Despite the odds, Pakistan Democratic Movement’s (PDM) government was able to snatch a deal out of the jaws of the IMF. Dr. Miftah Ismail deserved a quick pat on the back since he was instrumental in convincing the Prime Minister that without taking tough economic decisions, the IMF was not going to bring the stalled program back online. While the government initially dithered as it rightly suspected a political backlash, saner voices prevailed and Pakistan was able to avoid default. But, that was before these floods wrought destruction of biblical proportions.
Though a comprehensive demand and needs assessment is required, anecdotal evidence indicates that these floods are the worst in the country’s history impacting about 33 million people. What this means is that the both the federal and the provincial governments will now have to spend a massive amount of money not only for relief operations, but also for re-building homes, hospitals and schools as well as for infrastructure like roads and bridges. Preliminary estimates indicate that Pakistan is going to require at least USD 10 billion to cover reconstruction. There is no way Pakistan can adhere to the fiscal commitments given to the IMF before these floods. In other words, the on-going IMF program has now been rendered largely irrelevant. Thus, it comes as no surprise that there is already talk of approaching the IMF again for a Rapid Financing Instrument or an emergency loan.
Situation on the ground is still not clear as government and NGOs are still busy in relief operations, while there is still danger of more monsoon showers. What is clear, however, is that there are going to be plenty of knock-on effects in the wake of these floods for many years to come. Reports are trickling in that detail significant crop damage with some estimates putting it at 40% of total annual cotton production. If we assume a 40% reduction in Pakistan’s “textile group” export earnings from FY2022, then we are going to lose USD 7.4 billion in export earnings in this year, alone.
This substantial reduction in exports is going to significantly increase Pakistan’s current account deficit bringing further deterioration in the exchange rate. Moreover, in the absence of raw material factories are going to get forced to produce less. This reduction in annual production is going to lead to job losses as less production will require fewer workers. In the absence of unemployment benefits, large cities with industrial clusters may want to brace for sustained social unrest and higher crime rates.
If water does not drain quickly then the sowing season for the wheat crop is going to get delayed, thereby creating a shortage of wheat, the national staple. On top of a pernicious inflationary cycle in which the CPI increased by 27.3% year-on-year at end August, the prospect of a coming wheat shortage should be cause for alarm. Additionally, given extensive damage to road and rail links, it appears that this already-high inflation is about to get even higher! Such huge inflation, where it is going to substantially increase poverty in Pakistan, is going to eat away Pakistan’s economic growth thereby bringing new job creation to a standstill.
In time Pakistan will recover from these losses. But, what Pakistan will not recover from is the massive damage to the education infrastructure. According to Save the Children, almost 19,000 schools have been destroyed by these floods. The great majority of the damage has been in the province of Sindh where 16,000 schools have been destroyed while another 5,500 are being used to house displaced people.
The federal and provincial governments need to move against these challenges right away. For starters, the federal government should provide immediate relief by writing off last 3 months’ electricity bilIs of all BISP clients in all flood-stricken districts. This amount can be recovered from consumers in the rest of the country.
In order to get a grip on the coming fiscal deficit, the federal government should conceptualise, design and implement a flood relief tax on the more well-to-do citizens who belong to districts that have been spared by the floods, like Karachi, Lahore and Islamabad. Flood relief tax may be immediately implemented on banking transactions, restaurants, cinemas, luxury shopping and new car purchases, among others.
BISP has been instrumental in reaching the flood-affected people since there was already a mechanism in place for providing assistance to the poor—the program reached more than half-a-million people already in the flood-affected areas. Federal government has been quick in allocating funds to BISP, but the government should increase cash assistance amount by 100% and extend it to more families by lowering the approval criteria further, partially to also offset the coming tidal wave of inflation.
The government of Sindh, meanwhile, will have to take the lead in setting up thousands of temporary schools in the medium term. The Chief Minister may want to set up a “Teach for Sindh” program, whereby volunteers can temporarily move to the flood-affected areas and take on the role of teachers, mentors and motivators in order to ensure that interruptions in learning can be minimised. Karachi-based university students can play a very important role since they are closer to the hardest-hit districts in Sindh. All in all, the federal and the provincial governments will have to mobilise on a war-footing to tackle these challenges. Failure is not an option.
