India and Pakistan: U.S. Economic Sanctions
Released: 2003-02-03T00:00:00

RS20995 -- India and Pakistan: U.S. Economic Sanctions

Updated February 3, 2003

Recap of Nuclear Tests Sanctions (1)

In May 1998, India and Pakistan each conducted tests of nuclear explosive devices, triggering sweeping U.S. economic sanctions as required by the ArmsExport Control Act (AECA) and the Export-Import Bank Act. (2) Prior to the tests, for international treaty purposes, the two countries were classified asnon-nuclear-weapon states; the tests put each country in jeopardy of world condemnation and sanctions. In theUnited States, the law required the President toimpose the following restrictions or prohibitions on U.S. relations with both India and Pakistan: termination of U.S.foreign assistance other than humanitarianor food assistance; termination of U.S. government sales of defense articles and services, design and constructionservices, licenses for exporting U.S.Munitions List (USML) items; termination of foreign military financing; denial of most U.S. government-backedcredit or financial assistance; U.S. oppositionto loans or assistance from any international financial institution; prohibition of most U.S. bank-backed loans orcredits; prohibition on licensing exports of"specific goods and technology"; and denial of credit or other Export-Import Bank support for exports to eithercountry.

Since 1990, Pakistan had been under a sanctions regime that was mandated by another provision of U.S. law pertaining to U.S. foreign assistance. The Pressleramendment, added in 1985 to the Foreign Assistance Act of 1961, requires the President to determine that Pakistandoes not possess a nuclear explosive deviceand that any proposed U.S. assistance would reduce the risk of obtaining such a device. (3) President Reagan and President Bush issued determinations each yearuntil 1990, when then-President Bush did not make the finding required to make assistance available. In 1995, thisrequirement was changed to apply only tomilitary assistance to Pakistan, making the country eligible for other foreign assistance.

Sanctions are Eased

During the Clinton Administration. Almost immediately after the 1998 imposition of sanctions on India andPakistan required in the Arms Export Control Act, Congress intervened on behalf of U.S. wheat growers by passingthe Agriculture Export Relief Act, signedinto law on July 14, 1998. (4) The Act amended theAECA to exempt various Department of Agriculture-backed funding from sanctions applied pursuant tosection 102 of that Act. This freed up U.S. wheat farmers to participate in auctions in which Pakistan was asubstantial buyer. Congress later passed theIndia-Pakistan Relief Act of 1998, signed into law by the President on October 21, 1998. (5) This Act authorized the President to waive, for a period of one year,the application of sanctions relating to U.S. foreign assistance, U.S. government nonmilitary transactions, the U.S.position on loans or assistance byinternational financial institutions, and U.S. commercial bank transactions. President Clinton quickly made use ofhis new authority, announcing on November7, 1998, that certain transactions and support would be restored.

The authority granted to the President in each of these 1998 laws, however, was limited to a one-year period. Additional legislation was required to make theauthority permanent. Congress provided permanent waiver authority in the Department of Defense AppropriationsAct, FY2000, signed into law on October25, 1999. (6) This Act gave the President the authorityto waive all the economic sanctions imposed against India and Pakistan in response to the nuclear tests,including for the first time those sanctions related to military assistance, USML licenses, and exports to hightechnology entities. To waive those sanctionspertaining to the sales of defense articles, defense services, design or construction services, foreign militaryfinancing, or export licenses for specific goods andtechnology (the sanctions related to, or with possible, military applications), current law requires the President todetermine and certify to Congress "that theapplication of the restriction would not be in the national security interests of the United States." President Clintonexercised this authority on October 27,1999, when he waived the applicability of nonmilitary restrictions for India, on Export-Import Bank loans andcredits, Overseas Private Investment Corporation(OPIC) funding, Trade and Development Agency (TDA) export support, International Military Education andTraining (IMET) programs, U.S. commercialbanks transactions and loans, Department of Agriculture (USDA) export credits, and specific conservation-orientedassistance. For Pakistan, he waived therestrictions on USDA credits and U.S. commercial bank loans and transactions.

During the Bush Administration. Throughout the first eight months of 2001, the Bush administration hadhinted that the United States would like to remove the sanctions imposed against India and, to a lesser extent,Pakistan. (7) India's foreign and defense ministervisited Washington in April; Chairman of the Joint Chiefs of State, General Shelton visited India in May to discussmilitary-to-military relations. In May, 2001,and again in August, Deputy Secretary of State Richard Armitage visited India and publically stated the UnitedStates' interests in fully normalizing relationswith the country. In August 2001, U.S. Trade Representative Robert Zoellick visited India to promote global tradetalks.

