Wounds take time to heal

Published September 19, 2022

Flood-hit Pakistan needs at least three years of fiscal belt-tightening and energy reforms backed by a stable political system before it can reach the trajectory of 5-6 per cent annual economic growth.

General economic reforms aimed at plugging revenue leakages, restructuring state-owned enterprises, addressing structural issues of the export sector, ensuring growth in remittances and creating a conducive environment for foreign investment are also needed to sustain GDP growth at this level.

Initial estimates of economic losses due to flash floods in 2022 range between $22-$30 billion. The government says final estimates, expected to be out next month, maybe even higher.

If the flood-induced economic losses do not exceed $30bn, the country needs resources worth at least $15bn, or half the total estimated losses, within this fiscal year ending in June 2023. The need for the remaining $15bn could be left open for two more years ending in June 2025.

Keeping the ground realities in mind, we should not expect any significant improvement in key fundamentals of the external account anytime before Jan-March 2023

If this happens and fiscal controls and energy reforms are undertaken simultaneously for three years starting from the current fiscal year, only then can one hope to see Pakistan’s GDP growing at 5-6pc. This much growth is required to avoid politically explosive unemployment rates and socially devastating hunger and poverty.

During the recent visit of the UN Secretary-General Antonio Guterres to Pakistan, the government shared with him the fears of GDP growth sinking to just 1.7pc during this fiscal year (against the pre-flood projection of 5pc) due to flood-related losses to agriculture and livestock, industries, small businesses, services and households.

If the world does not help Pakistan generously in managing the economic fallout of the floods, then GDP growth in the next two years, too, could remain somewhere between 2pc and 3pc. That is why the government needs at least $15bn worth of financial arrangements in the next nine months while the country cries for much-needed political stability.

The world has started responding to the United Nations-Pakistan joint appeal for immediate foreign funds. But so far, only $150 million worth of funds have been pledged. The Asian Development Bank (ADB) is willing to offer a $1.5bn long-term loan. And Finance Minister Miftah Ismail says that after the ADB loan approval on September 21, Pakistan would get $500m from “another bank”.

During Oct-Dec 2022, the rupee would remain under pressure owing to the enhanced need for post-flood imports and the historic rise of the US dollar

The top UN official has made a strong case for soliciting global assistance for Pakistan, arguing that the recent floods result from climate change. While highlighting that Pakistan has “barely contributed” to climate change, it is “at the frontline of the impact of the change” he has also suggested holding a donor conference to help Pakistan. If advanced economies of the world keep the above fact in mind, they could provide sufficient funding cushion to Pakistan.

The support of the UN Secretary-General has made it easier for Pakistan to ask its creditors to consider debt swaps. If the idea of debt swaps is approved, the country can replace servicing of specified external debts on some green projects to reduce the impact of climate change.

And, with the consent of bilateral creditors, some domestic projects of Pakistan aimed at mitigating the flood-induced economic losses can also be adjusted for selective external debt-servicing. In both cases, Pakistan will be able to accelerate its GDP growth and generate jobs on the one hand and, on the other, reduce the need for foreign exchange for external debt servicing. But this will come with a cost: Pakistan will have to readjust some of its current geostrategic policies.

Pakistan has so far not indicated if it would also ask for external debt waivers. But the option of debt amortisation is open. The proposed donor conference may discuss the possibility of amortising some of Pakistan’s external debts, thereby delaying repayment of the principal amount of some debts. What is going to happen will be apparent within a few weeks.

Within weeks, it will also be clear what kind of financial support Pakistan eventually gets from China, Saudi Arabia and the United Arab Emirates. Much has been said and written about the possibility of billions of dollars worth of funding from these countries in different forms and shapes.

Keeping the ground realities in mind, we should not expect any significant improvement in key fundamentals of the external account anytime before Jan-March 2023. During Oct-Dec 2022, the rupee would remain under pressure due to weaker external account performance, enhanced need for post-flood imports and the impact of the historic rise of the US dollar.

The growth momentum of remittances is over now. In July-August this year, Pakistan received about $5.248bn in remittances, down 3.2pc from $5.419bn in July-August last year. Goods’ trade deficit in July-August 2022, however, fell about 16.4pc from a year earlier but still amounted to a whopping $6.327bn.

The deficit is bound to increase in the coming months as post-floods textile exports start falling, reflecting the impact of the damage done to the cotton crop and as Pakistan imports larger amounts of food grains, including wheat and prepared food like powdered milk. The floods have severely affected several standing food crops and killed more than 900,000 cattle heads.

Forex reserves with the State Bank of Pakistan (SBP) ($8.624bn as of September 9) are barely enough to cover six weeks of merchandise imports. Such a low level of reserves does not permit the central bank to intervene in the forex market to stabilise the exchange rates temporarily. That is why we continue to witness the rupee’s slide without any intervention from the SBP. Between September 1-15, the rupee lost 7.8pc value against the US dollar in the interbank market.

Published in Dawn, The Business and Finance Weekly, September 19th, 2022

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