ISLAMABAD, Pakistan – The latest catastrophic floods will wipe out economic growth and cause acute food shortages in Pakistan, officials warned, threatening anew to push a country already reeling from economic and political instability into default.
Pakistan sought an International Monetary Fund bailout, which it secured last month, and a package of global loan transfers and investments to help restore finances hit hard by price shocks caused by the Ukraine war. But plans to regain economic health have been undone by monsoon rains that pounded the normally dry southern regions of the country with five times more rain than they typically see, wiping out houses, bridges, roads and crops.
Government officials estimate at least $30 billion in economic damage and reconstruction costs, or about 10% of GDP. The number has tripled from an early estimate last month, and officials expect it to rise further. The United Nations Development Program, along with the World Bank and the Asian Development Bank, expect to complete an assessment of flood damage and reconstruction costs by mid-October.
Domestic resources can only cover a fraction of the government’s estimated costs, and the international aid received so far falls far short of the country’s needs. Pakistan is in discussions with the UN to hold an international donor conference to raise funds for flood relief.
“The road to solvency was narrow. It has narrowed,” said Finance Minister Miftah Ismail.
The bond and currency markets, which had shown more confidence in Pakistan after the IMF deal, are once again pricing in a high risk of the country defaulting on its foreign debt. Since the end of August, yields on some of the government’s international bonds have risen by a third, while the currency is one of the worst performers in Asia, down 25% over the past 12 months.
Globally, several countries are rated at high risk of default after waves of inflation from the Ukraine war coincided with rising interest rates in the United States, increasing pressure on indebted nations. Sri Lanka defaulted earlier this year, while in Africa Ghana is considered to be at high risk. But a default by Pakistan, with a population of 220 million – more than the combined populations of Kenya, Sri Lanka, Ghana and Egypt – would deeply rattle investor confidence in emerging markets.
Official data shows the country’s foreign exchange reserves are at about $9 billion, just enough to cover about six weeks of imports, according to analysts. The country must repay more than $20 billion in debt this fiscal year, which started July 1.
Before the floods, the IMF had forecast economic growth of 3.5% for the current financial year. The government estimates that the disaster will knock about 3 percentage points off growth, which would leave the country with little or no growth this year. Pakistan’s initial calculations show that the lost growth alone will cost the economy $10 billion. Gone, for example, is more than a third of the cotton crop that feeds the textile sector, the country’s main industry, according to the All Pakistan Textile Mills Association, an industry body.
Yousuf Nazar, an independent analyst, said tax revenue, industrial output and other targets set by the government have been shredded. “All figures have come to a standstill,” Mr Nazar said. “The risk of default has increased significantly.”
The IMF program is both a lifeline and a straitjacket when it comes to the government’s way forward. In return for funding, it requires strict limits on spending and borrowing to make the country’s debt more sustainable. The body, which did not respond to a request for comment, has given no indication of easing the terms of its loan, which provides $4 billion during the country’s current fiscal year.
The lender has attributed Pakistan’s financial crisis to its lax fiscal policy, although the IMF generally favors targeted aid to the poor. Pakistan says it is committed to remaining in the IMF program as a defense against default.
The government is looking at diverting close to half of its budget to development projects this fiscal year, which would provide about $1.5 billion, Mr. Ismail. The provinces may be able to divert another $2 billion from their budgets, he said.
It is uncertain how far the provincial governments, which have a lot of power, will cooperate with the national government. Two of the country’s four provinces, home to two-thirds of the population, are led by the political party of Imran Khan, who was ousted as prime minister in April through a parliamentary vote. Mr. Khan has since campaigned to topple the current government.
Pakistan will also push for compensation from richer countries at upcoming multilateral gatherings, 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 a cause of this year’s heavy monsoon rains, saying the amount of rain and geographic distribution deviated from the normal pattern. Climate scientists have only just begun the task of assessing the extent to which warming temperatures might have made this year’s extreme rainfall more likely.
Officials have said that immediate relief alone – such as food and tents for those whose villages were under water – will cost over $1 billion. Many of the 33 million people affected have yet to receive such basic aid, charities say. More than 1,400 people were killed in the floods, many of them children.
About five million people are receiving food from the authorities, the World Food Program and charities, according to the United Nations, which has launched an appeal to raise $160 million to cover immediate life-saving aid. The government has given 1 million affected families an emergency payment of US$110 each.
The United States has announced the largest contribution of aid to date, $53 million. Much of the aid comes in kind, with 96 flights of supplies arriving from countries including the United Arab Emirates, Turkey and the United States
The long-term rebuilding costs will be enormous. It will take about $9 billion to reconstruct close to 8,000 miles of road and the 390 bridges damaged or destroyed, the government estimates, while rail lines, schools and hospitals also need to be repaired. Flood defenses, such as embankments and water channels, must be restored and expanded.
About 1.7 million homes that have been damaged or destroyed are expected to cost about $4 billion to rebuild – and the figures do not include the mud houses of the poorest that were washed away.
The depth of Pakistan’s economic problems is so great that some UN officials have proposed using new mechanisms that are only just beginning to emerge 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 swap their loans for Pakistan’s spending on infrastructure such as flood drains to make the country more resilient to climate change. One such “debt for nature” swap was completed by Belize, the Central American nation, in 2021, albeit under very different circumstances.
It is unclear whether any of Pakistan’s lenders would agree to such an arrangement. The country has an external debt of nearly $100 billion, of which close to a third is owed to China, while $42 billion is owed to multilateral agencies such as 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 investing,” where the money is used for commercial projects that promote environmental goals, such as building dams and issuing “green bonds,” which raise money for climate-related spending, an instrument Indonesia has used.
“We have to look at much more than traditional official development assistance and much more than traditional government budgeting if we are to do proper recovery and reconstruction after a disaster like this,” said Mr Ostby, whose agency advises the government.
With many demands for donor money in recent years, including the Covid-19 pandemic, the collapse of the Afghan economy and the Ukraine war, Pakistan’s floods compete with several crises for attention.
Without much more help, up to 11 million people will fall below the poverty line from the floods, said Aisha Pasha, Pakistan’s deputy finance minister.
“Pakistan is not a big emitter [of greenhouse gases.] It is not our doing, what we are going through,” said Ms. Pasha. “The losses are out of our pockets.”
Write to Saeed Shah at firstname.lastname@example.org
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