US-Pak relationship history, economic impact, and markets

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After the killing of Osama Bin Laden on May 2, 2011, US-Pak relationship has taken a ‘U’ turn to reach its lowest in the last decade. This can be gauged from the latest US senate warning issued on September 21, 2011, which states, “Pakistan will have to fight the Haqqani network and other militant groups if it wants to continue to receive economic and security assistance from the United States”. Already the senate has passed the bill for 2012, which imposes restrictions on the US department of state, foreign operations and related programs appropriations bill for fiscal 2012. Though the details of the restrictions are kept secret, the bill does provide $1 billion aid in form of counter-insurgency capability fund for Pakistan. This, we believe, leaves the door open for negotiations between the two countries, said Muzzammil Aslam at JS, adding that what concerns us is how long will it take for the relationship to normalise? What will be the economic impact of this downturn? How the KSE has historically behaved in reaction to restrictions posed by the US.

US-Pak relation history

Historically, both countries have remained closed allies and have shared a great deal of military cooperation despite the lows and highs of political and economic relationship. Looking at the historical data, we conclude that both countries cannot ignore each other’s importance as they share common geopolitical interests. We believe the US will continue to pressurise Pakistan through blocking economic assistance to achieve its interests, he added. However, Pakistan is likely to resist the pressure given the comfortable external account situation and US’s vulnerable position in Afghanistan.

Economic & market impact

Due to the limited data available, we only review Pakistan’s credit rating trend, twin deficits behaviour and market performance. The analysis follows:
Credit rating: Pakistan’s credit rating has usually moved in tandem with US-Pak relationship. In 1995, when the US eased the sanctions, outlook on Pakistan moved to stable while during 1998-99 the ratings were substantially downgraded from B+ to CCC-and subsequently to no rating. After 9/11 Pak’s rating again improved to B stable from B-
Twin deficits: At times of US easing its sanctions, the current account deficit largely remained contained; however, fiscal deficit always remained higher even at times of no/lower US sanctions.
Stock market: With the exception of 1998 and the military coup of 1999, the stock market did not panic whenever US decided to slap sanctions on Pakistan.