Crushing blow to ailing economy

A devastating blow to the ailing economy

RThe recent catastrophic floods will snuff out economic growth and lead to acute food shortages in Pakistan, officials have warned, again threatening to default a country already wracked by economic and political instability.

Pakistan was hoping for an International Monetary Fund bailout, which it secured last month, and a package of global loan extensions and investments to help rebuild finances hit hard by price shocks caused by the Ukraine war. But plans to restore financial health were dashed by the monsoon rains that battered the country’s normally arid southern regions with five times more rain than they normally see, wiping out homes, bridges, roads and crops.

Government officials estimate the economic damage and the cost of reconstruction at at least $30 billion, or about 10 percent of GDP. The number has tripled since an early estimate last month, and officials expect it to keep rising. The United Nations Development Programme, along with the World Bank and the Asian Development Bank, expect to complete an assessment of the flood damage and the cost of reconstruction by mid-October.

Domestic resources can only cover a fraction of government estimates, and international assistance received so far falls far short of the country’s needs. Pakistan is in talks with the United Nations to hold an international pledging conference to raise funds for flood relief.

“The road to solvency was narrow. It’s tightened,” Finance Minister Miftah Ismail said.

Bond and currency markets, which had shown more confidence in Pakistan after the IMF deal, are once again pricing in a high risk that the country will default on its external debt. Since the end of August, some international government bond yields have risen by a third, while the currency is one of the worst performers in Asia, falling 25 percent over the past 12 months.

Globally, more countries are believed to be at high risk of default after inflationary waves from the Ukraine war coincided with rising interest rates in the US, putting pressure on indebted nations. Sri Lanka defaulted earlier this year, while in Africa Ghana is considered high risk. But a default in Pakistan, with a population of 220 million – more than the combined populations of Kenya, Sri Lanka, Ghana and Egypt – would deeply shake investor confidence in emerging markets.

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Official data shows that the country’s foreign exchange reserves are about $9 billion, which analysts say is only enough to cover about six weeks’ worth of imports. The country will have to repay more than $20 billion in debt in this fiscal year, which began July 1.

Before the flood, the IMF had forecast economic growth of 3.5 percent for the current financial year. The government estimates that the disaster will shave about 3 percentage points off growth, resulting in little or no growth for the country this year. Pakistan’s first calculations show that lost growth alone will cost the economy ten billion dollars. For example, more than a third of the cotton crop that feeds the textile sector, the country’s most important industry, is gone, according to the All Pakistan Textile Mills Association, an industry body.

Yousuf Nazar, an independent analyst, said tax revenue, industrial production and other government-set targets have been shredded. “All the numbers are messed up,” Nazar said. “The default risk has increased significantly.”

The IMF program is both a lifeline and a straitjacket for the government’s future path. In exchange for the funding, it is demanding strict spending and credit controls to make the country’s debt more sustainable. The entity, which did not respond to a request for comment, has given no indication of relaxing terms on its loan, which will bring the country $4 billion in the current fiscal year.

The lender attributes Pakistan’s financial crisis to its loose fiscal policies, although the IMF generally advocates targeted aid to the poor. Pakistan says it is determined to remain within the IMF program to resist defaults.

The government intends to redirect nearly half of its budget to development projects this fiscal year, which would bring in about $1.5 billion, Ismail said. Provinces may be able to siphon off an additional $2 billion from their budgets, he said.

It is uncertain how far the powerful provincial governments will cooperate with the national government. Two of the country’s four provinces, home to two-thirds of the population, are ruled by the political party of Imran Khan, who was ousted as prime minister by a parliamentary vote in April. Khan has since campaigned to overthrow the current government.

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Pakistan will also push for compensation from richer countries at multilateral meetings, including the UN General Assembly in New York and the next round of climate talks set for November.

Islamabad and UN officials have pointed to climate change as the cause of this year’s heavy monsoon rains, saying rainfall levels and geographical distribution deviated from normal patterns.

That view was scientifically supported Thursday by World Weather Attribution, an initiative for climate scientists to collaborate on a rapid assessment of whether climate change has caused extreme weather events.

The study found that up to 30 percent more rain fell on Pakistan in this year’s monsoon as a result of man-made global warming. That figure rose to as much as 50 percent more rainfall over a 5-day period studied in the country’s hardest-hit southern region.

A devastating blow to the ailing economy

However, the study also highlighted many uncertainties. “Our evidence suggests that climate change played an important role in the event, although our analysis does not allow us to quantify how large the role was,” said Friederike Otto, a climate scientist at Imperial College London and one of the authors . “While it is difficult to quantify the contribution of climate change with precision, the fingerprints of global warming are evident.”

Officials have said immediate relief alone – like food and tents for those whose villages were flooded – will cost over $1 billion. Many of the 33 million affected have yet to receive this basic help, charities say. More than 1,400 people died in the floods, many of them children.

About five million people are receiving food from authorities, the World Food Program and charities, according to the UN, which has called for $160 million to be raised for life-saving emergency relief. The government has given emergency payments of US$110 each to 1 million affected families.

The USA has announced the largest aid contribution to date with 53 million dollars. Much of the aid comes in kind, with 96 flights carrying supplies arriving from countries including the United Arab Emirates, Turkey and the US.

Longer-term recovery costs will be massive. The government estimates that about $9 billion will be needed to rebuild nearly 8,000 miles of roads and the 390 damaged or destroyed bridges, while rail lines, schools and hospitals also need repairs. Flood protection facilities such as embankments and water channels must be restored and expanded.

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About 1.7 million damaged or destroyed homes are expected to cost about $4 billion to rebuild – and the numbers don’t include the mud houses of the poorest that were washed away.

Pakistan’s financial woes are so profound that some UN officials have suggested using new mechanisms that have just emerged in the context of climate change. During a visit to Pakistan last week, UN Secretary-General António Guterres said he would push for a debt swap in which foreign creditors would exchange their loans for Pakistan’s spending on infrastructure such as flood drains to make the country more resilient to climate change. The Central American state of Belize carried out such a “debt for nature” swap in 2021, albeit under very different circumstances.

It is unclear whether any of the Pakistani lenders would agree to such an arrangement. The country has nearly $100 billion in external debt, of which nearly a third is owed to China, while $42 billion is due to multilateral organizations like the World Bank and more than $5 billion to Japan, according to the IMF.

Knut Ostby, head of UNDP in Pakistan, said the private sector should be involved. Longer-term options include attracting impact investments, where the money is used for commercial projects that advance environmental goals, such as

“We have to consider a lot more than traditional official development assistance and a lot more than traditional government budgeting if we’re going to have an orderly recovery and reconstruction after a disaster like this,” said Ostby, whose agency advises the government.

With many calls for donor funds in recent years, including the Covid-19 pandemic, the collapse of the Afghan economy and the war in Ukraine, Pakistan’s floods compete with multiple crises for attention.

Without much more help, up to 11 million people would be pushed below the poverty line by the floods, said Aisha Pasha, Pakistan’s deputy finance minister.

“Pakistan is not a big emitter [of greenhouse gases.] It’s not our doing what we’re going through,” Pasha said. “The losses are beyond our pockets.”

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