Post flood impact on Pakistan economy

Post Flood Impact on -930695210037Pakistan Economy Prepared by : Asad Wazir Ali (0958136) Naveed Khawaja ( Abdul Ahad Siddiqui Ravi Kumar Lassi Submitted: Syed Qamar Ali Zaidi Date: 26th December 2010 ACKNOWLEDGEMENT: First of all, we would like to thank God Almighty, for giving us the strength to compile and complete this report on the economical after effects of the disastrous flood that came in Pakistan in July 2010. I would then like to thank my teacher Syed Qamar Ali Zaidi, who motivated us to prepare this report and get a true picture of the real world economy at crisis-hit places. Most importantly the cooperation amongst the group members made this report a success and completing it with great interest and enthusiasm. TABLE OF CONTENTS: ,[object Object]

Estimate of Total Damage Costs by Sector

Percentage Damage by Province / Area

ConclusionEXECUTIVE SUMMARY: The massive floods that began to hit Pakistan in late July have afflicted the country extremely. 79 of the country’s124 districts (24 in Khyber Pukhtunkhwa, 19 in Sindh, 12 in Punjab, 10 in Balochistan and 7 each in Azad Kashmir and Gilgit-Baltistan) have been affected. The disaster has not only led to losses in terms of human casualties and large scale displacement but has also damaged the agricultural country’s major crops over an estimated area of more than 1.38 million acres which constitutes 30 per cent of Pakistan’s agricultural land. Pakistan’s worst ever flooding disaster, in the history of 63 years, has damaged twenty percent area of the country, which is roughly equal to the size of England. It affected twenty million peoples, intensified the energy crisis and has created fears of social unrest. This humanitarian disaster left more than 5 million people homeless and around 10 million in urgent need of humanitarian aid. According to the United Nations, the disaster has affected close to 20 million people, killing 1,600 and leaving 1.6 million homes damaged or destroyed. It is worth mentioning that most disastrous aspect of the river’s floods is not its immediate effects; its after effects are considered much severe than its immediate damages. Apart from the human losses, the worst ever disaster in Pakistan is threatening to disrupt the economy. Wheat, Pakistan's most important produce has been severely damaged in the floods. Data from the Ministry of Food, Agriculture and Livestock reveals that 44,896 tonnes of wheat in Punjab and 80,823 tonnes in Khyber Pukhtunkhwa have been totally spoilt. Moreover, in Sindh, some 5,41,696 tonnes of wheat are destroyed, whereas, in Balochistan, the overall damage to crops has occurred over an area of 321,651 acres. The destruction of cotton, rice, sugarcane, vegetable crops and fish farms are enormous as well. Damage to cotton, rice, sugarcane and maize will hit the export sector, the main source for Pakistan’s foreign exchange reserves. Textiles and agriculture account for about three quarters of Pakistan’s 21 billion dollar export target this year. The floods have eaten about 20 percent of the cotton crop (14 million bales for this year). It has negatively affected large-scale manufacturing and exports by 25 percent. It is noteworthy that after recording its lowest growth in a decade, GDP had been expected to grow by 4.5 per cent in the fiscal year ending June 30, 2011. Now, it was assessed that Pakistan could achieve about 3.5 percent GDP growth rate this fiscal year. It means a loss of around two billion dollars in terms of GDP. This loss does not include the losses of assets and properties. The huge economic losses can lead the massive unemployment, hyper-inflation and social unrest. The huge loss of food items and livestock will lead to higher inflation. Prices of vegetables, fruits, cloth, milk and meet can be accelerated. The floods are likely to push up food prices and transportation costs for other goods, so further increase in inflation is expected. It is an important aspect that reconstruction activities will lead the unusual increase in the cost of construction materials including steel, cement and other relevant accessories. FLOOD AFFECTED AREAS Pakistan Flood 2010 Overview Over the course of the monsoon season in July and August 2010, Pakistan experienced the worst floods recorded in its history. Heavy rainfall caused flash and riverine floods in the north and north-western regions of Pakistan (parts of Khyber Pakhtunhwa [KP], Gilgit Baltistan [GB], Balochistan, and Azad Jammu and Kashmir [AJK]) that combined to create a moving body of water equal in dimension to the land mass of the United Kingdom travelling southwards. The high-intensity rainfall in KP generated unprecedented flood peaks in the Swat River. These floods severely damaged the Amandara Headworks and washed away the Munda