STATEMENT BY KARL F. INDERFURTH ASSISTANT SECRETARY OF STATE FOR SOUTH ASIAN AFFAIRS SENATE FOREIGN RELATIONS COMMITTEE, SUBCOMMITTEE ON NEAR EASTERN AND SOUTH ASIAN AFFAIRS JULY 13, 1998 Mr. Chairman, thank you for the opportunity to appear before your Subcommittee today to continue our discussions about the critical situation in South Asia. In our previous meetings, we have discussed how the nuclear tests by both India and Pakistan in May have dramatically altered the context of our South Asia policy. We also have reviewed the definitions and scope of sanctions that have been applied against both countries, as required by law, as well as our efforts to re-establish a basis for resuming the type of broad-based, cooperative relations that we had hoped to promote with both countries prior to the tests. Today, I wish to review briefly for you the developments that have occurred in our diplomatic exchanges with the Indian and Pakistani governments, as well as certain issues with regard to the sanctions regimes. Diplomatic Efforts As you know, Mr. Chairman, we have begun in earnest a process of re-engagement with both India and Pakistan in an effort to secure genuine progress on our non-proliferation concerns and in improving relations between the two countries. Deputy Secretary of State Strobe Talbott, who has been given the lead by the President and the Secretary of State for our contacts with the Indian and Pakistani governments, has held two productive sessions with Indian Deputy Planning Commissioner Jaswant Singh, who is Prime Minister Vajpayee's designated envoy to the United States on these matters. I was pleased to accompany the Deputy Secretary to Frankfurt this past week for his most recent meeting with Mr. Singh. Similarly, with Pakistan the Deputy Secretary has held separate and useful meetings with Prime Minister Nawaz Sharif's envoy, former Foreign Minister Shahabzada Yaqub Khan, as well as Foreign Secretary Shamshad Ahmed. We are grateful for the constructive efforts of you and your colleagues to address the policy dilemmas in South Asia in the wake of the nuclear tests. In particular, we noted with great interest the conversations that you and Senator Robb had with the key players in both Delhi and Islamabad on your recent trip. We believe that it is critical that the governments, press and publics of both countries develop an understanding and appreciation of the role that the Congress plays on these issues. As a result of these diplomatic efforts, it appears we are making progress in defining the principles that will underpin U.S. relations with India and Pakistan in the post-test environment, in laying out our non-proliferation and other objectives, and in discussing the steps and activities that will be necessary to get us there. We will not let our current momentum slip: the Deputy Secretary plans to travel to both Islamabad and New Delhi next week, where I will accompany him along with the Vice Chairman of the Joint Chiefs of Staff, General Ralston, and the NSC Senior Director for Near Eastern and South Asian Affairs, Bruce Reidel. Impact of Sanctions Mr. Chairman, we have discussed in earlier hearings the sanctions that we are required by law to place against both India and Pakistan. For your convenience, I have brought with me a fact sheet on the sanctions that has been provided to the Committee previously. I ask your permission to include the fact sheet in the record of today's proceedings. As you know, we are implementing these sanctions firmly and correctly. They will result in significant economic and political costs for both countries. That said, our purpose is not to punish for punishment's sake, but to influence the behavior of both governments. We do not wish for unnecessary harm to fall upon the civilian populations of either country -- particularly the poor and less fortunate -- or on U.S. businesses. For this reason, we are pleased that the Senate acted last week to correct an obvious unintended consequence of the sanctions law preventing the provision of credits for agricultural commodities. It is too early to quantify, Mr. Chairman, the effect that these sanctions will have on economic growth or business activity in either country. Even prior to the onset of the sanctions regime, however, both India and Pakistan had been encountering difficulties in their economies. In India, sluggish industrial production, high tariffs, oppressive bureaucratic red tape, infrastructure bottlenecks, massive subsidies and scarce funds for investment had all contributed to lower rates of economic growth and a serious decline in investor confidence. U.S. sanctions will amplify some of those trends. To date, we have not seen from Indian policymakers or commentators a serious recognition that these sanctions, much less the underlying structural inequities, require serious economic policy adjustments. The introduction of a rather lackluster budget by the government only weeks after the nuclear test took place underscores that point. We are concerned that these developments, which come in the midst of significant economic turmoil in Asia, will put at risk all of the important economic progress that India has made since the onset of liberalization. In Pakistan, the situation is even more complex and potentially of grave concern. Pakistan has been grappling for months' with a significant balance of payments shortfall, and its economy suffers from similar, if more acute, structural deficiencies as India's. The Pakistani rupee has been under serious pressure -- on Friday it plunged past the 60 per dollar threshold -- and the stock market has been dropping steadily. Pakistan is particularly dependent upon external financing from the IMF and the multilateral development banks, and we are concerned that with dwindling foreign exchange reserves, Pakistan could soon begin defaulting on its international obligations. We are deeply troubled that Pakistan's leadership does not appear to be taking the necessary steps to deal with the country's difficult economic position. Not only has Pakistan been slow to implement tough economic reforms mandated by the IMF and ostensibly espoused by the Prime Minister, it has inexplicably acted to alienate the vanguard of the foreign investor community -- the independent power producers. For months, and with what has been increasing intensity, the IPPs have been faced with what can only be described as a shake