The year is reckoned worst in terms of US-PAK relationship. The recent standoff between the two countries resulted in the US senate approving a bill entailing the freeze of $700m aid. The fundamental question that arises is how the US aid restrictions will impact Pakistan’s economy? “We believe even if the US decides to block all aid, the damage to the economy will be relatively limited given Pakistan pursues economic reforms and increase savings,” said Furqan Ayub at JS.
2011 review: A year to forget for the two “allies”!: This year has been extremely turbulent for US-Pak relationship. Pakistan’s response following the killing of its soldiers by NATO air strikes includes cutting of NATO supply routes, boycotting the Bonn Conference and getting the US to vacate the Shamsi Airbase.
On the other hand, US reaction includes not apologising and threatening to freeze aid or adding further conditions to it. From the Raymond Davis issue to the NATO strikes the relationship has ebbed and is perhaps at a new rock bottom after May 2 (killing of OBL).
Is Pakistan’s economy dependant on US aid?: The recent approval by the US senate to freeze $700m in aid may weaken the general economic sentiment. Although the US State Department has reassured that it is merely a reporting requirement assessing the “general relationship” of the two countries that has been added to the legislation. Whatever the case may be, the general reliance on US aid is perceived to be overstated. Since 2002, Pakistan has received $1.7- $1.8b (avg. per annum) military and economic aid.
Thus, the total contribution is nominal, standing at 0.8 per cent of GDP and 2.7 per cent of external trade. Furthermore, it is important to note that a good chunk of aid is not cash dollar transfers to the government but in the form of military assistance. On the economic aid front, the bulk of the money is channeled through USAID or other NGO’s. This impacts the social sector more but from the perspective of the balance of payment funding has a minimal affect. Hence we believe, the dent to the economy is limited and far less than generally perceived, he added. However the country needs to continue its reform process and concentrate on increasing savings. Lastly, Furqan said, we rule out that US will suspend all military and economic aid to Pakistan considering US strategic interest in the region.
Will the “allies” patch up? Historically, after a reasonable interval, we have seen the two countries patch up. In fact the period of economic assistance has been longer than the economic tightening/sanctions phase. Considering the reliance (albeit to varying degrees) of both the countries on each other for various objectives, the patch up cannot be ruled out. However, politicians are less likely to accommodate their counterparts due to their rising accountability – leading to a relationship on a more equal footing from Pakistan’s perspective (relatively speaking of course).