Headworks, both major irrigation structures.5 The combined flow of the Swat and Kabul Rivers generated another unprecedented flood peak at Nowshera town, causing severe damage. The flood waters travelled downstream through the barrages in Punjab and Sindh until they reached the Arabian Sea downstream of Kotri Barrage. Extreme high floods were recorded at the Chasma and Taunsa Barrages, and a near historic flood peak was also recorded at the Kotri Barrage. Background The floods had expected to have a substantial adverse impact on the economy. As the effect on various macroeconomic parameters essentially depend on the policy that the government adopts, it would be difficult at this juncture to provide any quantitative assessment of the impact of floods on the economy. The government is faced with a set of macroeconomic tradeoffs and has to choose an optimal policy that will mitigate the impact of floods in the shortest period of time, while protecting the long-run objectives of sustainable economic stability and growth. The National Disaster Management Authority (NDMA) has estimated that the floods affected seventy-eight districts and covered over 100,000 square km. The floods have affected more than 20 million people, (over one-tenth of Pakistan's population) with over 1,600 reported deaths and nearly 2,946 injured. About 1.6 million homes have been destroyed, and thousands of acres of crops and agricultural lands have been damaged with major soil erosion happening in some areas.19 Pre-Floods Economic Scenario Pakistan's economy has been struggling to regain stability since enduring the external and internal shocks in 2007/08. Even prior to the floods, there were increasing concerns about the health of the Pakistan economy. While Pakistan's external economic position has improved significantly, as the external current account deficit declined to 2 percent of GDP in 2009/10 and SBP foreign exchange reserves rebounded to US$13.1 billion at end-June 2010, and economic activity has shown some signs of acceleration, with real GDP growing by 4.1 percent in 2009/10, fiscal performance has deteriorated and is posing a threat to economic stability. The 2009/10 fiscal deficit target, which was revised upwards to 5.1 percent of GDP only in March, was missed by a wide margin-by 1.2 percent of GDP- -owing to a substantial overrun in electricity subsidies and other public spending and a shortfall in tax revenues. Lack in structural reforms caused delays in mobilizing budget support from the donors, which caused the Government to yet again resort to borrowing from the central bank to finance its substantially higher fiscal deficit. Expansionary fiscal policy and monetization of government debt has added to inflationary pressures; the year-on-year inflation has rebounded to 12-13 percent. ECONOMIC IMPACT There is no doubt that the flooding in Pakistan inflicts serious damage on the present economic growth, public finances and socio-economic conditions, but the long-term effects come from the damages assets and properties. The shutting down of one major gas field and six power plants compounds the consumer’s misery by adding another 1500 MW to the already 4500 MW of power shortfall. Numerous bridges, roads and railway tracks washed away. The World Bank, states the economic impact is huge, indicating that direct damage was greatest in housing, roads, irrigation and agriculture. According to the Director General of the Pakistan Electric Power Company, they faced losses of more than four billion rupees (47 million dollars) due to the floods with some grid stations wiped out, while around 1000 villages in flood-hit districts of southern Punjab are without power, where two grid stations are badly affected. The installations of new poles, wires and feeders are required. The losses of assets and properties in private sector includes housing, business premises, livestock, dairy farms, fish forms, agriculture lands, crops of cotton, rice, sugarcane, maize, fruits, vegetables, domestic appliances, installations, furniture, fixtures and uncountable domestic assets and consumer durables. Direct and Indirect Damages: Direct Damage refers to the monetary value of completely or partially destroyed assets, such as social, physical and economic infrastructure calculated at the book value, or the depreciated value of lost immovable assets. Movable assets like goods, furniture, machineries and inventories lost during the earthquake are valued at the replacement cost. Indirect Losses are income losses, and comprise both the change of flow of goods and services and other economic flows such as increased expenses, curtailed production and diminished revenue, which arise from the direct damage to production capacity and social and economic infrastructure. Wherever possible damage and