Pakistan is literally and figuratively under deep water. The early estimates by the government put the direct losses to the economy from the deadly floods in the shape of the washed-away roads, bridges, rail tracks, homes, livestock, crops and so on in excess of $11 billion or close to about three per cent of the gross domestic product (GDP).

The exact estimates from floods that have affected at least one of every seven Pakistanis will not be available for several weeks, or it may take a few months before the damage can be assessed.

Prime Minister Shehbaz Sharif has said that the recent floods caused more significant damage than the 2010 calamity. Due to the 2010 super floods, the economic growth rate had slowed by 2pc, and the financial losses were estimated at $9.7bn.

The unprecedented rains and floods, which have been ravaging most parts of the country since mid-June, have already killed more than 1,200 people, perished nearly 750,000 livestock, swept away major crops on swathes of farmlands, damaged over 6,000 kilometres of roads, razed over 1.2 million homes, and destroyed 243 bridges connecting different areas and regions of the country.

The fast-paced surge in inflation and acute demand destruction shows how the country’s economic landscape will shape over the next several months

Most deaths, as well as infrastructural and crop losses, are reported from Sindh, the worst affected province during the 2010 floods, followed by Balochistan, Khyber Pakhtunkhwa and south Punjab. Overall, according to the National Disaster Management Authority (NDMA) situation report for September 2, at least 33m people have been affected by the floods, 14.5m in Sindh and 9.2m in Balochistan, with nearly 472,000 put up in relief camps set up by the military as well as relief agencies.

With the rain-induced calamity still moving from one place to another, its negative impacts are already starting to show up on the economy. The immediate effect of the floods can be seen in the rapid increase in the headline inflation in August when the consumer price index (CPI) spiked to the 47-year high of 27.3pc, the third fastest increase in the prices of consumer goods and services since April 1975, and the fifth fastest since October 1973.

The August prices don’t even capture fully the impact on food or non-food inflation resulting from the recent floods. No wonder analysts are projecting a sharper rise in food inflation going forward because of the destruction of food crops, especially tomatoes in Sindh and onions in Khyber Pakhtunkhwa, and disruptions in the supply chain due to flooded or damaged roads.

The historical inflation data confirms that the CPI index has increased by more than 13pc in the last three months as energy subsidies are revoked and taxes and levies imposed on fuels.

A brokerage firm recently said in a note that an increase of this scale in the inflation index is usually seen in a period spanning over 12 to 18 months. No wonder analysts are of the opinion that the International Monetary Fund (IMF) and the State Bank of Pakistan (SBP) will have to revise their earlier average annual pre-flood inflation projections for the current fiscal year from 19.9pc and 18-20pc to, maybe, 22-24pc once the actual economic impact of the devastation is fully factored into their fresh assessments. The Ministry of Finance has estimated that the inflation rate may soar to 26pc compared to the budget target of 11.5pc.

While the immediate victims of the devastation induced by weeks of flooding are poorer, rural populations, the massive destruction of industrial and food crops and livelihoods of millions of people are causing massive demand destruction across the country, including the parts that remain unaffected by the flood waters.

Consequently, we see carmakers, tractor manufacturers and steel producers cut down their production temporarily amid a fast build-up of inventories and a sharp reduction in demand. The fast-paced surge in inflation and acute demand destruction shows how the country’s economic landscape will shape over the next several months.

The impact of the floods will not remain confined to agriculture, large-scale industry and inflation. It will soon spread to the other segments of the economy, including textile and rice exports. The construction industry has also slowed down due to the dip in demand due to torrential rains and floods.

Most analysts agree that the crop losses and the impact of the food-related demand destruction on the large-scale industry will further slow down the economy, scaling down the budgeted GDP target of 5pc and the IMF projection of 3.5 per cent for the current year to just around 2pc. The SBP, in its last monetary policy statement, flagged heavy rainfall as a threat to the economy, given its impact on the agriculture sector.

The government ministers say it might take five years to rebuild the damaged infrastructure and rehabilitate the affected populations, with acute food shortages to remain its primary concern in the near term.

Analysts argue that funding and reconstruction will be a challenge for the cash-strapped government, which is forced to cut its spending under its loan deal with the IMF, which has just released $1.17bn in assistance to shore up the central bank’s liquid foreign currency reserves.

“The timing of the floods could not have been worse as Pakistan has already been facing a challenging time, trying to avoid a default and manage soaring inflation,” analysts at a brokerage firm write in their flash note on floods.

Published in Dawn, The Business and Finance Weekly, September 5th, 2022

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