January, 2002

The Pakistani Economy and the US Anti-Terrorism Campaign

Sania Al-Fekki

Pakistan is one of the countries most affected by the events of 11 September on the political and economic levels. This comes as a result of the political, economic, military and geographic proximity of interests between Pakistan and Afghanistan, in addition to its being the primary ally of the United States in its war against Osama bin Laden.

Before 11 September, the Pakistani economy was facing a deteriorating situation, with foreign debts of almost $32 billion consuming most of the government's resources. The situation was made worse by increasing rates of tax evasion, with only one per cent regularly paying taxes and tax revenues accounting for only 12.6 percent of total GDP - considered a very low percentage.

The impact of 11 September on the Pakistani stock market was immediate and prices fell within days of the attacks. Foreign trade also received a blow and Pakistani export rates witnessed a slowdown with the cancellation of contracts by many foreign importers. Losses have been estimated at $1-2 billion.

In a gesture that was described as a reward for the main ally of the United States in its war against terrorism, Washington lifted all the sanctions imposed on Pakistan since 1988. Moreover, the United States presented aid of $7.7 billion as compensation for the economic losses that Pakistan suffered as a result of the attacks. Japan, Germany and the Asian Development Bank also granted Pakistan financial aid and the International Monetary Fund approved a $1.32 billion loan for Pakistan. The fund expressed its support for the structural reform taking place in Pakistan and its readiness to present exceptional loans in this respect. In return, the IMF requested that Pakistan speed up its reform programme by, among other things, reforming its tax system, reducing inflation rates, cancelling subsidies and pushing forward privatisation.