losses have been further split across public and private sectors to assist in macroeconomic analysis and to guide the development of public sector recovery strategies that optimally also take into account the recovery of private sector assets and services Estimate of Total Damage Costs by Sector Overall damage is estimated at Rs 855 billion (5.8 percent of 2009/10 GDP), with damages in agriculture sector amounting to Rs 429 billion (over 14 percent of sectoral income). On the other hand, rupee value of damage to the housing sector is less than one-third of that in agriculture, yet comprises almost 39 percent of the sectoral value-added. With 44 percent of total (direct and indirect) damages, Sindh was the worst affected by floods, followed by Punjab (26 percent) and Khyber- Pakhtunkhwa (12 percent). The federal government also has a sizeable share (11 percent) share in total damages, although most of them are contributed by indirect losses of federally owned commercial banks and financial institutions. -2897080 Percentage Damage by Province/Area -646430389255 3854450-36195Agriculture: Agriculture has been the most severely affected sector, accounting for a full 50 percent of the estimated cost of overall damages. The overall damages and losses to the sector are estimated to be around Rs 429 billion (of 14 percent of the sector value added in 2009/10), most (89 percent) of which are attributable to cropped agriculture. As all of the crops affected by floods were ready for harvest, almost all of these damages can be taken as loss in sub-sectoral value added. This implies that the value added in crop agriculture, which was targeted to increase by 3.5 percent in 2010/11, is now projected to decline by about 10 percent (from the level of 2009/10), with major crops showing a decline of about 7 percent and minor crops of 20 percent. Livestock Livestock sector too suffered some heavy losses the overall direct and indirect losses in the sector are estimated to be Rs 48 billion (i.e. only 3 percent of sub-sectoral value added). As such, despite the loss of large number animals, value-added in the sub-sector will decline only by 0.6 percent and the sub-sector is still expected to show a reasonable growth of 3.5 percent. Industry Industrial sector was not unduly affected by the floods, it has also seen a significant slowdown due to input losses that the textile and food preparing sectors face. The slowdown in commodity producing sectors, disruption of economic activity and heavy damage to infrastructure resulted in some deceleration in services sectors despite the positive fallout of reconstruction activity. Inflation 190501361440Inflation is likely to remain high. During 2009/10, headline inflation averaged a relatively high 11.7 percent, but it had been expected to decelerate this year. However, at end-September 2010, the month-on-month headline inflation surged by 2.7 percent (highest increase over two years). This increase in the monthly headline inflation is driven by post-flood price increase of perishable and non-perishable food items. On month-on-month basis, prices of perishable food items increased by 14 percent in September, while that of non-perishable food items increased by 3.6 percent. Although, this may be a temporary acceleration in prices resulting from flood damages to crops, heavy government borrowing from the banking system to meets its burgeoning expenditure is likely to exacerbate the problem. To counter these inflationary trends, the State Bank of Pakistan (SBP, the central bank) is moving to mitigate price pressures, and raised the policy interest rate by 0.5 percent in July and by another 0.5 percent (to 13. 5 percent) in September. Gross Domestic Product (GDP) Government's fiscal position is likely to get weaker as a large proportion of relief, rehabilitation and reconstruction cost would be borne by the government. Agriculture accounts for 20 percent of Pakistan’s gross domestic product (GDP). Flood has damaged crops sown over 1.93 million acres. The country has lost around 20 percent of its cotton crops. The tragedy will strain the government’s finances in different ways. Before the crisis, the budget deficit was expected to reach at 4.5 percent of Gross Domestic Product (GDP), but now it could widen to as much as 6 percent to 7 percent of GDP. Obviously to fulfill IMF conditionality in term of Budget Deficit to GDP ratio is not possible in the present situation. The higher fiscal deficit would lead to increase government borrowing. The crisis of external debt will become more serious. An upgrading in Pakistan’s credit rating in coming months is unlikely due to the devastation from the floods and its fiscal effects, but the country’s current ‘B3′ rating “adequately captures the risk” of the likely economic slowdown. A ‘B3′ rating