Pakistan’s flood losses deal crushing blow to ailing economy

By Saeed Shah/Wall Street Journal

ISLAMABAD, Pakistan September 15: Recent catastrophic floods will wipe out economic growth and cause acute food shortages in Pakistan, officials warned, threatening anew to push a country already reeling from economic and political instability into default.

Pakistan was looking to an International Monetary Fund bailout it secured last month and a package of global loan rollovers and investments to help restore finances hit hard by the price shocks caused by the Ukraine war. But plans to regain financial health have been upended by monsoon rains that hammered the usually arid southern regions of the country with five times more rain than they typically see, wiping out houses, bridges, roads and crops.

Government officials estimate at least $30 billion of economic damage and reconstruction costs, or about 10% of GDP. The figure has tripled from an early estimate last month and officials expect it to rise further. The United Nations Development Program, with the World Bank and Asian Development Bank, expect to complete an assessment of flood damage and reconstruction costs by mid-October.

Domestic resources can only meet a fraction of the government’s estimated cost and the international aid received so far falls far short of the country’s needs. Pakistan is in discussions with the U.N. over holding an international donor conference to raise flood-relief funds.

“The path to solvency was narrow. It has gotten narrower,” said Finance Minister Miftah Ismail.

Bond and currency markets, which had shown more confidence in Pakistan after the IMF deal, are again pricing in a high risk of the country defaulting on its foreign debt. Since the end of August, the yields on some of the government’s international bonds have jumped by a third, while the currency is one of the worst performing in Asia, down 25% over the past 12 months.

Globally, more countries are deemed to be at a high risk of defaulting, after inflationary ripples from the Ukraine war coincided with rising interest rates in the U.S., adding to pressure on indebted nations. Sri Lanka defaulted earlier this year, while in Africa, Ghana is seen as being at high risk. But a default by Pakistan, with a population of 220 million—more than the combined populations of Kenya, Sri Lanka, Ghana and Egypt—would deeply rattle investor confidence in emerging markets.

Official data show the country’s foreign-exchange reserves stand at about $9 billion, only enough to cover about six weeks of imports, according to analysts. The country must repay debt of more than $20 billion in this fiscal year, which started July 1.

Before the floods, the IMF had forecast economic growth of 3.5% for the current fiscal year. The government estimates that the disaster will knock some 3 percentage points off growth, which would leave the country with little or no growth this year. Pakistan’s initial calculations show that the lost growth alone will cost the economy $10 billion. Gone, for example, is more than a third of the cotton crop, which feeds the textile sector, the country’s main industry, according to the All Pakistan Textile Mills Association, an industry body.

Yousuf Nazar, an independent analyst, said that tax revenues, industrial production and other targets set by the government have been shredded. “All the figures have gone haywire,” said Mr. Nazar. “The risk of default has gone up considerably.”

The IMF program is both a lifeline and a straitjacket when it comes to the government’s path ahead. In return for funding, it calls for strict limits on spending and borrowing to make the country’s debt more sustainable. The body, which didn’t respond to a request for comment, has given no indication of easing the terms of its loan, which provides $4 billion over the country’s current financial year.

The lender has attributed Pakistan’s financial crisis to its loose fiscal policies, though the IMF is, in general, in favor of targeted help for the poor. Pakistan says it is committed to remaining within the IMF program as a defense against default.

The government is looking at diverting close to half of its budget for development projects this fiscal year, which would provide some $1.5 billion, said Mr. Ismail. The provinces may be able to divert an additional $2 billion altogether from their budgets, he said.

It is uncertain how far the provincial governments, which hold much power, will cooperate with the national government. Two of the country’s four provinces, housing two-thirds of the population, are run by the political party of Imran Khan, who was ousted as prime minister in April through a vote in Parliament. Mr. Khan has since been campaigning to topple the current government.

Pakistan will also push for compensation from richer countries at coming multilateral gatherings, including the U.N. General Assembly in New York and the next round of climate talks, set for November. Islamabad and U.N. officials have pointed to climate change as a cause of this year’s heavy monsoon rains, saying the amount of rain and geographical distribution departed from the normal pattern. Climate scientists are only just beginning the task of assessing the extent to which warming temperatures could have made this year’s extreme rainfall more likely.

Officials have said immediate relief alone—such as food and tents for those whose villages were submerged—will cost over $1 billion. Many of the 33 million people affected haven’t yet received such basic aid, charities say. More than 1,400 people were killed in the flooding, many of them children.

Some five million people are receiving food from the authorities, World Food Program and charities, according to the U.N., which has made an appeal to raise $160 million to cover immediate lifesaving aid. The government has given 1 million affected families each a $110 emergency cash payment.

The U.S. has announced the biggest contribution of aid so far, $53 million. Much of the aid is coming in kind, with 96 flights carrying supplies arriving from countries including the United Arab Emirates, Turkey and the U.S.

Longer-term rebuilding costs will be massive. It will take about $9 billion to reconstruct close to 8,000 miles of road and the 390 bridges damaged or destroyed, the government estimates, while railway lines, schools and hospitals will also need repair. Flood defenses, such as embankments and water channels, will need to be restored and augmented.

Some 1.7 million homes that have been damaged or destroyed are expected to cost about $4 billion to rebuild—and the figures don’t include the mud houses of the poorest that were washed away.

The depth of Pakistan’s financial trouble is so great that some U.N. officials have suggested using new mechanisms that have only just started to emerge in connection with climate change. During a visit to Pakistan last week, U.N. Secretary-General António Guterres said that he would push for a debt swap in which foreign creditors would exchange their loans for expenditure by Pakistan on infrastructure such as floodwater drains to make the country more resilient to climate change. Such a “debt for nature” swap was carried out by Belize, the central American nation, in 2021, though under very different circumstances.

It is unclear whether any of Pakistan’s lenders would agree to such an arrangement. The country has foreign debt of nearly $100 billion, of which close to a third is owed to China, while $42 billion is owed to multilateral agencies such as the World Bank, and more than $5 billion to Japan, according to the IMF.

Knut Ostby, head of the UNDP in Pakistan, said that the private sector should be involved. Longer-term options include attracting “impact investments,” where the money is used for commercial projects that advance environmental goals, such as building dams, and “green bond” issues, which raise money for climate-related expenditure, an instrument Indonesia has used.

“We need to look at much more than the traditional official development assistance, and much more than the traditional government budgeting, if we’re going to do proper recovery and reconstruction after a disaster like this,” said Mr. Ostby, whose agency is advising the government.

With many demands on donor money in recent years, including the Covid-19 pandemic, the collapse of the Afghan economy and the Ukraine war, Pakistan’s floods are competing with multiple crises for attention.

Without far more help, up to 11 million people will fall below the poverty line from the floods, said Aisha Pasha, Pakistan’s deputy finance minister.

“Pakistan is not a big emitter [of greenhouse gases.] It’s not our doing, what we’re going through,” said Ms. Pasha. “The losses are beyond our pockets.”

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