Get Pakistan out of this quagmire

Impact of War on Terror on Pakistan’s economy

History is evident that wars had been and will always be costly both economically and in terms of the loss of human lives. The western world and its allies are facing a unique war with no defined goals, targets, definite end-period and a faceless enemy making it much more costly and destructive.

The USA-led War on Terror (WOT) and potential solutions as to its ‘end’ are the talk of the town these days, with different perspectives put forth by differing sections of our society, however the economic impact and cost of this war for Pakistan’s economy is an area less frequented.

Pakistan has been paying a very heavy economic price for the ongoing WOT. The economic costs have been high, including the direct costs due to heavier spending on defense, compensation for the affected, damage to the infrastructure, severely deteriorating law and order situation, extensive capital flight, lack of foreign investment, industry closures and resultant poor revenue generation for Government. Indirect costs includes loss of economic activity from increased uncertainty, lower investment due to increase in perceived risk, opportunity costs, social disorder, lack of exports due to uncertain conditions and travel restrictions on Pakistani businessmen and the economic impact of the loss of men and women earning bread and butter for their families.

Studies had been undertaken by government as well as non-governmental institutions to determine the cost of war on terror for Pakistan. While their estimates vary, they have all accepted that beside the irreparable loss of lives, a severe economic slowdown has engulfed Pakistan’s economy as a direct consequence of this war.

What’s significant for the economists is the recent initial estimate by the government of Pakistan of the up to date losses suffered by Pakistan’s economy in the last 12 years to be $100 billion, approximately. On the other hand, just $15 billion had been paid to Pakistan through official channels (recovery rate of a mere 15 per cent). It is worth mentioning here that the Pak-American Business Council and some other private institutions’ loss estimates are much lower, though still material losses are put at between 40 to 60 per cent of the official figure.

Pakistan received $10 billion from Coalition Support Fund (CSF) against explicit expenses incurred, $2.1 billion assistance from FMF (Foreign Military Fund) to strengthen the military’s capacity against terrorists, economic assistance grants had been $1.5 billion while budgetary support of $1.2 billion too had been received.

The amounts and purposes of the funds spent and distributed by USA directly through local and international non-governmental organizations (NGOs) are unknown while debt worth $1.65 billion had also been written-off.

The yearly official estimated losses to Pakistan’s economy as a direct consequence of participating in the USA led WOT are as below:

Ø 2001-02: $2.669 billion

Ø 2002-03: $2.749 billion

Ø 2003-04: $2.932 billion

Ø 2004-05: $3.410 billion

Ø 2005-06: $4.670 billion

Ø 2006-07: $4.670 billion

Ø 2007-08: $6.940 billion

Ø 2008-09: $9.180 billion

Ø 2009-10: $13.560 billion

Ø 2010-11: $17.830 billion

The total till 2010-11 comes to a whopping $67.926 billion.

The Economic Survey of 2010-11 disclosed that the loss to Pakistan’s economy due to participating in WOT was approximately $68 billion till then. The government didn’t disclose the updated economic losses in the Economic Survey of 2011-12. The latest official estimate as mentioned above is approximately $100 billion which is over 43 per cent of Pakistan’s GDP ($231.2 billion as per World Bank) and 164 per cent of the total foreign debt ($60.9 billion as of March 2013)

An interesting observation to note is the rising rate of the losses in the financial year 2010-11. This shows the rising intensity of the war and the upward trending economic costs. Moving forward this loss may rise at an even higher rate.

Not only did the growth in Pakistan’s economy nosedive but the overall economy was also hit hard. To understand the severity of the economic losses, let us examine the fiscal year 2010-11. The exports dwindled to the tune of $2.90 billion, terrorism compensation amounted to $0.80 billion, infrastructure damage amounted to $1.72 billion, foreign investment declined by $2.10 billion, privatization projects worth $1.10 billion could not materialize, industrial output was negatively affected to the tune of $1.70 billion, tax collection declined by $2.10 billion, cost of uncertainty amounted to $2.90 billion, expenditure overruns by $1.60 billion and others expenses incurred were $0.90 billion, totaling $17.82 billion in just one year.

Since accounts have been rebased to 2005-06, we’ll use comparative figures from 2006-07 to meaningfully appreciate the extent of the economic impact. Tourism industry has been destroyed. Industrial sector is adversely affected as working hours were lost with increased uncertainty, terrorism and resulting migration. Its growth rate of 7.7 per cent from 2006-07 fell to a mere 3.5 per cent in 2012-13 with the manufacturing sector amongst the hardest hit sub-sectors. The services sector also slumped to a growth rate of just 3.7 per cent in 2012-13 compared to 5.6 per cent in 2006-07. Agriculture growth rate at 3.3 per cent in 2012-13 almost regained the level of growth of 3.4 per cent from 2006-07. The massive potential of increasing this could not be realized though. Total investment has declined from 18.79 per cent of GDP in 2006-07 to 14.22 per cent of GDP in 2012-13.

Post 9/11 Karachi, the economic lifeline of the country, faced a series of terrorist attacks which were repeated in Punjab and Balochistan. The Khyber Pakhtunkhwa without doubt has been the worst affected. This further increased the risk perception of the country. Economic growth slowed down to the point of stagnation growing at an average of 2.94 per cent since 2008-09. With all these staggering losses, there is still no end in sight to this war on terror ravaging the economic, social and political landscape of Pakistan. The quicker we get out of this quagmire the better it will be for Pakistan.

The writer is an economist, a qualified chartered accountant, financial analyst and anti-money laundering expert. He can be reached on Twitter @OmerZaheerMeer