Economic Cost of Pakistan’s Participation in Wot

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Sultan M Hali*


(Pakistan has no option but to win this war, even at the expense of development expenditure to bring back peace and stability as these are indispensible for sustained economic growth. The cumulative cost of the war on terror and militancy has been staggering and Pakistan needs a Marshall Plan-like ‘Lifeline’ to overcome its economic problems. The conclusive defeat of terrorism will not only benefit Pakistan but also the region and the world. Whereas these are compelling reasons for the international community to participate in the process, Pakistan needs to put its own house in order. It has ample resources of its own which, if properly exploited, could be used to combat and defeat terrorism. The need of the hour is pragmatic leadership, which is selfless and dedicated to the cause of Pakistan, is willing to sacrifice its own comforts for the better future of the country; only then the people would be willing to tighten their belts and unite to defeat the scourge of terrorism. That is when every dollar spent would be justified because terrorism is the main hurdle in Pakistan’s socio-economic prosperity, political stability, geo- strategic sustainability and energy security. No cost is enough to attain it).


Pakistan’s tryst with terror is not new. It was faced with the wrath of fanatic Hindu and Sikh marauders, who attacked, raped looted and killed the Muslim refugees, heading towards the “Promised Land” of Pakistan after the declaration of Independence. After the 1947 partition, 7.2 million Muslim refugees from India crossed to Pakistan. It was the largest recorded refugee movement in history. There was little international assistance in this massive humanitarian crisis1  and it was left to the fledgling nation to fend for itself and rehabilitate the hapless refugees, the survivors of the ordeal who carried the mental and, in some cases, physical scars from the trauma for the rest of their lives.

The next phase of subversion, sabotage and terror attacks, which Pakistan faced, was during the Soviet Invasion of Afghanistan, when the secret services of USSR and Afghanistan: KGB and Khad/Wad singled out Pakistan for conducting punitive bombing attacks in various Pakistani cities, providing Pakistanis their first taste of acts of subversion, sabotage and terror.Before we embark upon discussing the economic costs of Pakistan’s participation in the global war on terror (GWOT) let us define terror.

“Terror”   comes   from   a   Latin   word   terrere   meaning   “to frighten.”2  The terror cimbricus was a panic and state of emergency in Rome in response to the approach of warriors of the Cimbri tribe in

105 BC. The Jacobins cited this precedent when imposing a Reign of Terror during the French Revolution.3 After the Jacobins lost power, the word “terrorist” became a term of abuse4 although the Reign of Terror was imposed by a government whereas in modern times “terrorism” usually refers to the killing of innocent people5 by a private group in such a way as to create a media spectacle.6 This meaning can be traced back to Sergey Nechayev, who described himself as a “terrorist.”7 Nechayev founded the Russian terrorist group “People’s Retribution” (Народная расправа) in 1869. In November 2004, a United Nations Secretary General report described terrorism as any act “intended to cause death or serious bodily harm to civilians or non-combatants with the purpose of intimidating a population or compelling a government or an international organization to do or abstain from doing any act.”8

Pakistan is currently undergoing one of its worst crises since its independence. The post-1971 trauma resulting from the severance of its Eastern Wing pales in comparison to what the  country is facing today. The economy is in tatters, soaring inflation, acute energy crisis, the rising tempo of crime and the near absence of security for the common man are problems enough by themselves, but this is further compounded by recurrent terrorist attacks against a backdrop of political instability. Pakistan has consistently opposed all forms of terrorism and this paper will examine the economic impact of its participation in GWOT.

Pakistan’s entry into GWOT

Pakistan’s decision to  join the  post-9/11 international coalition for the global war on terror proved consequential. Earlier, former President George W. Bush had enunciated a stark “either” “or” option for the international community with the words, “You are either with us or against us?”9 The message to Pakistan is said to have been even more brazen. In his book, In the Line of Fire, former President Pervez Musharraf writes that US Assistant Secretary of State, Richard Armitage, warned Lieutenant General Mahmood Ahmad, then Director General Inter Services Intelligence (ISI), who was on a visit to Washington at the time, that unless Pakistan cooperated it should “Be prepared to be bombed. Be prepared to go back to the Stone Age.”10This was repeated by Musharraf in his interview with CBS News’ 60 Minutes but   has since been denied by Armitage.11 Whatever the truth, President Musharraf consented to become a US ally. The rest of the narrative is well-documented and continues to mould contemporary events.

