While it is too early to estimate the post-flood job losses, Pakistan’s GDP growth this year may fall to just 2 per cent against the initial target of 5pc, according to the Ministry of Finance. As a rule of thumb 1 percentage point loss in GDP growth in Pakistan results in one million job losses.
This means that during the current fiscal year ending in June 2023, the number of jobless people in Pakistan will rise by an additional 3m. All owing to the deluge 2022 that has killed around 1,200 people and has affected more people and farmlands than the 2010 super floods.
Inflation in August has already hit a 49-year high primarily due to the higher cost of fuel and electricity. It may rise even higher as the country begins to fix flood-related losses to the economy. Tough times ahead!
According to initial estimates by the government, the 2022 monsoon floods have caused at least $11 billion in losses to the economy. This is why the government is considering requesting the International Monetary Fund (IMF) to offer a free-of-conditions loan facility just like the one it had offered in 2020 to mitigate the economic fallout of Covid-19.
During the 2010 floods, immediate foreign aid and grants did not even cover 10-15pc of the estimated economic loss of $9.7bn so it is unlikely that Pakistan will have the required $11bn flowing in any time soon
In the best case, the government will get one or two billion dollars from the IMF as flood-relief financing in addition to the ongoing Extended Fund Facility of which $3bn more are scheduled to come. And, it will also get some funding from the World Bank, the Asian Development Bank and other International Financial Institutions (IFIs).
Will the total amount thus arranged within this fiscal year equal $11bn? Seems too difficult. Will the flood-related foreign aid and grants be sizable enough that when it is combined with the post-flood borrowings from IFIs we get a total of $11bn? This, too, seems too difficult based on the experience of the 2010 super floods. During the 2010 floods, immediate foreign aid and grants had not even covered 10-15pc of the estimated economic loss of $9.7bn.
So far, the United Nations has flashed an appeal for $160m in emergency funding and the World Bank is working with the federal government to arrange $300m immediately.
This means that the external sector would remain under pressure during this fiscal year and the current account deficit at the end of the year would be much larger than the pre-flood estimate.
A larger than anticipated current account deficit will, in turn, keep the rupee under pressure bringing in imported inflation and causing consumer inflation to spike amidst a slowing down economy. It is not too difficult to imagine how it will erode the real income of ordinary Pakistanis and what would happen to the people who are already out of jobs or would shortly lose jobs as the floods start taking their toll on the economy.
The government estimates show that the floods would slow down the growth of the agriculture sector to just 1.8pc against the pre-flood estimate of 3.9pc. Post-flood estimate of growth in the livestock sector is just 2pc against the pre-flood estimate of 3.7pc. This will not only necessitate more food imports thus adding pressure on the exchange rate and imported inflation but will also cause higher food inflation due to reduced supplies of domestic food items.
The number of jobless people in Pakistan may rise by an additional 3 million by June 2023 because of the floods
Post-flood disruptions in food supply chains will aggravate shortages of cereals, meat and milk due to damaged crops and lost livestock, keeping food inflation high. The government’s post-flood estimates show that overall inflation may remain as high as 26pc during this fiscal year against the State Bank of Pakistan’s initial estimate of 18pc-20pc. It can be safely assumed that food inflation would remain even higher— somewhere around 30pc if not throughout this fiscal year at least during the next few months.
Already, in August this year annualised consumer inflation shot up to 27.3pc against 8.4pc in August last year. Food inflation readings for August 2022 were more disturbing — 28.8pc in urban areas and 30.2pc in rural areas. In August 2021 annualised food inflation stood at 10.2pc in urban areas and 9.1pc in rural areas.
At a time of such high food inflation rates, the government needs to focus specifically on the agriculture and livestock sector. The earlier the losses of agricultural and livestock sectors are compensated, and the people associated with them provided financial support, the better it would be for containing food inflation and minimising rural job losses.
The central bank has assigned a target of Rs1.8 trillion to banks for agricultural lending against the last year’s actual lending of Rs1.419tr. But setting a higher lending target is not enough.
The government and the SBP need to ensure that the farmlands damaged by the floods are reclaimed, farmers start recultivating major and minor crops as soon as possible — and livestock owners find enough resources and expertise to accelerate the breeding of cattle heads. Whereas the floods have damaged/affected major food crops like rice, sugarcane and maize and wheat, they have washed away minor crops like onion and tomatoes besides killing an estimated 800,000 cattle heads.
The government and the State Bank are working jointly on a few schemes for the rehabilitation of agriculture and livestock that are expected to be announced shortly. But the government has little fiscal room available for cost-sharing in concessional finance schemes. It is time for banks to perform their national duty and participate in those schemes wholeheartedly even at the cost of foregoing part of their normal profits.
Published in Dawn, The Business and Finance Weekly, September 5th, 2022