Archive for August 24th, 2010

Aid Flooded Pak by Withdrawing Army

By Swaminathan S Anklesaria Aiyar for The Times of India

Pakistan is suffering its greatest human tragedy since Partition. The floodwaters of the Indus are an incredible 20 miles wide, sweeping away entire towns, villages and farms. Over 20 million people have been displaced, far more than the nine million displaced by Partition in 1947. The immediate death count of 1,500 will soon increase hugely through disease and deprivation. Rehabilitation could cost $100 billion.

Some Indians might be perverse enough to rejoice that an enemy has been hit by a natural disaster — an act of God, as it were — and will be crippled economically for years. But most Indians will surely want to help their neighbours. In these traumatic times, we need to think of Pakistanis as humans in distress, not foes.

Even those who cannot think beyond realpolitik should see that the floods are potentially a strategic disaster for India too. Flood damage will create a fertile breeding ground for Islamist militancy. Islamist NGOs with links to terrorist groups like the Lashkar-e-Taiba and Jaish-e-Mohammed are at the very forefront of flood relief efforts and hence are gaining popularity. Meanwhile, the civil administration is seen as corrupt and ineffective. President Asif Zardari has further ruined his low reputation by going on foreign junkets.

The Pakistani army has in the last year battled some, though by no means all, militant groups in Swat and FATA (federally administered tribal areas). But much of the infrastructure built to reach the remote tribal areas has been destroyed by the floods. Besides, the Pakistani army is redirecting its efforts in the region, from combating militants to combating flood damage. The militants are re-occupying the resultant political vacuum.

The ISI recently came out with a study suggesting that Islamist militants had become a greater threat to the country than India. Flood damage can only deepen that perception. True, the army wants to back the Afghan Taliban even while battling the Pakistani Taliban, and this results in muddled thinking and sabotage of peace initiatives. The resolution of these contradictions is not in sight.

One day, the Pakistani army and the ISI will have no choice but to confront the reality that Islamist militants are Frankensteins that threaten their own creator. The ISI’s assessment should bring that day somewhat closer.
In the light of both human and strategic considerations, how can India help Pakistan? Individual contributions from Indian citizens must be encouraged, and red tape thwarting contributions in cash and kind must be cut. But the Indian government should not offer more than a modest amount of food and financial aid. Pakistan requires billions of dollars for relief and rehabilitation, so anything India offers will be a drop in the ocean.

Besides, recipients are rarely grateful for alms: they resent being supplicants, and suspect the motives of the donors. The US saved India from mass starvation after the twin droughts of 1965 and 1966 by giving record food aid. But this won the US very few friends and stoked resentment from many who felt India’s independence was being compromised. The US will once again be the chief donor to Pakistan, but will gain virtually no popularity or gratitude.

If food and financial aid will not help much, how can India best help Pakistan? The best way will be for the Indian Army to unilaterally withdraw from the border in Punjab, Rajasthan and Gujarat. This will pose no military risk whatsoever: flood-stricken Pakistan cannot possibly embark on military adventures against India. But the withdrawal of Indian troops will mean that the Pakistan army loses all excuses to avoid diverting manpower and financial resources from the border to flood relief and rehabilitation. This will cost India nothing, yet will release very large resources within Pakistan. Its impact on the Pakistani psyche will be significant. Even analysts who distrust Pakistan agree widely that India has no alternative to diplomatic engagement: cutting off ties will not win any minds and hearts there. Unilateral withdrawal will itself be a form of engagement, and will encourage other forms.

The wrong strategy will be to try to negotiate a mutual withdrawal of troops. Withdrawal must be unilateral and immediate. Defence hawks will express dismay that India is so soft on an enemy that encourages terrorism. But unilateral withdrawal will be a flood relief measure, not a military surrender. In the bargain, it will oblige Pakistan to withdraw its own troops and redeploy them for flood relief: its public opinion will be outraged otherwise.

