A halt of US aid reimbursement into Pakistan's treasury is unlikely to immediately affect the economy but could have a longer-term negative impact, analysts said on Tuesday. The US has confirmed it is holding off nearly one-third in security aid to show displeasure over Pakistan's cutback of American military trainers and other irritants such as limits on visas for US personnel.
The announcement put in question $300 million in what's called Coalition Support Funds (CSF), which are paid into the general treasury and are considered Pakistan budget revenue. In addition, a separate $500 million in US military aid is in question.
"$300 million is not a big amount so it's something that can be easily made up," said Sakib Sherani, former economic advisor of the finance ministry. "It's the signal which potentially could have some negative bearings." The $300 million in CSF funds is equivalent to about 25 billion rupees, or less than one percent of the total budget of 2.76 trillion rupees that Pakistan has set for the fiscal year that began July 1.
"The decision to delay $300 million in CSF will not have any direct impact, but it signals further straining of relations between the US and Pakistan and that could risk spreading into something broader, for instance the IMF negotiations," said Asif Qureshi, director at Invisor Securities Ltd.
US support was pivotal to securing an agreement in November 2008 for the International Monetary Fund to loan financially-strapped Pakistan $11 billion and stave off a balance-of-payments crisis. Its economy has since been propped up in part by this loan. In August 2010, the IMF stopped releasing funds because of Pakistan's patchy implementation of fiscal reforms the government promised to carry out.
IMF and Pakistani officials are due to meet this month to discuss the possible release of the sixth tranche, though no official date has been decided. Holding back CSF payments will not directly hurt the military, but could strain the country's finances further and widen the fiscal deficit.
The CSF money that's been suspended was expected by June 30, and its delay bumped Pakistan's fiscal deficit to 5.3 percent of gross domestic product for fiscal year 2010/11 (July-June), a finance minister official said. With the CSF money, the deficit was anticipated to be 5.1 percent. But since it is just the start of fiscal year 2011/12, Pakistan has time to make up this amount. It aims to contain the fiscal deficit at 4 percent of GDP for the year ending June 30, 2012.
Analysts said Pakistan can cut other expenditure or try to mobilise more revenue or could borrow domestically to make up for the $300 million. CSF money also supports Pakistan's current account. Though the July 2010-May 2011 current account had a surplus of $205 million, this might be not sustainable because of high international oil prices and lower cotton prices. Pakistan received $632 million in CSF funds in its 2010/11 fiscal year and a total of $8.8 billion since 2001. While the United States has decided to stall $300 million in CSF, it remains committed to civilian aid. It gave Pakistan $190 million for a post-flood programme in June.