The fear of war in the region has increased the cost of  imports and this in turn will affect exporters and hurt the economy in the long run. However, Pakistan will get some benefits in return for the government’s pledge to support the U.S. in its campaign to hunt down the terrorists involved in the September 11 attacks in New York and Washington.

            An insurance surcharge has been imposed on all cargoes destined to or from Pakistan. This will cost the country millions of dollars and the extra cost will be hard to sustain, particularly when fresh export orders from the west are not coming in while some standing orders have been cancelled.

            Though the government has not fully ascertained the cost, officials believe that the country has become ‘an unwitting victim to post-September 11 uncertainty.’  In response to the looming crisis, Commerce Minister Abdul Razzak Dawood left for the U.S. and Europe to convince authorities to give equitable market access to Pakistani products, so that more jobs opportunities could be created for local people.  Dawood said the damage to the economy was estimated at 1– 1.4 billion U.S dollars.

            Officials express concern about the cancellation of export orders in the middle of the buying season, due partly to the rising cost of production.  “Increase in freight rates, imposition of war risk insurance, high cost of imports and higher inventory maintenance are causing a problem for us,” says Shabir Ahmad, chairman, Pakistan Bedwear Association.

             Exports of fruits and vegetables have fallen by 70 per cent to European countries, 50 per cent to the Far East and 35 per cent to the Middle East. The drop in volume is because of the suspension of several airlines’ services to Pakistan, said Mateen Siddiqui, chairman, Fruit and Vegetable Processors and Exporters Association. If PIA provides special freight services, it might help forestall the drop in exports, Mateen said.

             The Karachi Stock Exchange recorded a decline of 180 points or 14.34 per cent to 1075, reaching around a 27-month low as investors sold their holdings in expectation of air strikes from the U.S. in neighbouring Afghanistan.  The prices of all blue chips, trading and investment stocks hurtled down and investors were shy to invest in the local bourses. The erosion accelerated when one of the biggest players in the market, the Crescent Investment Bank faced financial difficulties. The state-run banks arranged a bail-out package for Crescent, investing around 1.6 billion rupees and bought outstanding shares. But the support failed to bolster the sentiment of the market men as fears of war hovered over the minds of general investors.  Interestingly, the rupee strengthened during the period and at the inter-bank market it improved by 2.4 per cent to 62.65 rupees and in the open or kerb market by 5.9 per cent to 63.50 to the dollar. Analysts said that it was a blessing in disguise.

            The reasons put forward by foreign exchange dealers were that Pakistan now expects loan packages and debt write-offs to ease its economy from the huge overseas burden of 37 billion dollars, remittances from the U.S. and European countries in Pakistan have increased as some Pakistanis feared freezing of their accounts on charges of involvement in terrorist activity and above all the State Bank was out from the kerb market. For the last two years, the central bank has bought dollars from the kerb market to shore up its foreign exchange reserves and to service its debts.

           While things are gloomy for the short-term, analysts spot a  silver lining, saying that Pakistan will get further debt relief, loans under the Poverty Reduction Growth Facility from the International Monetary Fund and funds from the World Bank and Asian Development Bank to restructure the energy, banking, capital market and gas sectors.

            Officials are reluctant to reveal the exact amount pledged by the U.S. and European Union, but analysts predict that Pakistan will get as much as 5 billion dollars over a six-month period. The country received 135 million dollars as the last instalment from the IMF under the 10-month Standby Arrangement, worth 596 million dollars, approved in November 2000.

            Eduardo Aninat, Deputy Managing Director IMF, said, “Pakistan’s achievement is commendable. Despite adverse weather conditions, real per capita GDP rose, inflation has been lower than expected and external balances and official reserves have improved in line with programme targets. The implementation of structural reforms has been broadly on track. While tax revenue collection was weaker than expected, the budget deficit was kept within the targeted level.”

            The sanctions imposed in 1998 for conducting nuclear test have been removed while waiver of the democracy sanctions is under consideration.

            Several economic pundits believe that these decisions were taken at a time  when Pakistan is in the grip of fear due to the expected U.S. retaliation in neighbouring Afghanistan which will have both political and economic repercussions. Optimism was, however, running high among research heads at brokerage houses who elaborated that over a five-year horizon, foreign inflows will increase to benefit the economy.  They expect that U.S. authorities will encourage foreign companies to invest in Pakistan and lifting of sanctions will convince foreign lenders to reschedule their debts and some might even write-off Pakistan foreign debt obligations.

            Finance minister Shaukat Aziz said that a review of sanctions has been going on for some time and the government has been in touch with the U.S. administration. Terming the U.S. move as very positive, he takes the move to mean that the U.S. is now likely to support Pakistan directly in the multinational institutions.

            Aziz said that in terms of banking services, commercial aircraft and machinery, Pakistani entrepreneurs could look to the U.S. as a source of supply, adding that it would increase investment, create jobs and help the common man in Pakistan.

            The Standard & Poor rating agency has assigned a stable outlook to the country’s economy. This makes sense as the country is likely to get more and subsidised funding from various sources. However, S&P seems to be taking political risk in Pakistan very mildly. Given the presence of hard-liners among the masses as well as within the army itself, political risk should be given more weight in any external rating at this juncture.        

            Though President Musharraf is taking steps to counter the religious mafia, the near term scenario may be a frightening one. In my view, S&P should not overlook the possible backlash from the people in Pakistan, in response to the anticipated U.S. attack on Afghanistan. While the external side might become rosy for Pakistan, political unrest within the country will definitely affect the economy.

            In addition to the usual International Monetary Fund/World Bank funding, there are bright chances that Pakistan will also get debt relief. Though the writing off of 30 billion U.S. dollars sounds unrealistic, Arshad Arif, head of research at AKD Securities feels that donors can forgive approximately 3 billion U.S. dollars owed by Pakistan. The U.S. can also influence Japan to waive debt amounting to 7 billion U.S. dollars.

            ‘‘I believe the removal of sanctions will expedite the process and the International Monetary Fund will soon approve loans under the Poverty Reduction Growth Facility and help in the rescheduling of loans,’’ said Mohammad Sohail, head of research at Invest Capital Securities.  But he added that the expected war between the U.S. and Afghanistan will have negative implications for Pakistan that could offset its gains.

             The IMF board is scheduled to meet on October 9, to prepare a comprehensive package for the country and release the last instalment of 135 million dollars from the 10-month Standby Arrangement of 596  million dollars approved in November.

            “In the short-term, I am a bit confused as the fear of war hovers over Pakistan due to its geographical location,” said Zia Javed, research analyst at Westminster and Eastern Services in Karachi. “But in the long run, I hope more loans will filter in, foreign investment will improve in the capital market and removal of sanctions will convince Paris and London Clubs to reschedule Pakistan’s debt.”

            It is difficult for the common man to swallow promises of a good time ahead as the U.S. has an extremely poor track record in Pakistan. The majority of Pakistanis regard it as a fair weather friend and believe that it is at least partly responsible for the unrest in Afghanistan.

            Analysts believe that Pakistan will resume talks on the approval of 3 billion dollars in loans under the Poverty Reduction Growth Facility to be disbursed in three years to support the balance of payments position and the country should also get some debt write-offs. While the size of this package sounds small as compared to what Egypt got during the Gulf war, analysts said we should not forget that our vulnerability on the external front is a card that the U.S. might retain to ensure a margin of safety.