment and export-import banks of the US operating overseas - OPIC and EXIM Bank - would be allowed to finance private sector projects in Pakistan. Looking closely, all these benefits are not very significant in concrete terms. So far as aid and loans from multilateral institutions is concerned, Pakistan was getting it any-how because USA had preferred to abstain from voting. As for the import of capital goods, Pakistani importers would only have a wider choice of sources of supply and credit. Investment may also improve marginally. It would transpire that though waiving of sanctions is a positive signal, contributing to an enabling environment for contracting fresh loans and attracting investment, yet most of the benefits would not be automatic and could only come in the medium to long term and that too if other factors are made to improve considerably in the meantime.
There are many imponderables which need to be assessed before guestimating the net impact. The imposition of sanctions was not the only reason for the avoidance of investment in the country. Poor law and order situation, continuous confrontation on the borders, proliferation of Jihadi outfits, and inconsistency of policies were some of the other factors impeding investment in the country. If these inhibiting factors are not removed, the waiving of sanctions is hardly going to help. Also, if the US offensive is prolonged, the negative impact of regional turmoil could far outweigh the positive effect of removal of sanctions. Besides, it needs to be pointed out that sanctions have not been removed from the statue books and lifted permanently. Any hint that Pakistan is not cooperating wholeheartedly with US efforts to extirpate terrorism could provide a handy excuse for the re-imposition of sanctions. In this kind of uncertain environment, rush for investment is unlikely and government plans and projections for infrastructure development leading to job creation and economic growth would be premature.
There are also two major risks inherent in the situation. Pakistan authorities have the tendency to loosen the purse strings when the going is good. After the waiving of US sanctions and comparatively liberal availability of loans from European Union and Japan coupled with further rescheduling of past loans, public is in a mood to celebrate the bonanza which the government would be hard put to resist. Already, the government has postponed the increase in gas prices. On the other hand, all the money likely to flow into the country, except some small amounts for Afghan refugees, would be in the form of credit and loans. Easy access to foreign markets for the purchase of sophisticated arms and ammunition and increased availability of funds could also tempt the armed forces to replace their old weaponry. This would exacerbate the debt burden without corresponding increase in investment and growth with the result that, after a few years, the country could find itself in worse shape than at present.
It is more than obvious that sanctions, by and large, were not imposed due to our fault. Most of the sanctions were nuclear related which were unjustified in the first place. Our tit-for-tat response was due to a growing threat from a neighbouring country. Democracy sanctions were also not called for because the US has been pursuing different standards in different countries and the matter was purely internal. Similarly, waiving of sanctions was not prompted essentially by a sudden change in our behaviour but necessitated by the exigencies of a particular situation for the US. However, in order to avail of the opportunity presented by the situation, government authorities need to explore avenues for reaping benefits which could be longer-lasting and at the same time look for something which is more substantial.
There are, at present, a number of barriers for Pakistani products and services in accessing the markets of developed countries. Also there are precedents when the US and its allies had helped countries by offering them better terms of trade. Pakistan should prefer expansion in exports to aid inflows. Easy availability of aid and grants generally proves counter-productive and addictive at times. American military deployment has created a scare among foreign companies already engaged in different fields of economic activity and investors' risk perception has increased dramatically. There are credible reports of substantial slow-down in business activity in general and in the movement of merchandise across the borders in particular. The country has to bear the consequences of all these adverse developments due to a major accident in some foreign country. Therefore, Pakistan would be justified in asking for a liberal trade and investment package to compensate for the damage suffered by its economy.
It also does not require much wisdom to understand that all the financial assistance now under consideration like Poverty Reduction and Growth Facility of the IMF and increased flow from the multilateral institutions and rescheduling of past loans would only add to our debt burden. Even the waiving of sanctions could indirectly contribute to accumulating of further debt. This may be happening at a time when the country already finds itself unable to cope with the rising stock of debt and debt servicing burden. Since July, 1998, Pakistan had to request the Paris Club twice to reschedule its debt in order to get a breathing space and avert default on external obligations. It is obvious that the only way to attain a sustainable position in the medium to long run is the cancellation of the part of the earlier debt.
At the end of June, 2001, Pakistan's total external liabilities, including foreign currency accounts, were estimated at $ 38.8 billion. The multilateral debt is around $ 13.4 billion for which there is no precedent for forgiveness or rescheduling. Bilateral official debt amounting to over $ 12 billion can be rescheduled or written off if the donors agree to do so. The G7 donors of bilateral loans are Japan ($ 5.1 billion), US ($ 2.96 billion), Germany ($ 1.1 billion), France ($ 1.0 billion), Canada ($ 350 million), Italy ($ 180 million) and UK ($ 64 million). If Pakistani authorities are somehow able to convince these countries to write off this debt, the prospects of the economy could improve considerably and the country would have a better chance to be back on the rails. It must be stressed that Pakistan is putting its political and economic future on stake for the sake of fighting terrorism without any of its own fault. Economic consequences of the September 11 events are particularly horrendous. There is considerable slowdown in exports due to disruption in trade caused by transport problems, rise in insurance premium, etc. According to the Commerce Minister, export losses during the current year could be in the region of $ 1 to $ 1.4 billion. If the current campaign continues for long and uncertainty deepens, investment would come to a standstill, overall economic activity could slowdown considerably, unemployment may rise further and the country would be burdened with further influx of refugees from Afghanistan. Foreign forces would leave once the campaign is over but Pakistan has to, wily-nilly, bear the consequences for a long time to come. We are sure that Pakistani authorities must be thinking on these lines. It is time for the international community, particularly the developed countries, to show some compassion for our plight.
It also must be understood that the root cause of terrorism lies in economic factors. Although lingering and unresolved problems like that of Palestine and Kashmir are ready excuses to join Jihadi groups, religious schools often provide a fertile breeding ground to mould the minds in a non-conformist fashion. What essentially forces hundreds of thousands of boys to go to religious schools for education is the rising level of poverty and lack of well-functioning government schools due to paucity of resources. The religious schools offer them free education, free lodging and free boarding. Out of religious school, they do not have much employment opportunities. If the developed countries could forgive a substantial part of our loans, fiscal space could be created for opening more and better educational institutions, increased spending on social sectors and developing the necessary infrastructure. This would enable the children of poor families to get better education and absorb themselves in the main-stream. In the long-run, this is the only way to reduce their hatred towards civil society and check the rising trend of terrorism and militancy.
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