Should we care about cuts in American aid?

Pakistanis get angry when Uncle Sam says it isn’t going to pay us back for fighting terrorism. Last week, the Trump administration declared that it has cut another $300 million in aid to Pakistan. That takes it to $800 million withheld so far this year. 

That money is from the Coalition Support Fund which reimburses Pakistan for the money it spends fighting terrorism every year. The US cut the money because it says that Pakistan has not taken “decisive action” against Afghan militants operating from its soil. Pakistan denies this is the case.

The timing of this decision couldn’t be worse because we are dangerously low on dollars. For some people, news like this hits a nerve because we have conflicted feelings about taking money from global powers. We’re also unhappy about terrorism and this long fight we keep fighting.

Our anxieties about dollars in Pakistan grow sharper when we run low on them. These days we are facing what economists call a balance-of-payments crisis. This means that Pakistan has fewer dollars to pay its bills abroad (external financing). For example, the State Bank of Pakistan has $9.9 billion in its account but this is barely enough to pay for two months of imports (including cheese).

Pakistan needs to beef up its dollar reserves to pay for essential imports (like oil and machinery) that keep the economy running. It also needs dollars to repay its foreign debts to avoid defaulting. But the way things are now, the new government may be forced to ask the International Monetary Fund to bail it out again.

And so the news that America is withholding dollars taps into our fears for the economy. Many people think we’ve been depending on handouts for far too long.

Except, this is a myth.

 

In the last 30 years, Pakistan’s dollar reserves have gone up significantly and that was not because of American aid. In fact, American aid as a portion of the SBP’s reserves has reduced during this time.

For example, the central bank held an average $15 billion in its coffers in 2017. We received $558 million in American aid that year, which is 3.7% of the SBP reserves. This is a stark contrast to 1988 when American aid (as indicated in the graph) was more than twice the amount of dollars the SBP had in its reserves.

The aid is higher than the reserves because the dollars didn’t flow into Pakistan, rather it was the dollar value of technical assistance and credit to buy weapons that the Pakistani military received.

The data shows that the SBP’s dollar reserves do not depend on American aid as much as we think.

Why do we have less dollars then? The simple answer: our ailing economy.

For example, the 2008 plunge in our dollar reserves happened mostly because oil prices sharply went up. Paying for oil imports makes up a third of our payments that need dollars. Slumping exports, declining foreign investment and rising imports are the main reasons why our dollars in the bank are at low levels. This has led us to a situation where our economic advisors are even considering banning imported cheese to save every buck we can.

Note: SBP records foreign exchange reserves every month, for the sake of comparison with US aid data, we have taken the yearly average of this monthly reading.

Data: State Bank of Pakistan and USAID Economic Analysis and Data Services (EADS)

 
 
 
 
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