Though a comprehensive demand and needs assessment is required, anecdotal evidence indicates that these floods are the worst in the country’s history impacting about 33 million people. What this means is that the both the federal and the provincial governments will now have to spend a massive amount of money not only for relief operations, but also for re-building homes, hospitals and schools as well as for infrastructure like roads and bridges. Preliminary estimates indicate that Pakistan is going to require at least USD 10 billion to cover reconstruction. There is no way Pakistan can adhere to the fiscal commitments given to the IMF before these floods. In other words, the on-going IMF program has now been rendered largely irrelevant. Thus, it comes as no surprise that there is already talk of approaching the IMF again for a Rapid Financing Instrument or an emergency loan.
Situation on the ground is still not clear as government and NGOs are still busy in relief operations, while there is still danger of more monsoon showers. What is clear, however, is that there are going to be plenty of knock-on effects in the wake of these floods for many years to come. Reports are trickling in that detail significant crop damage with some estimates putting it at 40% of total annual cotton production. If we assume a 40% reduction in Pakistan’s “textile group” export earnings from FY2022, then we are going to lose USD 7.4 billion in export earnings in this year, alone.
This substantial reduction in exports is going to significantly increase Pakistan’s current account deficit bringing further deterioration in the exchange rate. Moreover, in the absence of raw material factories are going to get forced to produce less. This reduction in annual production is going to lead to job losses as less production will require fewer workers. In the absence of unemployment benefits, large cities with industrial clusters may want to brace for sustained social unrest and higher crime rates.
If water does not drain quickly then the sowing season for the wheat crop is going to get delayed, thereby creating a shortage of wheat, the national staple. On top of a pernicious inflationary cycle in which the CPI increased by 27.3% year-on-year at end August, the prospect of a coming wheat shortage should be cause for alarm. Additionally, given extensive damage to road and rail links, it appears that this already-high inflation is about to get even higher! Such huge inflation, where it is going to substantially increase poverty in Pakistan, is going to eat away Pakistan’s economic growth thereby bringing new job creation to a standstill.
In time Pakistan will recover from these losses. But, what Pakistan will not recover from is the massive damage to the education infrastructure. According to Save the Children, almost 19,000 schools have been destroyed by these floods. The great majority of the damage has been in the province of Sindh where 16,000 schools have been destroyed while another 5,500 are being used to house displaced people.
The federal and provincial governments need to move against these challenges right away. For starters, the federal government should provide immediate relief by writing off last 3 months’ electricity bilIs of all BISP clients in all flood-stricken districts. This amount can be recovered from consumers in the rest of the country.
In order to get a grip on the coming fiscal deficit, the federal government should conceptualise, design and implement a flood relief tax on the more well-to-do citizens who belong to districts that have been spared by the floods, like Karachi, Lahore and Islamabad. Flood relief tax may be immediately implemented on banking transactions, restaurants, cinemas, luxury shopping and new car purchases, among others.
BISP has been instrumental in reaching the flood-affected people since there was already a mechanism in place for providing assistance to the poor—the program reached more than half-a-million people already in the flood-affected areas. Federal government has been quick in allocating funds to BISP, but the government should increase cash assistance amount by 100% and extend it to more families by lowering the approval criteria further, partially to also offset the coming tidal wave of inflation.
The government of Sindh, meanwhile, will have to take the lead in setting up thousands of temporary schools in the medium term. The Chief Minister may want to set up a “Teach for Sindh” program, whereby volunteers can temporarily move to the flood-affected areas and take on the role of teachers, mentors and motivators in order to ensure that interruptions in learning can be minimised. Karachi-based university students can play a very important role since they are closer to the hardest-hit districts in Sindh. All in all, the federal and the provincial governments will have to mobilise on a war-footing to tackle these challenges. Failure is not an option.