Dr Manmohan Singh, you say we must be proactive in the peace process with Pakistan. The tragic floods there have given you an opportunity to be proactive in a way that will not come again. Go for it.

Pakistan Faces Economic Hit from Flood

By David Roman for The Wall Street Journal

The flooding in Pakistan will inflict serious damage on its economy, posing another major challenge for a cash-strapped government struggling to keep a recovery on track in the face of high inflation and a relentless Islamist insurgency.

Assistance from the International Monetary Fund and Western countries will likely help Pakistan avoid another brush with bankruptcy as it tries to cope with the damage, which by some estimates may reach $43 billion. But the floods will weigh heavily on economic growth this year and leave a long-term mark on the economy.

“It’s a very serious tragedy,” said Philip Wyatt, a senior economist at UBS. “The hit on the growth rate is going to be very severe … We can see a loss of one or two points of economic growth, depending on the damage.” In the last fiscal year ended June 30, Pakistan’s economy grew 4.1%.

Moody’s Investors Service, which had expected Pakistan’s economic growth to pick up to 4.5% this fiscal year, may lower its estimate to 3% to 3.5%, said analyst Aninda Mitra.

The flood began in July and at one point covered a fifth of the South Asian nation, or land roughly equivalent to the size of Uruguay. According to the United Nations, the disaster has affected close to 20 million people, killing 1,500 and leaving 1.2 million homes damaged or destroyed.

Coping with the social and economic costs of the catastrophe will strain the government’s finances. The budget deficit was already on track to reach 4.5% of gross domestic product in the fiscal year ending June 30 before the crisis but now could widen to as much as 6% to 7% of GDP, said Mr. Mitra. That’s a grim prospect for a country, which had external debt totaling $55.63 billion as of June 30.

President Asif Ali Zardari’s government has been reaching out to other countries for help. A delegation met with IMF officials Monday in Washington. Donors including the U.K. and the European Union have so far pledged almost $500 million in additional help.

Moody’s is unlikely to upgrade Pakistan’s credit rating in coming months due to the devastation from the floods and other challenges, but the country’s current B3 rating “adequately captures the risk” of the likely economic slowdown and is unlikely to be downgraded further, said Mr. Mitra. A B3 rating is just one notch above the C level, which applies to countries in effective sovereign default, and makes it hard for a country to issue bonds in the international market.

The natural disaster is the latest setback for the Pakistan economy, which after several years of strong growth almost ground to a halt in 2008, hurt by budget overruns, a loss in export competitiveness due to high inflation, and an insurgency that continues unabated. On Monday, while emergency workers worked to shore up levees in two southern cities, at least 36 people were killed in three separate bomb attacks across the country, and 12 suspected militants were killed in U.S. drone attacks near the Afghan border.

Concerns about the economic fallout have kept pressure on Pakistan’s financial markets, though the impact has been moderate.

The cost of insuring against a default or restructuring of Pakistan’s bonds remains at very elevated levels, but has been relatively steady in recent weeks, a sign that investors anticipate IMF and U.S. support to prevent any fiscal crisis. The spread on Pakistan five-year credit default swaps was quoted at 1,099 basis points Tuesday, roughly on par with those of other high-risk sovereign bond issuers like Venezuela, but well below early-2009 highs of over 2,100 basis points during the global financial crisis.

Pakistan’s benchmark stock index, KSE-100, has fallen 7% so far in August, but is up 4% so far this year, roughly in line with other emerging market indexes.

The Pakistan rupee, one of Asia’s weakest currencies in recent years, has fallen in recent days, but has found support above its record low against the dollar of 85.84 rupees hit on Aug. 2, helped by expectations that remittances from overseas Pakistanis, which have averaged around 10% of GDP in recent years, may rise to help families at home cope with the floods.

But analysts expect the rupee to remain under pressure in coming months due to Pakistan’s current account deficit and high inflation rate, which ran at 12.3% in July. The floods are likely to push up food prices and transportation costs for other goods, likely eliminating any chance that inflation might fall below 10% this year, said Mr. Wyatt at UBS.

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