The term “War on Terror” (also known as the Global War on Terror or the War on Terrorism) is the campaign launched by the United States of America, under the Presidency of George W. Bush, with the support of the United Kingdom, the rest of the NATO members and other countries with the stated objective of eliminating international terrorism in the backdrop of 9/11.12 The phrase was used frequently by President Bush and other high-ranking US officials to denote a global military, political, legal and ideological struggle against organizations designated as terrorist and regimes that were accused of having a connection to them or providing them with support or were perceived or presented as posing a threat to the US and its allies in general. It was used with a particular focus on militant Islamists and al-Qaeda. The administration of President Barack Obama has discontinued use of the term “War on Terror” and instead has adopted the formulation “Overseas Contingency Operation.” However, President Obama has stated that the US is at war with al-Qaeda.13

When the US-led forces attacked Afghanistan in October 2001, Pakistan severed its ties with the Taliban and threw in its lot with the coalition troops. Since then, Pakistan’s international standing and prestige have risen but it suffered tremendous losses, both directly in the shape of valuable lives, property and the cost of waging the war and indirectly through loss of revenue, investment and business. Since the start of the anti-terror campaign, an overall sense of uncertainty has prevailed in the country and it is at its peak in the NWFP (now Khyber Pakhtunkhwa) and the Federally Administered Tribal Areas (FATA). It has contributed to the flight of capital, slowed economic activities and made foreign investors jittery. Foreign direct investment has been adversely affected by the ongoing anti-terrorism campaign in FATA and other areas of the NWFP. Pakistan’s participation in the international campaign has led to an excessive increase in the country’s credit risk due to which the World Bank has lowered Pakistan’s credit rating further.14  In 2008 and 2009, Pakistan’s industrial base saw one-third of its factories close down. With the loss of jobs and the lack of foreign investment, domestic revenue collection fell, pushing the country into a debt trap. Pakistan was thus driven to resort to the IMF to bail it out, to which the latter consented but with stringent conditions, which have aggravated the situation further, but that is another topic.

The war against terrorism has cost Pakistan not just in precious lives but also in economic terms, freezing international investment and diverting priorities from social and other sectors. The aim of this paper is to briefly examine the economic costs of Pakistan’s participation in the Global War against terror and verify the extent of loss.

Cost of Terror

The menace of terrorism is eroding Pakistan’s social structure, economic development and political system. The immediate fallout includes the loss of human lives, destruction of property and infrastructure and economic depression. The cost of terror for Pakistan can be quantified both in the loss of human lives and the economic cost, which will be examined under various heads.

Loss of precious lives

The following figures are based on a research conducted by the Pakistani daily, The News,15  using statistics and chronology recorded by the US Department of State, archives of Pakistani newspapers and websites carrying information about global terrorism and are valid up to 17 May 2010. The extent to which Pakistan has borne the brunt of the US-led War against Terror can be gauged from the fact that during the last 102 months since the 9/11 episode, the country has, on average, faced terrorist attacks every 10th day and there has been 332 terrorism-related incidents resulting in 5704 deaths. While 58 terrorism-related incidents have jolted Peshawar (Charsadda and Darra Adamkhel included) since

11 September 2001, the twin cities of Rawalpindi and Islamabad have been hit 46 times in the last eight and a half years.

The report reveals that while the port city of Karachi has been struck 37 times by terrorists during this period, Lahore has faced such attacks on 21 occasions, the same number as the Swat valley. While Quetta has so far seen blood staining its streets 18 times, Dera Ismail Khan has been attacked 16 times. The Pakistan army personnel and installations of the country’s armed forces, outside the war zones of Swat, South and North Waziristan etc., have been targeted at least 22 times.

Meanwhile, no fewer than 105 terrorism incidents have occurred in the war-ridden Bajaur, Kurram, Orakzai, Mohmand, South and North Waziristan agencies as well as Lower and Upper Dir. The NWFP cities frequently targeted include Hangu, Kohat, Shangla, Buner, Bannu, Mansehra, Buner, Haripur, Nowshehra, Lakki Marwat and Parachanar. Terror has also wreaked havoc in Dera Bugti four times. The residents of Bahawalpur, Sialkot, Hub, Sargodha and Faisalabad found themselves in the grip of fear on two occasions each. Horror also visited Multan, Mian Channu, Taxila, Pishin, Panjgur, Gujranwala, Wah, Dera Ghazi Khan, Kalat, Kamra, Bhakkar, Chakwal, Mianwali, Hassan Abdal and

Muzaffarabad etc., at least once each Pakistan witnessed only two terror-related incidents in 2001, 14 in

2002, just 8 in 2003, 18 in 2004, 11 in 2005, 16 in 2006, 56 in 2007,

72 in 2008, 130 in 2009 and 37 in the first four-and-a-half months of 2010 till the filing of this report. The year 2009, of course, remained the bloodiest of all with 130 incidents claiming around 1,800 lives, followed by 2008 which saw 1,565 people falling prey to 72 such attacks. Terror in Pakistan claimed not only the lives of eminent personalities like two- time premier Benazir Bhutto (27 December 2007), but also prominent politicians, military personnel, educationists and opinion builders but more importantly ordinary civilians. The latter are the forgotten victims of terrorism who constitute the cold-blooded and ever increasing casualty statistics. Updated statistics are at Tables 1 a & b.16

Economic Cost of Terrorism

Sluggish Economic Activity. Pakistan’s economy, which was already tottering due to numerous constraints like the international economic meltdown, political instability and financial mismanagement, has suffered incalculable damage and is struggling to recover from a deep crisis. According to a recent survey, terrorism has cost the economy a hefty Rs. 380 billion in 2008 alone.17  Terrorism creates uncertainty, reduces confidence and increases risk perceptions leading to lower rates of investment and lower economic growth. Pakistan has not only lost precious lives and infrastructure, but also has borne a loss of around $ 35-40 billion since 2001-02.18 These figures are an estimate, but in the absence of any other statistics, will have to suffice for this study. Both the war on terror as well as rehabilitation of internally displaced persons (IDPs) consumed a sizeable portion of the government’s financial resources, thus widening the fiscal deficit and halting economic growth. With the ever looming threat of terrorist violence, normal businesses require more time and extra security for their transactions.  Thus, terrorism typically leads to a general slowdown in economic activity. The absence of primary data makes estimating the cost of terrorism to Pakistan even more complex.

