Islamabad: Pakistan is right up against the question whether a political solution in the east depends on stabilising the economy - or whether even this is impossible unless a political settlement has been reached. But one thing is clear: unless the East Pakistan economy is quickly restored_both as a market for West Pakistan's manufactures and an earner of foreign exchange_and if very substantial amounts of external assistance are not committed soon, the western wing will probably suffer a sharp reduction in industrial activity with the possible consequence of widespread social unrest.

Foreign aid needed for the new fiscal year (July 1971-June 1972) to avoid complete exhaustion of the State Bank's exchange assets in convertible currency and prevent imports from falling to a level at which a severe cutback in economic activity might become inevitable is computed by the World Bank at US$500 million. Project assistance not included, the bank's estimate is that Pakistan is in want of $175 million in a form equivalent to cash and of $200 million in foodgrain imports to meet a shortage of approximately 500,000 tons of rice and wheat in West Pakistan and two million tons (a conservative estimate) in the eastern wing. And it needs $125 million in commodity aid.

But it seems Pakistan may have to manage without most of this for the time being. The budget announced last weekend, extremely reticent about details of how the country was to be run minus such aid, could only prescribe "maximum austerity and self-reliance" as a method of overcoming the economic consequences of the east-west conflict. While Mirza Ahmed, economic adviser to President Yahya Khan, was not deterred at the same time from announcing a Rs200 million (US$26.4 million) hike in defence spending and made comforting noises about the continuing basic strength of the economy, the news that the 11 nations of the Pakistan aid consortium had agreed to postpone making any new commitments must have come as a severe blow. He put damage to public sector facilities alone in the eastern wing at Rs260 million (US$30.2 million).

Their informal decision, made a few days before the budget, appears to have been heavily influenced by the report of a World Bank and IMF (International Monetary Fund) mission which had toured East Pakistan extensively and conferred with the government in Islamabad. Humanitarian aid is not to be affected, and the World Bank's South Asia director, Peter Cargill, pointed out that Pakistan needed the cash sums listed by the end of this month, and food shipments even earlier. But his mission's view of the situation in the country was grave enough to decide the IMF against providing $250 million in foreign exchange which it had earlier been considering. Besides suspecting that Islamabad was using what foreign exchange it had left to buy arms abroad (including fighters and sophisticated anti-submarine weapons from France), the mission painted a picture of chaos in East Pakistan to the Paris meeting.

West Pakistani troops, the report said, were still conducting a reign of terror in the eastern province. Urban life was non-existent, with some towns lacking 90% of their normal population. Com- munications were shattered, the economy paralysed, the likelihood of famine this autumn high and guerilla resistance still far from negligible.

All the donor countries have claimed the decision was not political (although Canada and Britain allegedly urged that public opinion in their countries was against further aid without a political settlement). But as World Bank circles put it, while declining a formal statement: "The greatest difficulty confronting any effort by the consortium countries, the World Bank and the IMF to help Pakistan achieve a viable solution to the present crisis is the inability of those in authority to see the facts as they are." Even Islamabad's most senior officials, they said, believed the army had conducted a minor police action in East Pakistan, aimed at removing from the political scene a limited number of secessionists, that this was over and that the disruptions caused to economic and social life would soon be ended.

The World Bank team's impression i was quite the opposite. Though the factories and Chittagong port remained physically almost unaffected by the disturbances the visitors found them only partly operating - mainly due to the reluctance of fearful labourers to return to their places of work. Out of 10 shops they saw seven to eight still closed, not to speak of the difficulties the army had in restoring the communications and distribution. Cargill even urged Yahya to appoint a special political and economic adviser to East Pakistan's Martial Law Administrator Tikka Khan_who, he argued, was thinking entirely in military terms and therefore hardly the man to regain the Bengalis' confidence.

To Yahya that must have seemed a rather open interference in his administrative affairs, but the country's economic situation, and its image abroad, are too serious for him to afford simply to ignore the point. Without foreign assistance Pakistan's exchange assets in convertible currency are likely to be exhausted by early August, even taking into account Islamabad's decision to defer roughly $55 million of debt service payments for six months from May 1.

At the end of April the convertible reserves amounted to only $137.6 million ($67.2 million in foreign exchange, $16.9 million of special drawing rights and $53.5 million in gold). The State Bank's estimates they will be down to $20 million by the end of September.

Regarding the internal financial situation, against an original estimate of Rs600 million the government now expects to have to obtain Rs1,650 million from the banking system to finance the budget deficit in 1970-71 inflationary financing on a scale 25% over the peak reached during the Kashmir war with India in 1965-66.

Under such circumstances no prophetic gifts are needed to predict appalling difficulties in the new fiscal year.

And since the World Bank and the Aid-Pakistan consortium are agreed political stability is essential before further development aid can be extended, the priorities have at least been made clearer to Islamabad. The problem for Yahya is that he must somehow restore civilian rule to the ravaged east.

But this week he made it clear he has no intention of allowing the Awami League to participate, nor of entrusting the ill-fated national assembly with drafting a constitution. On the basic claims for greater autonomy for the east put forward by Mujib, the president hasn't budged an inch, though he recognised the vote for the Awami League had been a vote "for provincial autonomy".

Yahya's references to the members elected under the League's banner betrayed the double-think of which Cargill had complained. They would retain their seats in an independent capacity, except for those who had indulged in "anti-state. . . or. . . antisocial activities" No list was given, and the category was wide enough to embrace anybody the military regime chooses to consider obnoxious. What it lacked was any suggestion of a new political realism.