Regarding Pakistan, Secretary of State Powell met with its foreign minister in Washington in June. They reportedly discussed Afghanistan and the Taliban,terrorism, democracy, nuclear proliferation, and sanctions. (8)

After the terrorist attack on the United States on September 11, 2001, because of Pakistan's unique position - both geographic and political - vis-a-visAfghanistan, policymakers recognized the urgency by which U.S.-Pakistan relations had to be mended. At the sametime, parity had to be maintained in termsof India. As a result, the President exercised the authority granted him in the Defense Appropriations Act, FY2000,on September 22, 2001, when he lifted allnuclear test-related economic sanctions against the two countries after finding that denying export licenses andassistance was not in the national securityinterests of the United States. (9) Today, the solevestige of the nuclear sanctions is the listing of four Indian and 20 Pakistani entities (and their subsidiaries) onthe Commerce Department's list of entities for which export licenses are required. By comparison, restricted entitiesnumbered in the hundreds in the wake ofthe 1998 nuclear tests. (10)

Pakistan continued to be ineligible for most forms of U.S. foreign assistance under a provision of the annual foreign assistance appropriations act that bansforeign assistance "to any country whose duly elected head of government is deposed by military coup or decree." Pakistan's current leader, General PervezMusharraf seized power and overthrew a democratically elected government in October 1999. He declared himselfPresident on June 20, 2001. Pakistan wasalso denied most U.S. foreign assistance for falling into arrears in servicing its debt to the United States. (11) Pakistan was found to be in arrears under termsofthe Foreign Assistance Act in September 2000, and under terms of the Foreign Operations Appropriations Act inMarch 2001. (12) At the end of 1999, Pakistan'sinternational debt was $30.7 billion, of which $2.38 billion was owed to the United States ($1.14 billion in AIDloans, $981 million in food aid, $139 million inExport Import Bank loans, and $119 million in military loans).

Two steps were taken to relieve the prohibition on U.S. foreign aid. First, on September 24, 2001, the U.S. Ambassador to Pakistan signed an agreement inPakistan to reschedule $379 million of its debt to the United States, enough to cancel the arrearage. (13) Then Congress passed a bill to exempt Pakistanfrom thesections of law that prohibit making foreign assistance available to any country governed by a military thatoverthrew a democratically elected regime. ThePresident signed S. 1465 into law on October 27, 2001; its authority to waive the sanctions related to bothdemocracy and debt arrearage remainsavailable through FY2003, provided the President determines that making foreign assistance available "facilitatesthe transition to democratic rule in Pakistan"and "is important to United States efforts to respond to, deter, or prevent acts of international terrorism." (14)

Prior to the passage of S. 1465 , President Bush invoked the authority granted him in sec. 614 of the Foreign Assistance Act of 1961 (22 U.S.C.2364) to provide $50 million in Economic Support Funds to Pakistan on September 28, 2001, without regard torestrictions in that Act or the ForeignOperations Act that are applicable to Pakistan. The President made another $50 million available under the sameauthority on October 16, 2001. These twodisbursements were part of the Administration's proposed $600 million package of assistance to Pakistan. ThePresident also released $25 million inEmergency Migration and Refugee Funds to Pakistan around the same time. (15) Funding derived from the 2001 Emergency Supplemental AppropriationsActincludes the balance of the President's package to Pakistan ($500 million), and another $73 million for bordersecurity between Pakistan and Afghanistan. (16) On October 5, the President made another $100 million available for management of the emerging Afghan refugeecrisis - $50 million in food assistance toAfghanistan and neighboring countries, and $50 million in Migration and Refugee Assistance to be administeredthrough the United Nations and associatednongovernmental organizations tending to the Pakistan-Afghanistan border. None of these recent fund releases wassubject to sanctions. And on September 26,2001, the International Monetary Fund determined that Pakistan had met the requirements to become eligible for$135 million, to complete disbursement of a$600 million loan. (17)

The Fiscal Year 2003 Budget Proposal

Any lingering doubts about the repair of U.S. relations with India and Pakistan were dispelled in the President's FY2003 budget proposal, shown below. (18)

INDIA

PAKISTAN