Pakistan’s soft image shattered. The government had undertaken a number of initiatives in the late 1990s and early 2000s to project a soft image of Pakistan as a country that is not only investor friendly but also one that facilitates its nationals to conduct business with the rapidly growing economies of the world. Unfortunately, due to the terrorist incidents, the image of the country has been badly affected. As a result, there has been reluctance on the part of several countries to issue visas to Pakistanis. This has affected a broad spectrum of society including businessman, students and professionals who want to study or work abroad and bring productive wealth back to the country in the form of remittances. There have also been negative consequences for Pakistan’s trade links with other countries. Simultaneously, investors are reluctant to visit Pakistan while foreign governments discourage their citizens from traveling to Pakistan, either for business or for pleasure.

Fall in Domestic Consumption. A major negative impact of terrorism is the fear factor, which directly affects the consumption trends of society. For reasons of safety and security, people are afraid to visit the market places as these have been frequently targeted by terrorists. Consequently there has been a substantial decline in consumption/spending with negative implications for the country’s economic growth. This is borne out by the sharp fall in the GDP growth rate from 8.40 percent in 2004-05 to 5.80 percent in 2007-08 while in 2008-09 it plummeted to a paltry 2.1 percent (Table 2).19 The prognosis for the future is bleak as a GDP growth of a mere 2.10 percent means it will take around 33 years to double the size of Pakistan’s economy.

According to the World Bank’s Global Economic Prospects 2010, Pakistan’s economic growth is likely to be the slowest in South Asia for the next three years although the region was the least impacted by the global recession. The World Bank study also estimates that the real GDP growth rate of Pakistan will be 3.7 percent in 2009-10, 3 percent in 2010-11 and 4 percent in 2011-12. Furthermore, the current account balance is expected to be a negative 5.9 percent of the gross domestic product in this fiscal year and a negative 4.5 and 4.1 percent for 2010-11 and 2011-12.20

Reduced Foreign Direct Investment. AHarvard study (December 2008) states that the higher the risk of terrorism the lower the levels of net FDI and this has been Pakistan’s experience. In an integrated world economy, where investors are able to diversify their investments, terrorism has induced large transfers of capital across countries.21 Pakistan’s exports have reduced from $ 19.22 billion in 2007-08 to just $ 1.58 billion in2008-09 (Table-2), while imports have also fallen. The trade balance is – $ 4.5 billion. This decline in the country’s exports was primarily due to the global recession and also because of the negative image of the country. The tragically frequent incidents of terrorist violence have also caused a fall in the FDI as foreign entrepreneurs have lost business confidence in Pakistan and this applies as much to local investors who are wary of bringing their money into their own country. FDI has reduced from $484.7 billion in 2001-02 to $3.21 billion in 2008-09 (Table2). As a consequence the country’s reserves have also been depleted.

Friends of Pakistan commitments. The Friends of Democratic Pakistan (FoDP) was established as a forum for the purpose of extending support to the elected dispensation of the country in its efforts to consolidate democracy and support nation-wide social and economic development. The group was launched in New York on 26 September 2008 at the side lines of the United Nations General Assembly session. The initial meeting was co-chaired by the United States, the United Kingdom, the United Arab Emirates and Pakistan.

The founding member states of the FoDP included Britain, France, Germany, the United States, China, the United Arab Emirates, Canada, Turkey, Australia and Italy plus the United Nations and the European Union. Other countries also joined and at the meeting held in Abu Dhabi in April 2009 a total of 24 member states and international organizations attended.

The first meeting of Friends of Pakistan was chaired by President Asif Ali Zardari, and attended by the foreign ministers of Australia, Canada, France, Germany, Italy, Japan, Turkey, UAE, UK and US as well as representatives of China, the European Union and the United Nations. The next Friends of Pakistan meeting was held in Abu Dhabi in which Pakistan was represented by Javed Malik, Ambassador at Large, and Aizaz Chaudhary Additional Foreign Secretary.22 The FoDP members appointed since the inaugural meeting include: Sweden, Norway, Denmark, Spain, Netherlands, Republic of Korea, Iran, European Commission, World Bank, Asian Development Bank and Islamic Development Bank.23 On 24 September 2009 following the 64th session of the General Assembly in which UN Secretary General Ban Ki Moon appealed to the international community to help Pakistan tackle terrorist threats as well as the problem of internally displaced people, a summit of the FoDP was co-hosted by President Barack Obama, Prime Minister Gordon Brown and President Asif Ali Zardari. Ban Ki Moon reiterated that Pakistan was in the forefront of the war against terrorism and its democratic government needed the world community’s help to cope with the situation. Twenty heads of state and government and five multilateral financial institutions attended the summit. It was stressed on this occasion that: ‘While Pakistan remains committed to eliminating the menace of terrorism and is determined to become an anchor of peace and stability, it needs the moral, material and political support of its friends and allies.’… Only an economically, politically and militarily strong and stable Pakistan can combat the menace of terrorism and extremism in an effective manner.’

