Pakistan’s economy is no more what it was before 9/11. It was on the verge of collapse, notwithstanding the ‘successful’ completion of the 10-month Standby Arrangement (SBA) with the IMF which ended in the same month that year.

In fact, the SBA which the military government had signed in November 2000 with the Fund while on the hand had postponed the inevitable default by a year or so through a very stingy debt rescheduling concession by the Paris Club had on the other further squeezed the economy by imposing highly stringent expenditure breaks for enabling Pakistan to attain a modicum of macroeconomic stability.

All kinds of investments, both private and public had dried up. Unemployment was on the rise. Prices were going up albeit at a much slower rate because of a massive slump in demand as downsizing process was adding to the ever growing queue of the unemployed whose purchasing power had naturally bottomed out. Revenue targets of the SBA could not be met despite the extortionist measures like income tax surveys and imposition of levies on goods perceived to be smuggled, adopted by the government during this period.

Pakistan was given the waiver on revenue target because otherwise the SBA would have had to be stopped which would have meant Pakistan going broke and committing the default which the world was not ready to allow. The growth of the economy as a result went down to a little less than 3 per cent against over 4 per cent annual average growth rate in the decade before. A vicious cycle has, therefore set in. Decreasing investment, both private and public was causing the economy to shrink, the shrinking economy was causing the revenues to decline and the declining revenues were making it almost impossible for the government to make even the economically most essential investments causing the economy to further slump.

The so-called Fund and the World Bank devised structural reforms in the CBR, the Wapda and the KESC and the banking sector were also not yielding the desired results.This was the situation when the first quarter of the fiscal 2001-02 was nearing its end. The 9.11 events added further to this slump. The war against Taliban engulfed Pakistan immediately and economy suffered a new battering. The downward trend in both production and exports was further accelerated. Pakistan was declared part of the war zone and both the shipping and insurance rates sky rocketed. The 9.11 related hostility towards Muslim Pakistan in the rich markets also adversely affected Pakistan’s exports. The slump in exports affected imports as well which caused revenue income from import related levies to go down.It was all looking darker than ever for the economy as the Afghan war went into full gear.

It was sometime in the middle of November, 2001 that the Americans started helping out its born again friend in South Asia and rescued Pakistan from certain economic collapses. As the Americans made available about a billion dollars under various excuses to Pakistan, Japan and Europe followed suit. And the multilateral aid agencies which always take their dictation from the G-7 countries also opened up their coffers rather more generously. But the most important 9.11 related benefit which came to Pakistan in these early days of the war was the extraordinarily generous debt rescheduling offer made to Islamabad by the Paris Club in December 2001.

The rescheduling granted in January 1999 and in January 2001, both before 9.11, provided relief in terms of debt flows, i.e, they deferred interest payments. In contrast, the December 2001 relief is applicable to the entire stock of $12.5 billion owed to the Paris Club creditors. The restructuring of the debt profile as opposed to the traditional rescheduling has enabled Pakistan to defer repayments of nearly 40 per cent of its external debt to as far as the year 2017, when the first payment on the deferred debt will become due.

The saving in annual debt service payments appears to be substantial. According to the State Bank of Pakistan, saving may be in the range of $2.7 billion to $2.9 billion over 2001-04 and $8.5 billion to $11 billion over the entire period of 2017. For the current year alone, the restructuring reduced Pakistan’s debt servicing liabilities from $4 billion to $2.7 billion, a saving of $1.3 billion. At the current rupee-dollar parity of Rs60, the annual savings amounts to Rs78 billion. This is an enormous fiscal space which has been allowed to Pakistan by its creditors not because of any economic reasons but simply for political and logistical services rendered to the international community in its war against world terrorism.

Another 9.11 related exceptionally generous benefit accruing to Pakistan is the market access allowed to it by EU and the US. The impact of this benefit has started showing in the export earnings for the first two months of the current fiscal as exports in value terms grew by 17 per cent in this period compared to what was exported in the same period last year. As exports went up, imports too have started showing signs of improvement. This gives some hope of a gradual revival of the economy in the coming months which in turn is expected to improve the revenue position of the government as well. Some of the donor countries like the US have also agreed to write off part of the debt Pakistan owes to them and some others have allowed Pakistan to convert part of their debt into grants for social sector development.

Meanwhile, the concessional assistance as well as the cash grants received during this period have been used by the government to repay some of the debt carrying very harsh terms. Thus, overall the external debt has gone down from 38 billion dollars to $36 billion, debt servicing itself has been reduced considerably. Meanwhile, because of the 9.11 related stricter controls over the flows of remittances through informal channels as well as because of the over zealous vigilance in the developed world to unearth the terrorist related money, most overseas Pakistanis have started remitting their life savings as well as their incomes back to their country. This has enabled the government to build its foreign exchange reserves to record level of over $7 billion about $3 billion of which were purchased from the market. So, now Pakistan seems to have come out of the immediate pressure on its ability to finance its imports and debt servicing needs, thanks largely to the 9.11 related generosity of the donors.

However, all these benefits are no where near those the world had offered to Egypt and Turkey during the Gulf war of 1990-91. One had expected the world to write off at least half of the $12.5 billion debt Pakistan owed to the official bilateral donors in return for its services to the war efforts. There was this hope also that private sector in US and Europe would start taking a closer look at Pakistan’s investment opportunities by now.

And also, the market access allowed to Pakistan by both Europe and the US are too limited to make any significant improvement in the overall economy because the extent of the access allowed to Islamabad in the two markets would perhaps bring in no more than 300-400 million dollars a year. This is hardly enough to make much of a difference in the investment activity or revenue incomes. So, despite the seemingly generous help Pakistan has received from its new found friends during the year following 9.11 the overall climate for investment remains far from encouraging. And the rate of unemployment continues to go up.

And the way things are moving, once again we seem to be increasing our dependence on concessional assistance rather than on trade and investment. And once again there is a fear that if the flows of concessional assistance stop for one reason or the other as it did in 1990s and earlier in late 1960s, we would again be facing default situation because, once the concessional flows stop, the $7 billion or even $12 billion of FE reserves would not last long. More so because the reserves do not reflect the true state of the economy in the country.