MULTILATERAL lending agencies have expressed the need for undertaking tighter monetary controls to mitigate the likely negative impact of the October 8 earthquake. In their joint report on ‘Pakistan Earthquake,’ the World Bank and Asian Development Bank have pinpointed the grey areas where the local experts will recommend effective measures in the post-quake period to stay close to the fiscal deficit target, keep the inflation rate in single digits, manage the balance of payments risks and sustain the economic growth rate. It is a tall order, according to an independent economist.
But with pledges of loans and grants, the lenders and donors intend to play their part in containing the possible macro-economic imbalances. The positive outcome is expected to come from pledges being quickly followed by commitments and disbursement and an efficient and economical use of funds.
The quake has forced the government to revise downward the GDP growth rate target, for the second time during the financial year. Donor agencies have warned that the balance of payments is likely to be affected as imports of fuel, food and construction material increase during the relief operations in the quake-affected areas -– nine districts including 25 tehsils and some 4000 villages.
“There have been pressures on the external sector arising from strong aggregate demand and factors not directly related to the earthquake, which may result in some increase in imports of fuel, food and construction materials,” the report said.
Revenue mobilization and cut in expenditures, particularly reducing defence spending, are some of the measures donor agencies want the government to adopt in the near future to attain a certain degree of self-reliance. The multilateral agencies fear that a delay in aid inflows to finance the quake-related expenditures will aggravate pressures on the balance of payments.
The report points out that the magnitude of the devastation caused by the disaster has created additional expenditure needs to carry out relief and rehabilitation activities, thus putting under stress Islamabad’s budgetary plan for the current financial year.
“These pressures could pose difficulties for macro-economic balances and may undermine the achievement of its long-term development goals, unless additional concessional financing is made available by the international community,” the report said.
Independent experts believe that $6.2 billion pledges made, so far, by multilateral and bilateral donors/lenders will not be of much benefit unless these are followed by quick and timely commitments and disbursement. Normally, the lines of foreign credit take a much longer time than disbursement of local funds. For reasons best known to them, the donors often do not honour their pledges, worldwide. The government will have to be engaged in active diplomacy backed by transparency and accountability in the task of reconstruction and rehabilitation.
Given the fact that the bigger chunk of the pledges — $4 billion -– is in the form of loans, the external debt burden will mount. Of the $6 billion, a considerable amount of grants has already been utilized during the relief phase.
“The more significant pressure on the balance of payments comes from import demand, which was already very strong before the earthquake. Relief and reconstruction needs will have some additional impact on import demand due to higher demand for fuel and steel. This, in addition to the strong import growth arising from an overheating economy, will place an additional strain on reserves.”
The report asks for protecting important public expenditures in an effort to continue improving service delivery of health, education and public infrastructure. Though the federal government has indicated its preparedness to absorb a part of the budgetary impact of the disaster by making cuts in low-priority expenditures and raising additional domestic revenue, these adjustments will, however, be needed irrespective of the amount and type of financing that the donor community would provide.
Given the magnitude of resources for rehabilitation of the affected areas, it is unlikely that the government will be able to fully absorb the fiscal impact of the earthquake without significantly affecting public sector development activities, the report said. Though President General Pervez Musharraf has announced to delay the purchase of 75 F-16 fighter aircraft in view of the growing expenditure, the government has not yet found it prudent to cut its defence budget for the current financial year.
The other challenge the government is likely to face because of stepped up economic activities is the expected rise in inflation which, according to donors’ apprehensions, is expected to touch the double digit figure no sooner the reconstruction activities pick up pace.
“Once reconstruction starts, there will be further pressure on inflation, as the recovery will contribute to aggregate demand. Hence, there will be a need for a monetary policy geared towards containing inflation, in the absence of which average inflation in financial year 2005-06 could reach double digits, hurting the poor disproportionately.”
Though the impact on the GDP growth rate is likely to be minimal, the calamity forced the government to bring down its GDP growth rate target to 6.2 from 6.6 per cent. A seven per cent GDP growth rate was set for the 2005-06 financial year. Later, it was reduced by 0.4 per cent because of the cotton and sugarcane yields falling below target.
Further reduction in the output growth rate target has been necessitated because of a projected reduction in the NWFP’s output for the 2005-06 financial year. If the Rs76.4 billion output loss incurred by Azad Kashmir is added, the overall GDP growth rate is expected to end up at a level even less than the targeted 6.2 per cent.
The donors have expressed the hope that the impact on GDP growth could actually be positive, and will be felt mostly in financial year 2007-08 and 2008-09 once reconstruction activities pick up -– after adding $3.9 billion of new loans to well over $35 billion external debt payable by Islamabad. At the macroeconomic level, the most significant impact of the earthquake is expected to be on the government’s fiscal deficit, the report said.
“In the absence of any offsetting revenue increases and expenditure reductions, the earthquake is projected to increase the 2005-06 financial year’s deficit of the government by 0.6 to one per cent of GDP.”
An equally disturbing and difficult task needing urgent attention is the tens of thousands of people who lost their jobs, businesses and sources of earning, e.g. farmland. International financial institutions have evaluated that Pakistan needs over Rs8 billion to provide food for next six months to an estimated 324,000 people. The aggregate loss of unemployment has been estimated at some 1.6 million people in the affected parts of Azad Kashmir and the NWFP.
“Estimates show the total loss in employment to be around 324,000 jobs, or about 29 per cent of the employed population (above age 10) in the affected districts,” the report said.
About 38 and 25 per cent of the total number of people employed in the affected parts of AJK and NWFP, respectively, have suffered unemployment. Before the earthquake, a total of 1.12 million people were employed in different sectors, of which some 324,000 have lost their income sources. The people employed in the agriculture and construction sectors were hit hardest, followed by those having small businesses and shops. The estimates do not include unemployment suffered by migrant workers and public sector employees.
“Addressing the short-term needs of this vulnerable population for a period of six months, assuming that food requirements are fully met through a continuing relief programme, will require Rs3.5 billion, but if the basic food requirement is also included in the estimate, the amount will increase to Rs8 billion,” the report said, adding that, “in addition, an estimated Rs2.3 billion will be needed for a one-time grant to micro-entrepreneurs to help them rebuild lost assets.”