The summit acknowledged that Pakistan had already paid a huge price in terms of the lives of civilians and security personnel in addition to the economic costs of around $35 billion since 2001. At its third ministerial meeting held in Istanbul on 25 August 2009 FoDP undertook to expand cooperation with Pakistan to enable it to build upon its inherent strengths. It emphasized the importance of translating political support and solidarity into tangible projects on the ground.24  Earlier at Tokyo, on 17 August 2009 FoDP donors pledged $ 5.28 billion to stabilize the strife-torn country. However, to date not even a fraction of this amount has been received.

Currency Depreciation. The adoption of the structural adjustment program of the IMF, which has inducted reserves into the country, was

aimed at restoring macroeconomic stability but this has also impacted politically because of the stringent economic conditionalities. The value of the Pakistani rupee fell sharply from Rs 61 to the US dollar in 2001-02 to Rs 84.5025  and this has had a negative multiplier effect on the country’s economy. The depreciation of the currency has increased the cost of imports and is a major contributory factor to the inflationary spiral.

Trade Deficit.  The trade deficit stands at a staggering $20 billion as against a projected oil import bill of $11billion which can only be paid by completely depleting the country’s foreign exchange reserves. The trend is unlikely to be reversed. The price of oil five years ago was a mere $25 per barrel, subsequently it soared to $120 but again dropped substantially afterwards though it is slated to rise steeply again. Currently, the government is said to be providing subsidies of up to Rs17-18 per liter. It can no longer afford this and had to withdraw the subsidy on the advice of the IMF, raising fuel prices from Rs 53.70 to Rs 72.58.26 This trend is likely to continue. Inflation, as a result, is reaching pandemic proportions. Food inflation in the country already hovers around 20 percent and is set to rise further. This is a global phenomenon; however, its impact is particularly grave in developing countries where it is estimated that 70 percent of the meager income earned by an individual is consumed on the purchase of food. The number of ‘food insecure’ people in Pakistan is said to have risen to 77 million.

27 Cut on Development Expenditure.  The military operations against the Taliban, Al Qaeda and other terrorist outfits in FATA and Swat for the last several months has entailed heavy spending on security and this has whittled down budgetary outlays for development and other key sectors of the economy. The precarious security environment prevailing in Pakistan has triggered a diversion of FDI on a massive scale to India and contributed substantially to its impressive economic growth for the last several years. Thus, according to the World Bank’s Global Economic Prospects 2010, the Indian economy is projected to be the fastest growing in the region with a real GDP growth of 6 percent in 2009-10, 7.5 percent in 2010-11 and 8 percent in 2010. This means that the Indian GDP growth is forecast to be 2.5 times higher than Pakistan’s in 2010-11 and two times higher in 2011-12.28

Price Hike and Inflation. The poor condition of the economy can be gauged from the fact that the inflation rate has soared. This is due primarily to the spending on security arrangements and the rising cost of production. According to the Pakistan Economic Update for the First Quarter Fiscal Year 2009-10 (July-September 2009) published by the government’s Finance Division, Principal Economic Adviser’s Wing: Prices29

−            The trend of disinflation (a positive, but declining, rate of inflation) in the economy has continued for the eleventh consecutive month.

−             Inflation as measured by the Consumer Price Index (CPI) has declined to 10.1 percent year-on-year in September (versus 23.9 percent in September 2008). The rate of inflation (year-on-year) has nearly halved in the past six months.

−             The decline in the rate of inflation has occurred due to both the Food as well as Nonfood categories. Core inflation, measured as the rate of change in Non-Food, Non-Energy CPI, has decelerated to 11.9 percent in September.

−             In addition to the adoption of prudent macroeconomic policies,

a strong base effect has also played a significant role in inducing disinflationary trends in the economy, with the unwinding of the effects of the sharp rise in energy and food prices that occurred during 2008. While month-on-month CPI inflation has decelerated in September after several months of elevated levels, the environment for price pressures in the economy appears less benign going forward, based on the following factors:

•             The base effect will wash out by December this year;

•             International oil prices have reversed near term course and crossed US$80 as of third week of October, a rise of 15 percent since July 1;

•             The possibility of still higher electricity tariffs under the World Bank/Asian Development Bank-sponsored power sector reform;

•             The possibility of higher gas tariffs for end-users after the review of wellhead prices in December/January 2010.