down effort by the government to conserve hard currency. Recently the government of Pakistan announced arbitrary termination of a number of the IPP contracts, calling into question its understanding of and commitment to a fundamental business principle: the sanctity of contracts. Pakistan can ill afford to act in such a way at this critical time. Sanctions and Flexibility When we last met, Mr. Chairman, you, Senators Robb and Hagel and I discussed the effectiveness of the sanctions regime and whether the law permits the President sufficient flexibility to maximize his ability to influence events and behavior. That discussion, along with Thursday's debate on the Senate floor has put this question into sharp relief. To the extent that it is possible to discern a common thread among the various statements that have been made, it appears safe to say that both the Administration and the Congress share a desire to inject a greater degree of consistency, flexibility and effectiveness into the sanctions regimes against India and Pakistan, and indeed, our entire approach to sanctions in general. That is a very welcome development, and it is absolutely vital that we build upon this very strong foundation to effect the requisite changes in our policy and in our laws. In the Department of State, Under Secretaries Stuart Eizenstat and John Holum have the lead responsibility for our sanctions policy. They have both articulated to the Congress a number of principles and objectives that we seek for the various sanctions regimes that are already in place, and for future instances where sanctions may be needed. If you will permit me, Mr. Chairman, I would like to address briefly some of the issues that apply specifically to the sanctions against India and Pakistan. First, let me be clear that we have already laid out a number of objectives that we seek in implementing the sanctions. We have consistently articulated these objectives in our meetings with the Indians and the Pakistanis, in previous testimony to the Congress, and in our bilateral and multilateral exchanges with others. By no accident, they reflect the objectives -- some shorter term, others longer term -- that were spelled out in the communiques adopted in the recent meetings of the P-5 in Geneva and the G-8 in London and in U.N. Security Council Resolution 1172. To reiterate, we have established that we want to see both governments do the following: conduct no further nuclear tests; sign and ratify the Comprehensive Test Ban Treaty immediately and without conditions; refrain from deploying nuclear weapons or missile systems; halt the production of fissile material for nuclear weapons; participate constructively in negotiations towards a fissile material cut-off treaty; formalize existing policies not to export weapons of mass destruction and missile technology or equipment; and resume direct dialogue to address the root causes of tension between them, including Kashmir. Again, Mr. Chairman, these are steps we want to see both governments take. They are not demands. We fully recognize that New Delhi and Islamabad will have to assess them in light of their own national security requirements. At the same time, we believe these steps cover the full range of what will be necessary to make real progress in South Asia. We will need to engage with both governments to explore fully how best to pursue each of these objectives, in the shortest possible timeframes. It is clear that we will need greater flexibility than the law currently allows to tailor our approach, influence events, and respond to developments. In this regard, Mr. Chairman, we seek waiver authority for all of the sanctions currently in place against India and Pakistan. Of course, we would not utilize that authority until such time as substantial progress has been achieved on the objectives outlined above, or in the event that there were a serious negative and unintended consequence to a specific sanction -- such as impending financial collapse leading to economic chaos and political instability. We also would like additional flexibility to guard against an overwhelmingly disproportionate effect of the sanctions on one country versus another; ideally, the sanctions should have roughly the same effect on India as they do on Pakistan. That said, we do not believe it would be advisable, nor could we support efforts to codify or legislate the steps that India and Pakistan would need to take in order to gain relief from sanctions, or to match specific actions by India or Pakistan to the lifting of particular sanctions. While I believe there is substantial agreement between the Administration and the Congress on the objectives, it would tremendously complicate our efforts to bring about change if we were bound by a series of benchmarks in law. Our experience with India and Pakistan tells us that neither would respond well to such an approach. We believe the steps we are encouraging them to take are in their own national interests, and we hope they will share this view. But writing such steps into law would create the impression that India and Pakistan would be acting under pressure and simply to ensure the lifting of U.S. sanctions. This would greatly constrain our chances of achieving the outcomes we seek. Conclusion If I may leave you with one thought, Mr. Chairman, it is the conviction that our discussion of these matters should not leave India and Pakistan with the impression that a lifting of sanctions is imminent. Affirmative, positive steps will be necessary by both parties if sanctions are to be lifted and our relationship restored to where it had been heading prior to the events of May -- including the Presidential visit later this year. The sanctions have been imposed for specific purposes, and India and Pakistan are well aware of them. As I have already mentioned, the Administration does not plan to ask for easing sanctions unless India and Pakistan have achieved significant progress in meeting our non-proliferation objectives. That said, it seems we have a rare opportunity to have a serious discussion and adopt some changes in law and policy. These will better serve our own national interests, and better position us to deal effectively with both India and Pakistan on the critical issues that are at stake. Thank you, Mr. Chairman, and I look forward to your questions. (End text)
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