ISLAMABAD, Nov 14: Pakistan’s cost of war on terror has increased by 40 per cent to Rs678 billion from Rs484 billion last year, causing an adverse impact on the country’s socio-economic development.

“As a result of being a partner in the international counter-terrorism campaign, Pakistan is currently facing major challenges, including growing fiscal and current account deficits, rising inflation, growth deterioration and depleting foreign exchange reserves”, says the Ministry of Finance ‘s draft Poverty Reduction Strategy Paper-II issued here on Friday.

The cost includes both direct (actually spent) and indirect — on account of loss of exports, foreign investment, privatisation, industrial output and tax collection.

The report cites figures showing that the expected direct cost of war on terror will reach Rs114.03 billion in 2008-09 from Rs108.527 billion last year. The indirect cost will increase to Rs563.760 billion from Rs375.840 billion.

According to the report, the anti-terrorism campaign, which began after the 9/11 incident in the United States in 2001, overstrained Pakistan’s budget as allocation for law-enforcement agencies had to be increased significantly, curtailing the funding for development projects.

“Several development projects started earlier in the affected areas of the NWFP and tribal region are afflicted with delays, which may ultimately result in large cost overruns. Since the start of the anti-terror campaign, an overall sense of uncertainty has prevailed in the country, which has contributed to capital flight and slowed down economic activities making foreign investors jittery.”

The report said: “It is apprehended that Foreign Direct Investment, which witnessed a steep rise over the past several years, may be adversely affected by the ongoing anti-terrorism campaign in Fata and other areas of the NWFP.

“Pakistan’s participation in the international campaign has led to an excessive increase in the country’s credit risk, which has in turn made borrowing from the market extremely expensive. Pakistan’s sovereign bonds have underperformed due to increased law and order concerns amongst other reasons, including domestic political and economic instability.

“Pakistan’s participation in the anti-terrorism campaign has also led to massive unemployment in the affected regions. Frequent bombings, worsening law and order situation and displacement of the local population have taken a toll on the socio-economic fabric of the country.”