Tourism badly Affected. Tourism in Pakistan was once thriving and was a major source of revenue. The varied geography encompassing the towering peaks of the Hindu Kush, the Himalayas and the Karakoram ranges; the lush green plains of the Punjab, the deserts of Thar and Cholistan,  the picturesque coastline of the Arabian Sea and the environmental diversity make Pakistan a tourist destination for all seasons. This is reinforced by the country’s rich culture and its history which spans ancient civilizations such as those that once flourished at Harappa, Taxila, and Mohenjo Daro as well as the historical but still bustling cities like Peshawar, Lahore, Multan and Thatta. The historical and geographical diversity has the potential of attracting both the casual tourist as well as the visitor with special interests.30 In 2007, Pakistan attempted a bold initiative. Despite an ‘image problem,’ it hoped that visitors could help fight poverty and extremism. It declared 2007 as the year of tourism. Pakistan’s missions abroad and the Ministry of Tourism chalked out ambitious plans to attract tourists. The Op-Ed page of The Christian Science Monitor of 5 April 2007 carried a piece by David Montero titled: ‘Pakistan Looks to Tourism to Fight Terrorism’  in which he commented, “While promoting tourism isn’t likely to take precedence over finding Al Qaeda leaders, President Pervez Musharraf’s regime is making hard-selling Pakistan’s softer side a priority. Still, how do you lure tourists when you are presumed to have become terrorists? But many, including the United Nations, see this as a novel approach to stability: Get more tourists, generate income, and the number of terrorists could decrease.”

Unfortunately, 2007 proved to be a year of disaster for Pakistan. The sacking of the Chief Justice triggered massive street demonstrations and civic unrest, there were also increased bomb attacks and the invasion of Swat by the Taliban upset all plans of promoting tourism.

Whereas the scourge of terrorism has hit the tourist industry worldwide, the terrorist activities, suicide attacks, political instability, the kidnapping of foreigners and fortnight-long curfews have badly affected tourism in Pakistan. In some parts of the country particularly in the Northern Areas it has been the only means of sustenance for the local inhabitants. But at present many of the major tourist attractions, are almost on the verge of closure. The picturesque Swat valley, where not only international but local tourists swarmed in the summers to escape the heat of the plains, came under the control of the Tehreek-e- Taliban Pakistan.  After the Swat valley was invaded and captured by these terrorists, they took over the hotel resorts, burnt or destroyed the furniture and in some cases, garrisoned themselves in the hotel premises, conducting raids on security agencies and ultimately the hotels were reduced to rubble. There is no economic estimate to the losses suffered and revenue lost due to the trekking, mountaineering and vacationing expeditions coming to a virtual standstill. Even if the war against terror ends, it will take years and huge expenses to rebuild the resorts and attract the tourists again.

The Burden of Internally Displaced Persons (IDPs). The military operations in Swat resulted in a massive displacement of residents who sought refuge in relatively safer locations. The Swat operations had displaced more than two million residents, increased unemployment manifold, discontinued education of youth, badly damaged infrastructure, ended tourism – the main source of income generation of the area – sparked violence in other parts of the country, and stopped the supply of essential raw materials from Swat such as marble, gems, jewelry and furniture, besides fresh fruits, vegetables and other hilly food items to other parts of the country. More than 2.8 million IDPs (400’000 families) were registered and distributed in various cities of NWFP. Out of those, about 10 percent were registered in 12 major camps and the rest sought shelter outside the camps with family, friends or on their own. The IDPs were provided food, non-food, health & education support. The situation was not permitted to get out of hand as a special support group (SSG) was created by the government of Pakistan to provide the basic amenities including disbursement of compensation. International agencies like the International Red Cross and others also provided valuable support. It goes to the credit of the SSG that after the successful military operations against the terrorists in Swat, the IDPs were moved out of the camps and enabled to return to their homes within a short span of two months. However, tremendous cost was incurred on the movement, housing, lodging, feeding, schooling and return of the IDPs. On return they found their houses damaged or destroyed, their crops ruined and their orchards torched. Additional compensation had to be provided for reconstructing the infrastructure and rehabilitating the IDPs.

Revenue from Sports activities suspended. Terror attacks have dealt a crippling body blow to sporting events in Pakistan.  International teams, who were reluctant to visit the country for sports fixtures, put a complete stop to it after the unfortunate attack on the Sri Lankan cricket team at Lahore. Sports tournaments not only provided the people of Pakistan a healthy entertainment, but were also a source of revenue for the government and for the various sports boards, who organized these events. The law and order situation has deteriorated to the extent that Pakistan, which was a co-host for the 2011 Cricket World Cup, along with India, Bangladesh and Sri Lanka has been dropped from the list. Thus a tremendous opportunity to generate revenues has been sacrificed at the altar of terrorism. Pakistan was to have hosted 14 matches, including one semi-final. Eight of these matches have been shifted to India, four to Sri Lanka and two to Bangladesh. It is estimated that the Pakistan Cricket Board (PCB) will lose $10.5 million due to the tournament being taken away from them.32 This figure only includes the match-fee of $750,000 per match guaranteed by the ICC. The overall loss to the PCB and the Pakistani economy is expected to be much greater. Venues for sporting events of the stature of the World Cricket Cup encourage numerous sources of revenue generation, which include broadcasting rights, other entertainment and hospitality industries including food and beverages, event souvenirs, sightseeing and support to local economy through traditional handicraft purchase by visitors. The figure for these is unquantifiable.

