Pak-US economic relations

The economic relations between the US and Pakistan have reached a low point once again. The US President, Donald Trump, has announced in a tweet message that the US will not give aid to Pakistan anymore. This has been further confirmed by official announcements subsequently made by the White House.
This is not the first time that cessation of aid from the US has taken place. After the 1965 war with India, bilateral assistance from the US ended for some time. Following the Pressler amendment there was little support from the US during the 1990s. Sanctions were imposed by the US following the atomic explosion by Pakistan in 1998.
The US President has said that the aid given cumulatively to Pakistan is $33 billion over the last fifteen years. This is not entirely correct. According to the Washington-based Centre for Global Development, almost $22 billion, equivalent to a two-thirds, has been in the nature of security assistance, especially in the form of reimbursements from the Coalition Support Fund (CSF). Only the remaining $11 billion or one-third can be classified as economic assistance or aid.
From 2001-02 onwards, after 9-11 and Pakistan's support to the US in the Afghan war, the initial flow of assistance annually approached $2.0 billion. During the Musharraf Government, total assistance received was close to $12 billion. It peaked during the tenure of the PPP Government when $16 billion were received in the five years. This was facilitated by the Kerry Lugar bill whereby the US Congress authorized tripling of economic assistance to Pakistan.
However, since 2012-13, the level of support has fallen sharply. It is estimated at $5 billion over the last four years. In 2016-17, it declined to less than $ 800 million, with CSF inflow of $650 million. To compensate for this, exports will need to increase more by only 4 percent. Therefore, the process of retreat of the US from assistance to Pakistan had already been under way for some time.
The important message is that economic and security assistance is the least vital part of the economic relations between Pakistan and the US. The more important links are in trade and the inflow of remittances. The US is the largest export market of Pakistan, with a volume of $ 3.7 billion in 2016-17. This represents 17 percent of the total exports of Pakistan. Further, the US is one of the few countries with which Pakistan has a trade surplus, approaching $ 1.6 billion in 2016-17.
The flow of remittances is also sizeable from the US. Last year it was $ 2.5 billion, equivalent to 13 percent of total remittances. As from many other countries, there has been a significant decline since 2014-15.
The other area where the relationship with the US has weakened is in the inflow of foreign direct and portfolio investment to Pakistan. In 2014-15, foreign private investment from the US to Pakistan was relatively high at $823 million, substantially higher than that from China. Thereafter, China has overtaken the US. During the last two years, the inflow from China is $2.3 billion as compared to $ 600 million from the US. This difference is likely to be magnified with peaking of CPEC investments.
The cessation of US assistance should not have a material impact on Pakistan's economy as the level had already fallen substantially. The other dimensions of the relationship, especially trade and remittances, are likely to remain largely unaffected. Hopefully, Pakistani expatriate workers in the US may send more to Pakistan to demonstrate their support at this time.
The Government and the Military have taken the appropriate stance with respect to the US. The demand to 'do more' is clearly unacceptable. Pakistan has already paid a very heavy price for the war on terror. We have lost over 70,000 valuable lives and the conservative estimate of the economic cost to the economy since 2001-02 is $125 billion. This is almost four times the combined security and economic assistance received from the US.
However, we need to be watchful about the possibility of more pressure being put indirectly by the US Administration, especially in the context of the vulnerable external balance of payments position of Pakistan. The IMF Post-Program Monitoring Mission has recently concluded its visit to Pakistan following interaction with the relevant Ministries, especially Finance.
The Mission is expected to submit its report to the Executive Board of the IMF in early February. The US has a dominant position in the IMF Board. There is the likelihood that the US member may put pressure to be especially harsh on the 'negative' developments in Pakistan. This may further impair the perception of the country's debt repayment capacity. In the absence of a 'letter of comfort' from the IMF, multilateral agencies may withhold their concessional assistance to Pakistan. Simultaneously, a negative signal will be conveyed to international commercial banks and mutual funds. This will make it more difficult and raise the cost to Pakistan of floating Euro/Sukuk bonds.
The assistance pledged by the World Bank and the Asian Development Bank for 2017-18 is $2.3 billion. Already, the flow is beginning to decline. During the first five months only 18 percent of the amount committed has been received. Pakistan may be compelled to search for other financing at a substantially higher cost.
The worst case scenario is what could happen if Pakistan is left with no option but to approach the IMF for a Program. In 1998, when sanctions were placed by the US on Pakistan, initial contact with the Fund was met by, more or less, impossible prior actions being asked for. These included a steep devaluation, big hike in tax rates and power tariffs and so on.
The time has come now to move decisively towards greater self-reliance instead of only a 'holding operation' with minimum policy action till the next elections. It is imperative that a much stronger trade policy be put in place on a priority basis. The contours of such a policy have already been described article by the author in 'A Stronger Trade Policy' carried by this newspaper recently.
Given the extremely unreasonable posture adopted by the US the people of our country will probably support the attainment of the objective of depending less on the largesse of other countries. It was reassuring to note that the stock market did not react negatively after the US President's New Year tweet. Instead, it has since gone up by almost 5 percent. Also, the inter-bank rate of the rupee has remained stable.
There is need for evolving a political consensus on the steps to improve the external balance of payments position and averting a financial crisis. This will be a clear demonstration that Pakistan is now a mature and a sovereign nation.
(The writer is Professor Emeritus and former Federal Minister)