The floods scouring through Pakistan, in a catastrophe that may be bigger than the combined effect of the 2004 Indian Ocean tsunami and the 2005 Kashmir and 2010 Haiti earthquakes, are throwing into doubt all forecasts for an economy already struggling to survive amid terrorism, high inflation and widespread grinding poverty.
The political outlook is also increasingly dark. President Asif Ali Zardari is facing heavy criticism after being in the United Kingdom and France while flood waters ripped a 1,000 kilometre path of destruction from the far northwest to southern Sindh province. The standing of the military, which is spearheading relief efforts, has by comparison climbed. Religious groups are also welcomed by desperate citizens for the help they are providing.
The damage has affected up to 14 million people and destroyed 650,000 houses, according to local estimates. As many as 4 million people have been displaced or made homeless and at least 1,600 killed. UN spokesman Maurizio Giulian told Associated Press that if the estimate is correct, the total affected would exceed the number hit by the tsunami and the two noted earthquake disasters of the past six years.
Reflecting the chaos and outlook, stocks are tumbling, with the benchmark Karachi 100-share index dropping 2.8% on Monday to 10,026 and falling below 9,950 in early Tuesday trade.
The country has suffered estimated losses of 40 billion to 60 billion rupees, a newspaper reported, citing Farhan Mahmood, analyst at Topline Securities. This may be a gross underestimate. Farmers in northwestern Khyber Pakhtunkhwa reportedly lost crops worth 35 billion rupees.
The floods may cut economic growth by up to a half percentage point from the 4% growth target for the current fiscal year, the Topline report said. Inflation, meanwhile, is set to rise as the loss of crops drives up food prices and the government borrows more to meet relief costs. Entire towns, infrastructure, livestock and crops have been swept away. Electricity generation has been hit in a country already suffering crippling energy crisis.
“The damage to crops, supply disruption of essential food commodities and the impact of reconstruction and rehabilitation costs on government finances has significantly increased inflation risks,” another newspaper reported, citing a Standard Chartered Bank report. Crops such as wheat, cotton, rice and sugar cane contribute about 7% of GDP.
Inflation may climb to 12% over the next 11 months, against the government’s 9.5% target, the central bank said. Headline inflation averaged 11.7% in the year to June 30, against a 9% target after increases in power and gas tariffs that are still feeding into the economy. The rise in inflation may prompt a 1 percentage point increase in interest rates by next July, which will force up business costs and hinder economic growth, analysts said.
The fiscal deficit – the gap between what the government spends and what it raises through taxes – is expected to widen further, even beyond the central bank’s forecast of 6% of GDP. That will take it above the 4% target that is one of the conditions attached to an International Monetary Fund bailout package initially agreed in late 2008 as the government struggled to meet international debt obligations.
“If the fiscal deficit goes more than last year’s expected 6% it would be disastrous for the country as it would face another spell of very high inflation which could force the State Bank to further tighten monetary policy,” yet another newspaper reported Mohammad Imran, head of research at Arif Habib Investment, as saying.
The central bank in its most recent monetary policy statement at the end of July increased its key discount rate to 13% from 12.5% after refusing to accept the government’s fiscal targets.
“Fiscal pressures are expected to mount further [… on] expenditure for rebuilding the calamity-hit areas, and with tax exemptions being announced for them,” the newspaper reported Khurram Shahzad, Head of Research at InvestCap Research as saying.
Extensive loss of crops, including cotton, rice, sugarcane and maize, threatens the government’s 3.8% growth target for farm output this fiscal year. Damage to cotton n the Punjab may lead to higher imports, Bloomberg reported, citing the Pakistan Kissan Board, a farmers’ group. Rice exports may be cut after the loss of as much as 5% of the rice crop.
The country will need billions of dollars more from international donors to recover from the floods, a daunting prospect at a time when the financial crisis has shrunk aid budgets in many countries. The US and other international partners have so far donated tens of millions of dollars and providing relief supplies and assistance.
The White House said US helicopters have helped to save more than 1,000 lives in Pakistan. Washington has provided US$35 million in aid, including 436,000 meals and 12 prefabricated bridges.
The People’s Liberation Army (PLA) of China has reportedly announced relief assistance worth 10 million yuan (US$1.5 million) in addition to 10 million yuan announced by the Chinese government. Last week, three Chinese aircraft delivered tents, medicines, water purifiers and generators to the country.