Opportunity-lost for participating in Afghan reconstruction. Pursuing its own war against terror has deprived Pakistan the opportunity of participating in the reconstruction projects in Afghanistan. The Afghan refugees, who have spent decades in camps in Pakistan and otherwise assimilated in the country’s economic activity, could have been provided employment opportunities and given Pakistan the chance to earn both goodwill as well as revenue. Instead, India, China and Iran made full use of the situation along with a host of other countries. India than $1 billion invested, Afghanistan constitutes its biggest overseas investment. China’s role in Afghanistan is primarily economic. It spent $3.5 billion to secure extraction rights at a copper mine in Aynak, south of Kabul, the largest single-investment project in the country.33

Occupation of Afghanistan affecting Pakistan’s exports/imports. The ongoing war in Afghanistan is blocking Pakistan’s exports to the Central Asian Republics, Russia and Europe. On the other side of the coin, popular opinion in Pakistan does not approve granting India a trade corridor to Afghanistan as a result of which Pakistan is losing out on transit fees. More importantly, major projects like the proposed trans-Afghanistan natural gas pipeline being developed by the Asian Development Bank, which will transport Caspian Sea natural gas from Turkmenistan through Afghanistan into Pakistan and then to India is being held up owing to the war. Other lucrative projects like the Iran- Pakistan-India gas pipeline have also been a victim of the war against terror. After fourteen years of negotiations, Pakistan and Iran have inked an agreement34 though India is still to come on board.

Delays in reconstruction of FATA. The     militancy     and     the consequent  military  operations  against  the  Taliban/Al  Qaeda  and other terrorist groups have delayed the much needed reconstruction projects envisaged for the approximately 10,500 square miles Federally Administered Tribal Areas (FATA). It has been rightly pointed out by numerous sociologists that poverty, deprivation and illiteracy are the root causes of terrorism. To remedy the situation,    several projects were planned, however, they are yet to be implemented because of the fighting and the absence of an administrative structure that can provide governance and restore the rule of law. Thus economic opportunities have declined and, consequently, less than one-third of FATA’s nearly

5 million inhabitants barely manage to live above the poverty-line. Literacy has fallen to17.4 percent because access to education, especially for women, is extremely limited. Consequently, “fundamentalist Madrassas lure hopeful people with promises of knowledge and wealth, and then turn them into lawless hate-filled thugs” lamented one local FATA leader. Recently, a survey conducted in FATA by the Community Appraisal and Motivation Programme in collaboration with the British High Commission35   revealed that the people believed that amongst the major causes of religious extremism in Pakistan, illiteracy was the foremost, followed by the Afghan conflict, poverty, bad governance and unemployment.


Various aspects of the economic costs incurred by Pakistan because of its fight against  terror have been presented in this study and some of these have been quantified by scholars. According to the report ‘Costs of Conflict in FATA’ 36   the total cost of the insurgency in FATA has so far been Rs 171,671 million. This includes losses in infrastructure, human resource, economic, social, environment, security and IDP sectors. The figures are disconcerting:

•             Infrastructure and human loses stand at PKR 12,675 million. Human resource (deaths, injuries and disabilities), public and private infrastructure damages are calculated to be PKR 4405 million, PKR 4270 million and PKR 4000 million respectively.

•             Economic costs incurred stands at PKR 9505 million. The reasons for the rise in economic dispossession are inflation, unemployment, increase in transportation costs, and decrease in agriculture, industry and trade.

•             Social costs, equated as seven times the total infrastructure and human loss (point 2 above) stands at PKR 88725 million. The losses are due to closure of schools (500 schools have been destroyed), hospitals, non-attendance, poor service delivery etc.

•             Environmental  costs  ‘roughly  run  over’  PKR  15,000  million.

Damages are incurred due to deforestation by security forces for tactical reasons, halt in plantation activities, depletion of pastures, soil erosion and loss of crop due to the resulting flash floods.

•             Security and IDPs (Internally Displaced Person) costs stands at PKR 45766 million. This includes capacity building of local law enforcement units (Levies and Khassadars, community police) – PKR 2656 million. It does not include costs incurred by regular Army and Frontier Corps units. Fixed costs to rehabilitate the 791,000 IDPs

(reported and unreported, excluding refugees from Swat, which lies outside FATA) and recurring costs to provide services to the IDPs is calculated to be PKR 15,425 million and PKR 27,685 million.

A Pakistan Ministry of Finance document37 discloses: “Due to (the) war on terror, Pakistan suffered a loss of Rs. 2,080 billion from 2004-05 to 2008-09.” It added, “The average loss to Pakistan’s economy due to the war on terror is about US $7 billion per annum.” The document continues: “The impact of the war on terror on Pakistan’s economy only in 2008-09, was Rs. 678 billion.” On the GDP front, the State Bank of Pakistan reported that “Pakistan’s GDP growth declined from 9 percent in 2004-05 to 2.4 percent in 2008-09.”


