Focus on economic impact of Afghan crisis

A warning from General Pervez Musharraf, Pakistan's military ruler, alerting the international community to the country's financial losses in the fallout from the Afghan crisis, is the latest in a series of indications over growing economic uncertainty. According to Musharraf, Pakistan could soon become home to another million Afghan refugees, adding to the burden of more than two million already living in the country. Whereas the general has urged foreign investors to remain committed to Pakistan, senior government economists expect exports during the current financial year (July-June) to fall by up to US $1.5 billion. As yet, there is no consensus on how the fall in exports will affect the quality of life for Pakistanis, especially the poorest. However, rising unemployment in a sector as crucial as textiles, is almost inevitable. Almost 60 per cent of Pakistan's annual export income comes from textiles, a sector which hires an estimated 10 per cent of the labour force. In this context, this week's visit to Washington by Pakistani Finance Minister Shaukat Aziz, is all the more critical. He is expected to gather economic support for the country, and to brief US officials on the impact of the Afghan crisis on Pakistan's economy, in the wake of the US-led strikes. Pakistani officials anticipate new economic pressures arising from an influx of Afghan refugees. Officials at the ministry responsible for monitoring refugee numbers have already said Pakistan would need more than US $120 million to cope with the refugee influx for the next six months. The arrival of the refugees would also add to the social tensions affecting Pakistani society. While the economic costs of such tensions have not been calculated, Pakistani officials say they are bracing for mounting tensions between locals and refugees, which could lead to the disruption of business activities, especially in the North West Frontier Province (NWFP) bordering Afghanistan. "With such a large number of people coming in, many locals would be unsettled. Obvious problems may include frictions over Afghan refugees willing to work for less than locals," an official with the NWFP government in the provincial capital, Peshawar, told IRIN. Last week local people in the Khyber Agency of the NWFP blocked a bulldozer heading out to clear a potential refugee site 20 km from Peshawar. Refugees aside, Pakistan's already fragile economy is certain to suffer. Experts maintain that the obvious economic impact will be on Pakistan's international trade performance. The 11 September attacks were immediately followed by the Lloyds of London raising reinsurance charges on shipments bound for Pakistan, out of fear that the sea lanes near Pakistan could become relatively insecure due to heightened naval activity in the area. Insurance and freight charges have edged upwards by 25 percent to 30 per cent, according to some estimates. On the other hand, Pakistan's exports are likely to suffer, partly due to higher shipment costs and partly on account of a revaluation of the Pakistani rupee, which has risen six to seven percent against the US dollar in the past 10 days. The rise in the value of the rupee is reportedly driven by a fall in demand for foreign currency in the local market. Bankers note that part of the lift in the value of the rupee has been facilitated by many Pakistanis with overseas accounts repatriating some of their funds for fear of being investigated by Western intelligence agencies in an anti-terrorist clampdown. Pakistani officials remain confident that last year's annual inflation rate of about five per cent will remain largely unchanged, although they concede that they are expecting a large economic assistance package from the US to help narrow the budget deficit. Officials expect funds from the US to help subsidise areas in the social sector, such as health care, education and agriculture. While no firm estimates are available yet on the scale of assistance to these areas, government officials say their first priorities would include offering subsidies to farmers towards the cost of purchasing chemical fertilisers. They also plan to increase the flow of low-interest credit to agriculture through the government's Agricultural Development Bank of Pakistan, thereby making it possible for farmers to purchase machinery and livestock. In Pakistan, such outflows to the agricultural sector are crucial to the overall economy. Almost a quarter of Pakistan's annual gross domestic product comes from the agricultural sector, while an estimated 65 percent of the country's population of 140 million derives its income directly or indirectly from crops. While no figures have been made public either by Washington or Islamabad on the extent of the US economic assistance, Pakistani newspapers have reported that the US may offer up to US $600 million in fresh assistance. The outcome of Aziz's mission to Washington could bring signs of tangible US assistance to Pakistan. In the past fortnight, the US has lifted its sanctions on Pakistan as the first step towards increasing aid flows. The US has also extended a US $50 million grant, which may be a token sum, yet government officials say it is the first indication of more significant assistance to come. Pakistani officials hope that in the medium to long term, the US would use its influence with other Western allies to help Islamabad seek write-offs on its foreign debt of US $36 billion. Almost 10 per cent of that debt is owed to the US alone. For Pakistan, faced with a debt which exceeds its total GDP, a successful write-off would help lower debt-servicing costs in years to come. During his stay in Washington, Aziz is also expected to begin formal discussions on a new loan programme from the International Monetary Fund (IMF) under its Poverty Reduction and Growth Facility. While officials have not stated the size of the loan sought by Pakistan, independent economists say Islamabad may seek up to US $2.5 billion over a three-year period. However, the main difference between a new IMF loan and what Pakistan was seeking before 11 September may be that Islamabad will be less willing to accept some of the harsher conditions tied to a new reform programme. Pakistani officials say privately that they may have to relax earlier plans to enforce a first-ever tax imposition on farm incomes, in view of the sensitive nature of this tax. For years, farm owners have resisted suggestions of a farm tax on the grounds that such a tax would cause a substantial reduction in their incomes, as profits in the agricultural sector are already slim. "In view of a sensitive political environment where there's going to be a backlash in Pakistan, especially after US attacks on Afghanistan, tough reforms may have to be delayed," a senior government official told IRIN.