The government spokespersons reckon that since much of the rehabilitation effort will be funded by foreign aid and concessional loans, no significant burden thereof will shift on to the exchequer. Everyone would like to believe these optimists but experience, so far, proves otherwise

AS details of the damage caused by the earthquake that hit northern areas and Azad Kashmir unfold, it is obvious that its long-term cost would be enormous – the highest suffered by post-1970 Pakistan in a calamity.

In sharp contrast thereto, the prime minister, his economic advisors, and pro-government lobby in the private sector believe that the impact of rescue and rehabilitation effort won’t impact the 05-06 GDP growth target of seven per cent.

Private sector believes that with major industrial centres unaffected, productive capacity of the economy is intact. If anything, rehabilitation task will boost its growth as more of its output is consumed in that effort. This belief helped to the KSE-100 index to rise by over 330 points since October 8, as everyone else ran from pillar to post in a frustrating effort to transport relief goods to the quake victims.

Other businesses, especially transporters and textile and medicine wholesalers displayed a vigour for cashing in on this tragedy. Besides this appalling state of affairs, there were instances, though not many, of the relief goods finding their way to private warehouses instead of the quake-hit areas.

In this milieu, government spokespersons continue to point to the fact that, since much of the rehabilitation effort will be funded by foreign aid and concessional loans no significant burden thereof will shift on to the exchequer and fiscal deficit won’t rise. Everyone would like to believe these optimists but experience, so far, proves otherwise. For a variety of reasons, this optimism isn’t justified.

Either the government is unclear about the enormity of the task ahead or it is over-estimating the generosity of donors which, in spite of being warm, has not been overwhelming. Or perhaps, the government plans to continue with its policy of containing fiscal deficit and building foreign exchange reserves, no matter what it may cost, as a result of delaying urgently needed repairs to the social and physical infrastructure.

Government’s 12-point rehabilitation plan can be divided into two clear phases. The first, already underway, will end after the injured are shifted to rescue centres for medical treatment. It would be a massive effort involving many agencies and huge resources considering the fact that it will require transporting and treating nearly 75,000 injured and housing as many orphans in state-run safe houses until their relatives are located.

To prevent spread of epidemics, a simultaneous operation will involve providing the remaining three million victims food, medicines, cooking utensils and clothing, and housing them away from the ruins in emergency shelters with sewerage facilities.

Given the impediments to access, more difficult will be the removal of debris and burial of the dead to reclaim land for relief camps and commence the task of building secure shelters wherein the victims can live through the winter.

Although the cost of this operation may just be met by local and foreign aid that will add up to $375 million, the second phase — rehabilitation — would test to the hilt government’s over-optimism; WHO estimates that it could exceed $10 billion. This phase will involve paying not just for re-building the damaged physical infrastructure but also for building thousands of houses via cash grants to victims.

It is estimated that over 0.5 million houses collapsed. Given the high death toll and some victims being able to avail housing finance from the banking sector, the number of state financed houses may drop to 0.4 million. At Rs75,000 per house, the total rehabilitation cost this part alone could amount to Rs300 billion or $5 billon. Interestingly enough, official estimate of the total rehabilitation effort, that includes a lot more, is only $5 billion.

It overlooks the cost of repairing roads, bridges, schools, colleges, hospital, government offices, power houses, telecom centres and cantonments as well as the cost of setting up several permanent rescue centres in these areas whose absence magnified the impact of the recent disaster. Setting up these centres will require equipping them for effective disaster recovery work and training hundreds of locals in rescue work.

Finally, it must upgrade its seismic activity monitoring capacity and set up at least two such centres in these areas. Making all these systems work will also entail hiring individuals from other provinces and giving them financial and other incentives to encourage them to shift to these areas. But this colossal outlay is one part of the effort; the other and more demanding part is the revival of economic activity in these areas.

Over a million have been rendered jobless by the tragedy. Reviving economic activity to accommodate them would require offering many incentives including improvement of land and air access to these areas and tax incentives to encourage setting up of businesses. This is the area which will require public-private consultation, cooperation and commitment to deliver according to peoples’ expectations.

The rehabilitation effort will strain the ability of cement, steel, timber and aluminium industries to deliver, which will force import of these items. To counter the impact of imports on BoP, for a limited period Pakistan could seek concessional access for its exports to developed country markets. But to sustain higher exports, this alone won’t suffice. In an environment of rising interest rates, oil prices and energy costs, it must be supplemented by lowering export duties and increasing export subsidies.

Spread over several years, this entire effort will consume billions of rupees each year on development expenditure, tax exemptions, concessions, and subsidies. Generating a surplus for this outlay may not be possible because a lot needs mending in the rest of Pakistan. Industrialists, including the pro-government lobby, vocally complain that weaknesses in Pakistan’s physical and social infrastructure greatly limit their competitive ability.

Rising oil prices and interest rates will compound their problems. Increase in inflationary pressures could dampen domestic demand causing a contraction in GDP and tax revenue. Aid from Europe is uncertain as that continent braces up to fight the pandemic feared from the spread of bird flu virus. Donors elsewhere, already stretched by rescue effort in war-torn Africa and tsunami hit South East Asia may not help as much as they might want.

It is in the interest of the West to support Pakistan – their ally in the war-on-terrorism – but their initial response wasn’t exactly heart warming. Aid-to-Pakistan ministerial moot scheduled for October 24 will be the testing ground for their resolve but even if lofty promises are made therein, rescue agencies the world over would vouch for the fact that such promises often don’t materialize. Unfulfilled promises to tsunami victims are the latest proof thereof.

All this poses a challenging scenario but instead of being frightened we must put our heads together to devise a strategy that delivers the essential minimum that is necessary to keep the country afloat until this phase is over. The strategy must focus on those country-wide development projects that are necessary for sustaining at least the present standards of living, to minimize the social and political fallout from this period of economic stress.

The government doesn’t have the kind of fiscal space this task requires. Going by the massive earnings declared by the corporate sector and big business houses in the past three years, it is obvious that they benefited a lot from this country. It is time they repaid a fraction of those gains by owing certain areas of the rehabilitation task. By all means their contribution to this effort should be allowed as an expense to give them full tax benefit.

Monetary management must ensure that inflation doesn’t exceed eight per cent. This will require sterilizing the money supply of the effects of converting the aid dollars into rupees, and prioritizing resource flow in productive investment. Tax relief to sectors of secondary importance should be postponed but taxes on sectors that will support rehabilitation work should not be raised. And we shouldn’t worry if fiscal deficit touches six per cent of GDP during the next two years; the world will understand the reason there for.

There is nothing unholy about running down exchange reserves by a couple of billion dollars as long as these resources are used for economic rehabilitation. Finally, the need for raising the productivity of every tax rupee was never felt more acutely. Unless accountability of tax revenue spenders is made truly robust, benefits of postponing many desirable expenses (at a high ultimate cost to the nation) may be insignificant.