Despite the concessional inflows of foreign aid, Pakistan faces different economic, social and political problems. There is massive income disparities, thirty one percent of Pakistanis live below the poverty line. Pakistan’s public spending on the social sector like health, education, housing are among the lowest in the region. For the resuscitation of the economy and jump-starting development the following policy options are recommended:-

•             Trade not aid is necessary.

•             The US  should give market access to  Pakistan for  its  textiles sector.

•             Transfer of technology is required as that will provide Pakistan a base for competition in the region.

•             Joint economic ventures should be initiated with the EU and the US. These will help improve bilateral relationship in the long term.

•             Visa restrictions should be eased for Pakistani businessmen and exporters.

•             Two-thirds of US aid should be reserved for the development of economic programmes and one-third to security assistance.

•             Consistency in economic policies should be ensured through stable

political institutions as that will strengthen economic stability in the long run.

In conclusion, it must be emphasized that Pakistan has no option but to win this war, even at the expense of development expenditure to bring back peace and stability as these are indispensible for sustained economic growth. The cumulative cost of the war on terror and militancy has been staggering and Pakistan needs a Marshall Plan-like ‘Lifeline’ to overcome its economic problems. The conclusive defeat of terrorism will not only benefit Pakistan but also the entire region and the world. Whereas these are compelling reasons for the international community to participate in the process, Pakistan also needs to put its own house in order. It has considerable resources which, if properly exploited, could be used to combat and defeat terrorism. It should be amply clear by now that The Friends of Democratic Pakistan, have not fulfilled their pledges as yet and may not do so for whatever reasons they may have. Despite being in an economic morass, if Pakistan evolves and formulates sound policies, takes its people into confidence and adopts austerity measures, cutting unnecessary expenditures, there is no reason, why it will not emerge victorious. Instead of begging before others and smarting at the stringent checks and balances over the IMF bailout, Pakistan needs to demand the immediate reimbursement of the expenditure it has already incurred. Furthermore, whatever assistance Pakistan receives must be transparent and under no circumstances should there be under the table arrangements or illegal transactions. The need of the hour is pragmatic leadership, which is selfless, dedicated to the cause of Pakistan and is willing to sacrifice its own comforts for the better future of the country; only then would the people be willing to tighten their belts, face any hardship and unite to defeat the scourge of terrorism. That is when every dollar spent would be justified because terrorism is the foremost hurdle in the way of Pakistan’s socio-economic prosperity, political stability, geo-strategic sustainability and energy security.  No cost is enough to attain it.

Fatalities in Terrorist Violence in Pakistan 2003-20

Table 1 a

Annual Fatalities in Terrorist Violence in Pakistan, 2003-2010

Civilians Security Force


Terrorists/ Insurgents Total
2003 140 24 25 189
2004 435 184 244 863
2005 430 81 137 648
2006 608 325 538 1471
2007 1523 597 1479 3599
2008 2155 654 3906 6715
2009 2307 1011 8267 11585
2010* 653 206 2146 3005
Total 8251 3082 16562 28075

* Data till May 17, 2010

Table 1 b

Year 2010

Civilians Security Force


Terrorists/ Insurgents Total
January 182 33 387 602
February 92 68 340 500
March 168 36 502 706
April 182 50 558 790
May* 29 19 359 407
Total 653 206 2146 3005

* Data till May 17, 2010

Source: Figures are compiled from news reports and are provisional.

Table 2 – Economic Indicators (2008-2009)

Indicators 2001-












2007-08 2008-09


Exports (Bil- lion $) 9.13 11.16 12.31 14.39 16.47 17.01 19.22 1.58
Imports (Bil-

lion $)

10.34 12.22 15.59 20.6 28.58 30.54 39.96 2.91
Trade Balance

(Billion $)

-1.2 -1.06 -3.28 -6.21 -12.11 -13.53 -20.74 -1.33
FDI (Billion


484.7 798 949.4 1524 3,521 5,125 5,152.80 1012.30


(Million $)

475 820 922 1667.7 3,872 8,417 5,193 3,339



2.39 4.24 3.872 4.17 4.6 5.49 6.5 4.53
Forex Re-

serves (Bil- lion $)

6.43 10.72 12.33 12.61 13.14 15.18 10.83 15.203

Rate (Rs./ US$)

61 57.7 57.92 59.66 60.16 60.5 71 84.5
GDP Growth 3.60 % 5.10 % 6.40 % 8.40 % 6.60 % 7.00 % 5.80 % 2.1 %
Inflation 3.40 % 3.30 % 3.90 % 9.30 % 8 % 7.90 % 10.3 % 17.9 %


1              Saumitra Mohan, Refugee Problem in South Asia, 18 September, 2009, PTI,

2              Kim Campbell (September 27, 2001). ‘When is ‘terrorist’ a subjective term?’. Christian Science Monitor. Retrieved 2010-01-11. “New York Times columnist William Safire wrote that the word “terrorist” has its roots in the Latin terrere, which means “to frighten.””

