KARACHI: The relationship between the two major allies, Pakistan and the United States has been remained patchy during the year, following series of unfavorable events.
A stream of incidents ranging from Raymond Davis issue to the latest NATO strikes on Pakistan forces in Salala has jolted an affiliation between two countries to fight against terrorism.
Nowadays, the subject matter of every economic expert is to ascertain the repercussions of strained relationship on the economy of Pakistan if it leads to a deadlock between the two countries. It means that there will be no more financial assistance injection soon in the economy of Pakistan.
Recently, the US senate approved a bill entailing the freeze of $700 million aid. The fundamental question that arises is how the US aid restrictions will impact Pakistan’s economy?
If US decides to block all aid, the damage to the economy is relatively limited given Pakistan pursues its economic reforms and increase savings, says the research note of JS Global Capital Limited
In Pakistan, the economic dependence on the US aid has been overstated; however, situation is not vulnerable to that extent. Pakistan has received $17.8 billion in the form of military and economic aid. Thus, the total contribution is insignificant, standing at 0.8 percent of GDP and 2.7 percent of external trade.
According to the research note, the major chunk of the US aid is not cash dollar transfers to the government, but in the form of military assistance. On economic aid front, the bulk of the money is channeled through USAID or other NGO’s. This impacts the social sector more but from the perspective of the balance of payment funding, it has a minimal impact.
Hence, if the US completely freezes its foreign aid to Pakistan; then its adverse impact on the economy of Pakistan could be ruled out. However, the social development and military assistance could be deeply affected.
In such a scenario, it is imperative that government should looks to tighten its belt by controlling expenditures, taking tax reforms and measures to expand the tax base and revenues and if that can be achieved, it will relieve the money market and crowding out of private sector investment will become avoidable. Supply side reforms are also needed to make any meaningful policy move effective.
A stream of incidents ranging from Raymond Davis issue to the latest NATO strikes on Pakistan forces in Salala has jolted an affiliation between two countries to fight against terrorism.
Nowadays, the subject matter of every economic expert is to ascertain the repercussions of strained relationship on the economy of Pakistan if it leads to a deadlock between the two countries. It means that there will be no more financial assistance injection soon in the economy of Pakistan.
Recently, the US senate approved a bill entailing the freeze of $700 million aid. The fundamental question that arises is how the US aid restrictions will impact Pakistan’s economy?
If US decides to block all aid, the damage to the economy is relatively limited given Pakistan pursues its economic reforms and increase savings, says the research note of JS Global Capital Limited
In Pakistan, the economic dependence on the US aid has been overstated; however, situation is not vulnerable to that extent. Pakistan has received $17.8 billion in the form of military and economic aid. Thus, the total contribution is insignificant, standing at 0.8 percent of GDP and 2.7 percent of external trade.
According to the research note, the major chunk of the US aid is not cash dollar transfers to the government, but in the form of military assistance. On economic aid front, the bulk of the money is channeled through USAID or other NGO’s. This impacts the social sector more but from the perspective of the balance of payment funding, it has a minimal impact.
Hence, if the US completely freezes its foreign aid to Pakistan; then its adverse impact on the economy of Pakistan could be ruled out. However, the social development and military assistance could be deeply affected.
In such a scenario, it is imperative that government should looks to tighten its belt by controlling expenditures, taking tax reforms and measures to expand the tax base and revenues and if that can be achieved, it will relieve the money market and crowding out of private sector investment will become avoidable. Supply side reforms are also needed to make any meaningful policy move effective.
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