By Chris Allbritton and Zeeshan Haider
ISLAMABAD (Reuters) - A U.S. decision to suspend $800 million in military aid will not affect Pakistani army operations, a Pakistani military spokesman said on Monday. But analysts say the move is likely to fray ties and could harm the country's economy.
White House Chief of Staff William Daley confirmed on Sunday a New York Times report that the Obama administration had held off a third of $2 billion in security aid in a show of displeasure over Pakistan's cutback of U.S. military trainers, limits on visa for U.S. personnel and other bilateral irritants.
The United States provides hundreds of millions of dollars a year to reimburse Pakistan for deploying more than 100,000 troops along the Afghan border to combat militant groups. Other funding covers training and military hardware. The White House announcement puts $300 million in reimbursement and another $500 million in aid in question.
"The tribal operations won't be affected" by the loss of U.S. assistance, said Pakistan's military spokesman, Major-General Athar Abbas. "We can conduct our operations without external support."
Some of the assistance, he said, was reimbursement for money already spent on several operations on the Afghan border rather than money for future operations.
"I don't think there will be any significant impact from this," he added.
Politically, however, it would be damaging to the relationship, said Pakistan's former ambassador to the United States, retired Major-General Mehmood Durrani said, reflecting a widespread view in Pakistan that it was fighting America's war, for which Washington must reimburse it.
"This is something that they have to pay, and if they don't then it's breach of agreement and breach of trust," he said.
In Washington, Pentagon spokesman Colonel David Lapan said the $800 million in U.S. aid had been put on hold and could be resumed if Pakistan increased the number of visas for U.S. personnel and reinstated the training missions.
"It's ... directly tied to those decisions by the Pakistani military to curtail training and to not grant visas for some of the U.S. personnel that we need to get in. So if those things change, then this aid will change as well," Lapan said.
Lapan said the suspended aid included funds for training, for equipment typically provided with trainers, and for the so-called Coalition Support Fund, which goes to reimburse U.S. allies for their assistance in counterterrorism operations.
Also in Washington, U.S. Secretary of State Hillary Clinton praised Pakistan as a valuable ally and told reporters the relationship was vital to U.S. national security interests.
"That said, the government of Pakistan must take certain steps, and we have outlined those steps on more than one occasion, to ensure that we can deliver all the military assistance ... discussed with Pakistan," she said.
"So our decision to pause delivery on this portion of security assistance does not signify a shift in policy but underscores the fact that our partnership depends on cooperation," she added.
Pakistan's economy could be hit if Washington holds back on the $300 million reimbursement from the Coalition Support Fund that Pakistan says it is owed.
Because it is reimbursements for money already spent on military operations, CSF monies go into the general treasury. So holding back these payments will not hurt the military, but would strain the country's finances further at a time when it is battling a deep downturn.
The money was expected by June 30, and its delay has already bumped Pakistan's fiscal deficit to 5.3 percent of gross domestic product for fiscal year 2010/11 (July-June), a finance ministry official said. With the CSF money, the deficit was anticipated to be 5.1 percent.
CSF money also supports Pakistan's current account. Though the July-May current account is in surplus by $205 million, it may not be able to maintain the surplus in the long term because of rising international oil prices and lower prices for cotton, its main cash crop.
Pakistan received $632 million from the CSF in its 2010/11 fiscal year. Finance ministry officials were unavailable for comment.
The cutback in assistance is part of a high-stakes stand-off between the United States and Pakistan, said Ayesha Siddiqa, an expert on the Pakistan military. Washington has given up on winning Pakistani hearts and minds and is now counting on Pakistan's precarious financial situation to bring it onside.
"America understands that Pakistan needs money," she said. "Pakistan is insolvent. It cannot disengage (from the United States), so eventually it will turn around."
The U.S.-Pakistan relationship has been on a downward spiral since last year, but the decline accelerated after the killing of two Pakistanis by a CIA contractor in Lahore in January and the U.S. raid to kill Osama bin Laden, which Pakistan complains it was not told about and says was a breach of its sovereignty.
Pakistan has demanded the number of U.S. military personnel in Pakistan be slashed, and the U.S. has complied. Pakistan also wants to cut the number of U.S. intelligence officials.
If ties became truly frigid, Pakistan could seek closer links with China, it's single largest arms supplier.
(Additional reporting by Sahar Ahmed and by Arshad Mohammed in Washington; Editing by Sanjeev Miglani and Cynthia Osterman)