US decision may harm economy

A US decision to suspend $800 million in military aid will not affect Pakistani army operations, its spokesman said on Monday, but analysts say the move is likely to fray ties and could harm the country''s economy.
White House Chief of Staff William Daley confirmed on Sunday a New York Times report that the Obama administration had held off a third of $2 billion in security aid in a show of displeasure over Pakistan''s cutback of US military trainers, limits on visa for US personnel and other bilateral irritants.
The United States provides hundreds of millions of dollars a year to reimburse Pakistan for deploying more than 100,000 troops along the Afghan border to combat militant groups. Other funding covers training and military hardware. The White House announcement puts $300 million in reimbursement and another $500 million in aid in question.
"The tribal operations won''t be affected" by the loss of US assistance, said Pakistan''s military spokesman, Major-General Athar Abbas. "We can conduct our operations without external support." Some of the assistance, he said, was reimbursement for money already spent on several operations on the Afghan border rather than money for future operations.
"I don''t think there will be any significant impact from this," he added. Politically, however, it would be damaging to the relationship, said Pakistan''s former ambassador to the United States, retired major-general Mehmood Durrani said, reflecting a widespread view in Pakistan that it was fighting America''s war, for which Washington must reimburse it. "This is something that they have to pay, and if they don''t then it''s breach of agreement and breach of trust," he said.
ECONOMIC IMPACT The military might weather the storm, but Pakistan''s economy could be hit if Washington holds back on what is called the Coalition Support Fund (CSF) - the $300 million in reimbursement Pakistan says it is owed. Because it is reimbursements for money already spent on military operations, CSF monies go into the general treasury. So holding back these payments will not hurt the military, but would strain the country''s finances further at a time when it is battling a deep downturn.
The money was expected by June 30, and its delay has already bumped Pakistan''s fiscal deficit to 5.3 percent of gross domestic product for fiscal year 2010/11 (July-June), a finance ministry official said. With the CSF money, the deficit was anticipated to be 5.1 percent.
CSF money also supports Pakistan''s current account. Though the July-May current account is in surplus by $205 million, it may not be able to maintain the surplus in the long term because of rising international oil prices and lower prices for cotton, its main cash crop. Pakistan received $632 million from the CSF in its 2010/11 fiscal year. Finance ministry officials were unavailable for comment.
The cutback in assistance is part of a high-stakes stand-off between the United States and Pakistan, said Ayesha Siddiqa, an expert on the Pakistan military. Washington has given up on winning Pakistani hearts and minds and is now counting on Pakistan''s precarious financial situation to bring it onside. "America understands that Pakistan needs money," she said. "Pakistan is insolvent. It cannot disengage (from the United States), so eventually it will turn around."
"Military aid is just an indicator of what Americans can do," she added. "If they pull back economic aid as well, everything else would dry up, including the multilaterals." Negotiations with the International Monetary Fund, which is propping up Pakistan''s economy with an $11 billion loan programme, could also be affected. In August 2010, the IMF stopped releasing funds because of Pakistan''s patchy implementation of promised fiscal reforms.
DOWNWARD SPIRAL The US-Pakistan relationship has been on a downward spiral since last year, but the decline accelerated after the killing of two Pakistanis by a CIA contractor in Lahore in January and the US raid to kill Osama bin Laden, which Pakistan complains it was not told about and says was a breach of its sovereignty. Pakistan has demanded the number of US military personnel in Pakistan be slashed, and the US has complied. Pakistan also wants to cut the number of US intelligence officials.