While it is too early to estimate job losses after the floods, Pakistan’s GDP growth this year could fall to just 2% from the original target of 5%, according to the finance ministry. Typically, a loss of 1 percentage point in GDP growth in Pakistan results in the loss of one million jobs.
This means that in the current financial year ending in June 2023, the number of unemployed in Pakistan will increase by another 3 million. All because of the 2022 flood that killed an estimated 1,200 people and affected more people and farmland than the super floods of 2010.
Inflation in August has already hit a 49-year high, mainly due to the rising cost of fuel and electricity. It could rise further as the country begins to repair flood-related losses to the economy. Hard times ahead!
According to the government’s first estimates, the 2022 monsoon floods caused at least $11 billion in losses to the economy. This is why the government is considering asking the International Monetary Fund (IMF) to offer an unconditional loan facility like the one it offered in 2020 to mitigate the economic fallout from Covid-19.
During the 2010 floods, immediate foreign aid and subsidies did not even cover 10-15% of the estimated $9.7 billion in economic loss, so Pakistan is unlikely to have the $11 billion soon. dollars needed.
In the best-case scenario, the government will receive one or two billion dollars from the IMF in flood relief funding on top of the ongoing expanded financing facility, of which an additional $3 billion is planned. And, it will also receive funding from the World Bank, Asian Development Bank and other international financial institutions (IFIs).
Will the total amount so arranged in this fiscal year equal $11 billion? Seems too difficult. Will the flood-related foreign aid and grants be large enough that, combined with post-flood borrowing from the IFIs, we get a total of $11 billion? This, too, seems too difficult based on the experience of the 2010 super floods. $7 billion.
So far, the United Nations has appealed for $160 million in emergency funding and the World Bank is working with the federal government to immediately arrange $300 million.
This means that the external sector would remain under pressure during this fiscal year and that the current account deficit at the end of the year would be much larger than the pre-flood estimate.
A larger-than-expected current account deficit will in turn keep pressure on the rupee, leading to imported inflation and a spike in consumer inflation amid a slowing economy. It is not too difficult to imagine how this will erode the real income of ordinary Pakistanis and what would happen to people who are already unemployed or soon to lose their jobs as the floods begin to wreak havoc on the economy.
Government estimates show that the floods would slow agricultural sector growth to just 1.8% from 3.9% before the floods. The estimated growth of the livestock sector after the floods is only 2% against 3.7% before the floods. This will not only require more food imports, thus adding pressure on the exchange rate and imported inflation, but will also lead to higher food inflation due to reduced domestic food supply.
The number of unemployed in Pakistan could increase by another 3 million by June 2023 due to floods
Disruptions to food supply chains after the floods will exacerbate grain, meat and milk shortages due to damaged crops and loss of livestock, keeping food inflation high. Government post-flood estimates show headline inflation could remain as high as 26% this fiscal year against the State Bank of Pakistan’s initial estimate of 18-20%. It can be safely assumed that food inflation would remain even higher – somewhere around 30%, if not throughout this fiscal year, then at least for the next few months.
Already in August this year, annualized consumer inflation rose to 27.3% from 8.4% in August last year. The food inflation readings for August 2022 were more worrying – 28.8% in urban areas and 30.2% in rural areas. In August 2021, annualized food inflation stood at 10.2% in urban areas and 9.1% 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 sooner the losses of the agriculture and livestock sectors are compensated and the people associated with them provide financial support, the better it will be to contain food inflation and minimize the loss of rural jobs.
The central bank has assigned a target of 1.8 trillion rupees to banks for agricultural lending compared to last year’s actual lending of 1.419 tr. But setting a higher loan goal is not enough.
The government and the SBP must ensure that agricultural land damaged by flooding is reclaimed, that farmers begin to re-cultivate major and minor crops as soon as possible – and that livestock owners find enough resources and expertise to accelerate the raising of cattle heads. While the floods damaged/affected major food crops like rice, sugar cane, maize and wheat, they washed away minor crops like onion and tomatoes in addition to killing around 800,000 head of livestock .
The government and the State Bank are working together on a few agricultural and livestock rehabilitation programs which should be announced soon. But the government has little fiscal space for cost-sharing in concessional financing programs. It is time for the banks to do their national duty and participate wholeheartedly in these programs, even at the cost of losing some of their normal profits.
Posted in Dawn, The Business and Finance Weekly, September 5, 2022