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The Impact of Foreign Aid on Pakistan in post-9/11 Scenario

During Musharraf’s tenure, the US provided over $13 billion in military and economic aid, with military assistance accounting for over two-thirds, mostly through Coalition Support Funds (CSF). The approach was described by well-informed analysts as billions of dollars ‘provided without an overall perspective or any real sense of objective aside from support to Pakistan’s military.’ In return, Musharraf agreed to cooperate in the US-led war on terror, including informal agreements to provide the primary route for supplies to Nato forces in Afghanistan.

Pakistan started receiving foreign aid when it sided with the West in the cold war era. In 1954, Pakistan signed a Mutual Defence Assistance Agreement with the US. In the following year it signed the Baghdad Pact. With these agreements, Pakistan received over $1 billion in US. military assistance in 1956, the highest level of such assistance until 2002. The US aid continued after the first military coup in 1958. The assistance from US was well over half of all the aid received by the country. The assistance was primarily for civilian development and aimed at economic growth. Funds and technical expertise were provided to modernise the agricultural and industrial sectors. During that time, the Tarbela and Mangla dams were financed through the aid to meet energy and irrigation needs.

Pakistan fought two wars with India during 1965 and 1971. The conflict provided an excuse to the US to stop economic assistance to Pakistan. The economic aid was reduced and most military assistance was withdrawn. The situation further deteriorated following the launch of Pakistan’s nuclear programme in 1974. The economic and military aid continued to fall, and it remained at low levels throughout the first democratic transition. The democratic government saw an abrupt end when Zulfikar Ali Bhutto was ousted in a military coup in 1977 by Gen. Zia-ul-Haq. The aid to Pakistan was stopped. But a number of developments were taking place at the time. In 1979, Bhutto was executed. The same year, the Shah of Iran, a key western ally in the region, was ousted by anti-American regime. The Soviets intervened in Afghanistan during the same time and this gave another opportunity to regain its geo-strategic importance. Pakistan became the frontline state in the anti-Soviet jihad through the 1980s. In 1981, the US agreed to provide $3.2 billion in economic and military aid over five years. While economic aid more than doubled, from $164 million in 1981 to $400 million in 1982, military assistance increased most dramatically: almost non-existent in the 1970s, it reached almost $500 million in 1983.

Some lobbies were not happy with such assistance to Pakistan and lobby against its interests. In 1985, an amendment the ‘Pressler Amendment’ was introduced and passed by the Congress to condition aid on an annual presidential certification that ‘Pakistan does not possess a nuclear explosive device and that the proposed United States assistance programme will reduce significantly the risk that Pakistan will possess a nuclear explosive device.’ Both President Reagan and Bush provided that certification throughout the 1980s and channelled $3 billion to the Afghan mujahideen through Pakistan. With Zia’s death in 1988, the military era ended and power was handed over to civilians. The PPP of Benazir Bhutto won plurality of seats in general elections and formed a coalition government at the centre. Incidentally, this second democratic transition coincided with the Soviet withdrawal from Afghanistan. The cold war era ended and the Soviet Union disintegrated. The changing situation made a drastic shift in Washington’s mood. The US did no longer deem it essential to certify that Pakistan did not possess nuclear capability. President Bush invoked the Pressler Amendment in 1990. Military aid was ceased, and economic assistance drastically reduced, from $548 million in 1990 to $149 million in 1991 and $27 million in 1992.

  In 1985, an amendment the ‘Pressler Amendment’ was introduced and passed by the Congress to condition aid on an annual presidential certification that ‘Pakistan does not possess a nuclear explosive device and that the proposed United States assistance programme will reduce significantly the risk that Pakistan will possess a nuclear explosive device.’
 
 The economic assistance from US remained at low levels during the 1990s. USAID closed its mission in 1994 and the little that flowed to the country, under a humanitarian assistance regulation, bypassed the civilian government to go through NGOs. Following the withdrawal of western political and economic support and facing a financial crunch, democratically-elected governments were forced to obtain high-interest loans. Already in 1988, as western assistance began to shrink, Pakistan agreed to an International Monetary Fund (IMF) structural adjustment package. Stringent conditions, including freezing public sector wages and reducing subsidies, undermined successive civilian governments’ popularity and, some analysts argue, contributed to increased poverty and inequality. Nuclear tests in May 1998, in response to those of India the very month, and Pervez Musharraf’s coup in October 1999 further isolated Pakistan globally. A political narrative of international betrayal, alliances of convenience and abuse of Pakistani cooperation began to congeal.