is just one stage above the ‘C level’ while a ‘C level’ rating indicates sovereign default of the country. -396875709930 Balance of payments Balance of payments is under pressure. Even before the floods, the current account deficit was projected to widen slightly in 2010/11 from the 2 percent of GDP registered in 2009/10. The disaster is emphasizing this trend, mainly by increasing the trade deficit. Notwithstanding the positive impact of EU granting Pakistan an enhanced market access for a limited time (one year), export performance is weakening, as the textile sector is impacted by the need to source some 2 million bales of cotton that is lost due to crop damage, and a promising new export - cement - will now have to be diverted to domestic consumption. In contrast, reconstruction and rehabilitation will require a significant increase in imports particularly of food, medicines, fuels, construction materials, and machinery. Workers' remittances are likely to continue playing an important role in financing household consumption in Pakistan. 2037715348615 Conclusion The economy’s ability to achieve sustainable recovery remains constrained owing to slow progress in the prevailing security and economic conditions. The key economic variables impeding stabilization and thereby growth are high and persistent inflation, continuing fiscal slippages and unresolved power sector issues. Whereas adjustments in administered prices of fuel and energy and the post-flood disruption in the supply chain of food items have contributed to the recent upsurge in inflation, the high level of government borrowing from the SBP is diluting the effectiveness of monetary policy in containing excessive monetary expansion and thus inflation. The need for such borrowing is largely emanating from a seemingly difficult fiscal predicament. While rising security and flood-related expenditures and continued power sector subsidies are one aspect of the problem, a narrow tax base and a declining tax to GDP ratio are bigger issues magnifying the fiscal challenges. The cost to the economy is being paid through erosion in the purchasing power of the rupee, growing total debt, and discouragement of productive private sector activity. It is also an important aspect of the present crisis that this may further enhance the regional imbalances, because this damaged the economy of those regions which are already in underdeveloped and belong to economically depressed areas. The losses of income and business assets are the basic cause of unemployment, while unemployment along with inflation may add further poverty in the region where majority of poor is residing. If policy measures are not taken, the enhancing poverty will not be limited up to the flood affected areas it will be transformed ultimately to the urban centers, because inflation led by the shortage of food items and mobility of -2546351068705peoples in search of employment will affect the entire country. Glossary AJK: Azad Jammu & Kashmir Barrage: a type of dam which consists of a line of large gates that can be opened or closed to control the amount of water passing the dam. Burgeoning Expenditure: rapidly increasing expenses CPI: Consumer Price Index Credit Rating: estimates the credit worthiness of an individual, corporation, or even a country. Deficit Target: Direct Damage: the monetary value of completely or partially destroyed assets economic growth EU: European Union exports fiscal deficit fiscal policy GDP: Gross Domestic Product GB:Gilgit and Baltistan Indirect Losses income losses, and expenses which arise from the direct damage of economic infrastructure. Inflation: IMF: International Monetary Fund KP: Khyber Pakhtunkhwa macroeconomic parameters monetization of government debt NDMA: National Disaster Management Authority non perishable: not subject to rapid detoriation or decay optimal policy: In optimization problems of systems, a sequence of decisions changing the states of a system in such a manner that a given criterion function is minimized. perishable: subject to decay public finances: is a field of economics concerned with paying for collective or governmental activities, and with the administration and design of those activities. SBP: State Bank of Pakistan sectoral income: income of a particular sector socio economic conditions: a wide variety of interrelated social and economic factors that might tend to explain an observed phenomenon, event or set of events SPI: Sensitive Price Index Tradeoffs: a situation that involves losing one quality or aspect of something in return for gaining another quality or aspect. WPI: Wholesale Price Index Appendix Bibliography Magzines ,[object Object]

Economic Horizon - September 2010

Post flood impact on Pakistan economy

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