US aid cut worries economists; souring ties with foreign donors feared

KARACHI: US government’s decision to wean Pakistan off its financial aids may sour the country’s ties with international financial intuitions and could throw a spanner into much-needed foreign inflows, economists said on Wednesday.

A former finance minister said the US decision seems to influence the various multilateral agencies/creditors, such as the International Monetary Fund (IMF), World Bank and Asian Development Bank to close or limit their financial pledges for Pakistan.

“In response to the US move, the IMF’s staff mission is expected to come up with an adverse post-program monitoring report on Pakistan, which is due in February,” the ex-finance minister said on condition of anonymity. “I fear the post-program monitoring mission to ask for something, which will not be acceptable for the country to fulfill.”

Early this week, US government announced to suspended $255 million military aid to Pakistan on what they claimed the country’s weak support in war on terror.

Ministry of finance, however, said the government has arranged alternative means to deal with the $255 million worth of cut in US aid.

“Government has already prognosticated the US decision,” a finance ministry’s spokesperson told journalists.

“The aid cut would not hurt the country’s external account position,” the spokesperson said.

Economist Ashfaque Khan said Pakistan needs American support in dealing with international financial institutions despite that the US financial support “accounts for less than one percent of our budget”.

“The US economic ties with Pakistan have already been on the decline since 2011 onwards – either it is trade, investment or remittances,” Khan said.

He said the US had not provided $33 billion in aid claimed by US President Donald Trump in the last 15 years. Of that, $15 billion is a coalition support fund was not financial support but reimbursement of expenditure on account of services and logistic support given by Pakistan in the war against terror.

But, an economist warned that the foreign inflows, including loans and grants, from international lending agencies could slow down if the US takes some more harsh decisions against Pakistan.

“This could weaken the country’s debt repayment capacity at a time when it needs at least three billion dollars to meet its external financing requirements in the next six months,” the economist said.

Muhammad Yaqub, a former central bank’s governor said the government would quietly yield to ‘bullying tactics’ in exchange for a softer stance by the US administration, “enabling the government to negotiate a bailout package without meaningful structural reforms that are so desperately needed”.

Yaqub advocates steps “not to please the USA and the IMF but to lay the foundations for a self sustaining economy”.

“Successive Pakistani governments took the easy way out of adopting cosmetic and, at many times, deceptive reform measures to obtain bailout packages from international financial institutions and bilateral economic help from western countries,” he said.

“Self respecting nations led by sincere leadership do not sell their long term national economic sovereignty for short term monetary compensation. But governments in Pakistan have done so for too long a time in order to avoid adopting policy measures to address its structural economic problems.”

Economists, however, said the desperate US administration may, in fact, help in shaking up and awakening the government and the people from their slumber by denying the country access to its bilateral assistance.

“The economy can survive and ultimately prosper if actions by the Trump administration unite the nation to take difficult economic policy decisions that help reduce structural imbalances in the budget and the balance of payments,” another economist said. “Based on strong fundamental reforms, the government can make a persuasive economic case for financial backing of the IMF, World Bank and Asian Development Bank.”

The economist said Pakistan can earn the support and vote of other major stakeholders of the financial institutions on the basis of a credible and strong structural adjustment program, even with US opposition.

“The problem is that with a weak and vulnerable government and a politically divided nation drugged to rely on foreign financial assistance without structural policy reforms, there is low probability of adoption of strong structural reforms,” he added.