Floods and the relief package

Flood-related losses will affect the industrial output. The shortage caused due to the loss of local cotton would need to be bridged by importing it

Floods and the relief package


T

he perplexities related to the future political and economic landscape of the country are worrying. The incumbent coalition government of Pakistan Democratic Movement (PDM) seems to be trapped in a Catch-22 situation where it has to choose between economic reforms and its already diluted political capital.

The PDM government’s performance so far pales before the claims it made before pushing out the government led by the Pakistan Tehreek-i-Insaf (PTI) from power and removing Imran Khan from premiership through a vote of no confidence. On the economic front, Pakistan is facing a wide array of challenges in the backdrop of rising energy and commodity prices; a cascading crisis on the external front where foreign exchange reserves are hovering around alarming levels and any mismatch in planned inflows can exacerbate an already difficult external position.

Pakistan’s economic outlook is poor as is evident from the ratings given by leading rating agencies: Moody’s Investor Service and Fitch Ratings. They have downgraded Pakistan’s ratings to Caa1 and CCC+ respectively, which is indicative of substantial underlying risks. The latest action by Fitch notes serious risks for Pakistan on the external account as well as inherent structural weaknesses in the overall economic structure.

The following observations by the rating agency are an eye-opener: “The downgrade reflects further deterioration in Pakistan’s external liquidity and funding conditions, and the decline of foreign-exchange (FX) reserves. This is partly a result of widespread floods, which will undermine Pakistan’s efforts to rein in twin fiscal and current account deficits. The downgrade also reflects our view of increased risks of policies potentially undermining Pakistan’s IMF programme and official financial support. Liquid net FX reserves of the State Bank of Pakistan (SBP) were about $7.6 billion by October 14, or about a month of current external payments, down from more than $20 billion at end-August 2021. Falling reserves reflect large, albeit, declining current account deficits (CADs), external debt servicing and earlier FX interventions by the SBP. Before stabilising in the week to October 14, reserves had been falling every week since the disbursement of $1.2 billion from the IMF in the week to September 2, upon the completion of the 7th and 8th reviews of Pakistan’s Extended Fund Facility (EFF).”

In their reports, the rating agencies have indicated the impact of the recent catastrophic floods on the fragile economy. Because of unprecedented rains and flash flooding, a third of the country came under water. According to various estimates, around 33 million people were affected. The magnitude of the calamity has been unparalleled, undoubtedly far beyond the damage by normal floods that hit the country in 2010.

The Ministry of Planning, Development and Special Initiatives, in collaboration with the European Union (EU), the Asian Development Bank (ADB), the World Bank and United Nations agencies, has recently published Pakistan Floods 2022 Post-Disaster Needs Assessment. The document evaluates damage and financial losses caused by this unprecedented disaster in our history to the tune of Rs 6.5 trillion ($30 billion), whereas the current rehabilitation estimates for reconstruction are at least $16.3 billion.

The sectors that took the heaviest toll of damage are housing at $5.6 billion, agriculture, food, and livestock with estimated damages of $3.7 billion and transport and communications with estimated damages of $3.3 billion. More significantly, due to flooding, business activities got disrupted, severely affecting the domestic economy.

As a result, it is apprehended that poverty will increase significantly. The economy, already having limited buffers, cannot offer any viable solution for recovery. The damage, expected to be 4.8 percent of the GDP, will further scale down the already suppressed economic momentum. The process of recovery and reconstruction needs are projected to be colossal at 1.6 times the budgeted national development expenditure for financial year 2023. Of course, Pakistan alone cannot cope with it.

The sectors that took the heaviest toll are housing at $5.6 billion, agriculture, food, and livestock with estimated damages of $3.7 billion and transport and communications with estimated damages of $3.3 billion. 

The floods have severely damaged cotton, sugarcane and rice crops and caused a loss of approximately one million livestock. The significant damage will lead to spillover effects on the allied industrial and services sectors. For example, the textile industry accounts for around a fourth of total industrial output and more than 50 percent of goods exported from Pakistan, generating a significant amount of foreign exchange.

Flood-related losses will affect the industrial output and the shortage caused due to loss of local cotton will need to be bridged by importing cotton. This will further intensify bleeding of already dwindling foreign exchange reserves. Moreover, disruptions in the supply chain of basic staples has already triggered high inflationary pressure, forcing the government to import these to avoid huge gaps.

As an immediate measure, the Asian Development Bank has approved and disbursed $1.5 billion to help Pakistan provide social protection, promote food security and support employment for its people amid devastating floods and global supply chain disruptions. The PDM government is looking forward to similar gestures from other lenders and bilateral partners to cope with the damage.

In this regard, the role of the International Monetary Fund (IMF) is critical. The terms agreed to are very stringent and hardly leave room to extend meaningful relief to the public before making macro-economic corrections to the satisfaction of the lender.

The finance minister is confident that the IMF and other lenders will take cognizance of the catastrophic floods and challenging economic situation on ground and allow revision of the targets accordingly. The government has already expressed its intention and taken measures to offer targetted relief to the most vulnerable segments of the society. It plans to offer sector-specific incentives as well as some en masse enticements so that the economic wheels keep on moving.

Prime Minister Shahbaz Sharif recently announced what he called a “mega package” aimed at reviving the agriculture sector and help struggling farmers. The financial impact of this package is estimated at Rs 1,800 billion. It is meant to revive and promote agricultural activity across the country, particularly in flood-hit areas.

The package is designed to offer low-rate financing, free seeds and reduced prices for electricity for tubewells and fertilisers. The price of DAP fertiliser has been fixed at Rs 11,250 per bag after the government committed to subsidise Rs 2,500 per bag. A flat rate of Rs 13 per unit of electricity will be charged on agricultural tubewells.

One hopes that the relief package is duly budgeted and funded and will not impede the ongoing Extended Fund Facility (EFF) programme with the IMF. More importantly, the government must show that it is fully cognizant of addressing issues like why are we lagging far behind in the world in avoiding unnecessary use of fertilisers and cutting waste of water resources. Why are our crop yields the lowest in the region and the quality of seeds so poor? Why do farmers suffer financial losses in imperfect markets and for lack of infrastructure? Why is there a lack of research and no inclination for innovation in the sector? Why can we not provide modern machinery and equipment to boost production? Why is food security such a challenge as fertile lands are being converted into housing societies?

These problems have persisted for ages and successive governments have miserably failed to find any solutions. If we do not address these vital issues, “mega packages” will not be enough to help the agricultural sector meet the national needs.


Abdul Rauf Shakoori is a corporate lawyer based in the USA

Dr Ikramul Haq, an advocate of Supreme Court, is adjunct faculty at the Lahore University of Management Sciences

Floods and the relief package