A sorry state of affairs

Finally, the much awaited “sorry” from the US over last year Salala tragedy that killed two dozen Pakistani troops came on Tuesday.
Reciprocating the gesture, Government of Pakistan (GoP) is likely to reopen Ground Lines of Communication (GLOC) that was blocked as a reprisal of the tragic incidence.
The agreement is expected to reaffirm Pak-US relationship that has remained fragile ever since the Abbottabed incidence of May 02 last year. Furthermore, the development is likely to pave way for the reimbursement of Coalition Support Funds (CSF) and other foreign flows, providing some respite to country’s fragile external account and currency outlook in FY13.
To recall, following the Nato attacks in November 2011, Pak-US relations which were already fragile after Abbottabad incidence came under considerable strain.
As a retaliation, Pakistan closed the GLOC while Pakistan’s biggest donor and trading partner i,e. US reciprocated by curtailing aid and other financial flows to Pakistan, with US providing approx. US$2bn a year in military and non-military aid to Pakistan during 2001-2010.
Furthermore, the onus was passed on to the parliament which placed apology from the US as one of the key determinant to reopen GLOC. Yesterday, after US Secretary of State mild statement saying “we are sorry for the losses suffered by Pakistan military”, the DCC (Defense Committee of Cabinet) agreed to reopen while forgoing its demand to put additional taxes and additional transit fees.
“The agreement is expected to unlock reimbursement of CSF with certain news corner quoting US will release about US$1.1bn soon to Pakistan’s as part of the deal that lifted the blockade on NATO supplies,” said Topline analyst Nauman Khan.
He said the unlocking of CSF, $1.6bn budgeted in FY13, and other foreign flows including Kerry Lugar from country’s biggest foreign donor and trading partner is expected to provide antidote for country’s external account.
“The development could reduce country’s current account deficit to 1.3-1.6% of GDP in FY13 from our initial estimates of 1.7-2.0% of GDP, while could keep our overall forex reserves around $11-12bn by the June 2013,” the analyst said.
Further, he said, with improving Pak US relationship, the gov’t could leverage its reaffirmed relationship with US at the time of likely re-entry in the IMF program, which is anticipated to happen in later part of this current fiscal year. This in turn could allow country’s excess to tap in other donor agencies funds like World Bank and Asian Development Bank with new commitments contingent on the nod from IMF.
However, Khan said Pak rupee had not rallied significantly in the morning trade on Wednesday amid uncertainty as to when and how much flows will come after this deal. PKR has already deprecated by 4.2% against US currency in last 4-months. “Though some stability is expected in PKR in short term but in the medium term pressure will be there in the local currency due to higher debt payment (including US$2.2bn IMF SBA loan repayment), reduce foreign flows amid energy crisis and heightened political noise,” he concluded.