POST-2001 Scenario

With the Musharraf regime pledging its cooperation in the Bush administration’s war on terror and the US-led intervention to oust the Taliban in Afghanistan, sanctions were lifted and international aid returned. Pakistan became the critical player in ‘Operation Enduring Freedom’. In September 2001, following the al-Qaeda attacks in the US, the Bush administration released US$600 million in emergency cash to Pakistan. The EU, Canada, Japan and IFIs also extended grants and loans and agreed to reschedule debt payments. Pakistan’s foreign exchange reserves, then around $700 million, were $7 billion by August 2002.

During Musharraf’s tenure, the US provided over $13 billion in military and economic aid, with military assistance accounting for over two-thirds, mostly through Coalition Support Funds (CSF). The approach was described by well-informed analysts as billions of dollars ‘provided without an overall perspective or any real sense of objective aside from support to Pakistan’s military.’ In return, Musharraf agreed to cooperate in the US-led war on terror, including informal agreements to provide the primary route for supplies to Nato forces in Afghanistan.

Bilateral economic aid, primarily distributed through USAID, lacked transparency and was seldom conditioned on meet ing clear, mutually agreed benchmarks. According to a former US National Security Council official, ‘the main idea was to give Pakistan something so that they would allow for all the strategic cloak-and-dagger stuff.’ A former administration official described direct budget support to individual Pakistani ministries during this period as ‘even more opaque than CSF [Coalition Support Funds].’ Budget support, for instance, was officially intended to relieve part of Pakistan’s debt repayment so that it could dedicate more resources to the social sector. Yet, public spending on education declined from 2.6 per cent of GDP in 1990 to 1.8 per cent in 2002-2003, while the regime increased military spending, diverting billions – by Musharraf’s admission to buy arms to counter a perceived Indian threat.

  President Bush invoked the Pressler Amendment in 1990. Military aid was ceased, and economic assistance drastically reduced, from $548 million in 1990 to $149 million in 1991 and $27 million in 1992.
 The US and other donors largely allowed Musharraf to determine aid priorities and, by doing so, helped the military to consolidate its hold over state institutions. Donor support for his Devolution of Power plan, for example, was drafted with technical help from and its implementation supported by the UN Development Program (UNDP). Announced in August 2000, the plan pledged to build genuine democratic institutions and empower people at the grassroots by placing local political and administrative powers under elected representatives, reversing a system that subordinated elected politicians to bureaucrats. But with elections held on a non-party basis and amid allegations of mass rigging and other critical flaws, the scheme allowed the military regime to create pliant political elite at the local level.Donors, however, continued to channel their funds to the military’s devolution plan, justifying it as support for democratic governance. Similarly, the US, UN, EU and UK channelled significant funds to the Election Commission of Pakistan (ECP) for the 2002 national elections. By failing to condemn electoral abuses and continuing to support deeply flawed electoral institutions, they helped the military regime gain international legitimacy and consolidate its hold at home.

In 2007, a movement for the restoration of democracy, comprising the legal community, political parties and civil society activists, brought about the downfall of Musharraf’s military regime. After elections in February 2008, a PPP-led coalition government was formed. The fledgling democratic coalition faced a deteriorating economy and major security threats. Given the importance of Pakistan’s stability for broader strategic objectives, influential international actors, including the US, appeared willing to support the new government as it addressed these challenges.

On September 26, 2008, Presidents Asif Ali Zardari and Barack Obama co-chaired the launch of the Friends of Democratic Pakistan (FoDP) in New York, a forum through which donors could support the government’s efforts to consolidate democratic institutions and confront the myriad social, economic and security challenges. The then UK foreign secretary, David Miliband, described the meeting as sending ‘a very strong signal of political support and also of practical support to the democratically-elected government of Pakistan.’ Yet, FoDP’s ability to facilitate dialogue between the international community and Islamabad had major limitations.

Analysts and donor representatives argued the group was too large and diverse to use its influence to press for policy reforms in Islamabad. Moreover, the FoDP countries did not support the financial bailout Islamabad sought. With no other choice to avoid defaulting on its foreign debt, and also in order to pursue macro-economic stability, the government entered into a Stand-by Arrangement with the IMF for a $7.6 billion loan (later raised to $11.3 billion) in November 2008.The IMF imposed politically difficult conditions, such as ending power sector subsidies, imposing a general sales tax on goods and services and taxing agricultural benefits.  At the April 2009 FoDP meeting, donor countries and IFIs pledged over $5 billion in aid, with host Japan promising $1 billion, but ‘premised on the continued steady implementation of the IMF program underway since November 2008’. Implementing an austerity program, no matter how desirable, requires political will but also stability; this has eluded the government. By linking aid to IMF conditionalities, with little flexibility, donors have failed to recognize the stresses of a young democratic order.

By: Dr Zafar Mueen Nasir

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