3              Kim  Campbell  (September  27,  2001),  Christian  Science  Monitor. Retrieved 2010-01-11. “The French were the first to coin the term, he says.” Geoffrey Nunberg (October 28, 2001)’, San Francisco Chronicle, Retrieved 2010-01-11. “In 1792 the Jacobins came to power in France and initiated what we call the Reign of Terror and what the French call simply La Terreur.”

4              Geoffrey Nunberg (October 28, 2001)’, San Francisco Chronicle, Retrieved 2010-01-11. “For the next 150 years the word “terrorism” led a double life – a justifiable political strategy to some an abomination to others”

5              Robert  Mackey  (November 20,  2009).  ‘Can  Soldiers  Be  Victims  of Terrorism?’, The New York Times, Retrieved 2010-01-11. “Terrorism is the deliberate killing of innocent people, at random, in order to spread fear through a whole population and force the hand of its political leaders.”

6              Jeremy Lott (December 5, 2001). ‘Suicide Blunderers: Terrorists kill selves, blame Jews’, Reason Magazine. Retrieved 2010-01-11. “The World Trade Center and Pentagon bombings were an unthinkable masterstroke, producing a media spectacle that rocked the world.”

7              Crenshaw, Martha, Terrorism in Context, p. 77.

8              “UN Reform”, United Nations. 2005-03-21. Archived from the original on 2007-04-27. Retrieved 2008-07-11. “The second part of the report, entitled “Freedom from Fear backs the definition of terrorism – an issue so divisive agreement on it has long eluded the world community – as any action “intended to cause death or serious bodily harm to civilians or non- combatants with the purpose of intimidating a population or compelling a government or an international organization to do or abstain from doing any act.””

9              George W. Bush (from a November 2001 press conference with Jacques Chirac)

10           President Musharraf, in an interview with CBS News’ magazine show “60 Minutes,” aired on September 24, 2006

11           Richard Armitage, former Deputy Secretary of State in an interview with NBC, and news services, aired on September. 22, 2006

12           The White House (October 7, 2001), “Presidential Address to the Nation”, Press release, quoted at

13            Spillius, Alex (January 8, 2010). “Barack Obama: US is at war with al-Qaeda”, The Daily Telegraph (London)

14            Khan, Mehmood-Ul- Hassan, ‘Socio-Economic Costs of Terrorism with Special Reference to Pakistan’  Overseas Pakistani Friends, March 3, 2009

15           Shah, Sabir, ‘332 terror hits claimed 5,704 lives since 9/11’, The News, Islamabad, March 18, 2010


17           Jamal, Nasir, “Economic cost of terrorism”, Dawn, 26 October 2009.

18           Report, Socio-economic cost of Terrorism: A case study of Pakistan, Pakistan Security Research Unit, Published April 11, 2010

19           Board of Investments Government of Pakistan, “Pakistan Economy: Economic Indicators (2008-2              009)”, available at

20            Mansoor Ahmad, ‘Pak economy may grow at slowest pace in South Asia’, The News, January 22,2010

21           Khan, Mehmood-Ul- Hassan, ‘Socio-Economic Costs of Terrorism with Special Reference to Pakistan’ Overseas Pakistani Friends, March 3, 2009

22           “Friends of Pakistan meeting in Abu Dhabi today”, Geo Pakistan. November 17, 2008.


24           ‘Friends of Democratic Pakistan First Summit Meeting Concluding Statement by the Co-Chairs’,


26           Oil & Gas Regulatory Authority, Notification E-10, Gasoline prices effective May 01, 2010

27           Murshed, Mushfiq, ‘Cost of combating terrorism’, Dawn, May 6, 2008

28           Ibid 29 Pakistan Economic Update, First Quarter Fiscal Year 2009-10, (July- September 2009), issued by   Government of Pakistan Finance Division, Principal Economic Adviser’s Wing, vailable at pk/admin/images/ecoSituation/PakistanEconomicreport.pdf

30           ‘Terrorist  activities  hamper  tourism  industry  in  Pakistan’at n.-a0197573111

31           Montero, David, ‘Pakistan Looks to Tourism to Fight Terrorism’  The Christian Science Monitor, April 5, 2007 Chakrabarti, Kaustav Dhar, ‘Costs of Conflict in FATA’, Observer Research Foundation report, 09 July 2009

32           “Cricket-Pakistan counts financial losses of World Cup shift”. Reuters.

33           Ridge, Mian, ‘Q&A: Who Else Could Help in Afghanistan?’, The Christian Science Monitor, February 2, 2010

34           ‘Pakistan, Iran finally sign gas pipeline accord’, Dawn, May 24, 2009

35           Malik, Sadia, M., ‘Threats to human security’, Dawn, May 3, 2008


37           Arsalan, M., ‘Terror takes economic toll on Pakistan’, Central Asia, May 10, 2010