Sep 22-2010
WAQAS AHMED
Pakistan's worst ever flooding disaster 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 may create fears of social unrest in the near future.
This humanitarian disaster left more than five million people homeless and around ten 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 1.2 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. Earthquakes and tsunamis damage suddenly the human life on earth, but river floods are considered as slow tsunami because they affect the human life more severely when flooding crisis is over. For instance flood along Yangtze River in China in 1931 left 1.4 million people dead by drowning; while ultimately this number had reached 3.7 million because of diseases and starvation.
Apart from the human losses, the worst ever disaster in Pakistan is threatening to disrupt the economy. Though, it is too early to estimate the economic cost of the devastating floods at this stage as waves of floodwaters may bring more destruction.
In comparison of magnitudes of human casualties and economic losses, the worst ever disaster in Pakistan seems a less devastating; its severe problematic aspect is its timing and the socio-economic characteristics of the region affected by the flood. Majority of the poor in Pakistan lives in flood affected areas. Big urban business tycoons or financial houses are not its direct sufferers; it directly hits the areas where majority of the people under the absolute poverty is living.
This was the time when they were expecting to earn their long waiting annual income by sale of cotton, sugarcane and other seasonal crops and they were planning to start the cultivation of wheat in the coming month. The crisis during the holy month of Ramazan and before celebrating Eid-ul-Fitr will further deepen the social and psychological problems in the poor regions of Pakistan.
It is notable that the production and distribution of cotton has a pivotal role in the economy of Pakistan. It is not only a part of economic strategy, but has its social dimensions. Rural population in cotton and sugarcane growing areas prepares its annual schedules of social activities with consideration of expected cash flows. Those cash flows are received twice in a year: after the sale of wheat and cotton crops.
In the rural Pakistan, sale and purchase of assets, date of marriages, social functions and gatherings, home construction, stock of consumable goods, purchase of consumer durables, redemption of loans, funding for education and the purchase of jewellery and clothes are based on the receipts of income from cotton, sugarcane, rice and wheat crops.
When income from crops goes into the pockets of the growers, they transfer it into banks and retailers of urban areas. The demand for consumers' goods in the urban areas increases at the end of crop seasons and income of the traders and manufacturers of durable and consumers' goods increases. This is the basic simultaneity in the domestic economy of Pakistan. Unfortunately, flood damaged this simultaneity.
MACROECONOMIC IMPLICATIONS Several methods and techniques are available in economic literature to quantify the economic losses by flooding. 'HAZUS-MH Flood Loss Estimation Methodology', Loss of Life Estimation Risk Assessment System', GIS-Based distributed techniques', 'Elsevier Mathematical Model', and 'Input-Output method' are included in these techniques. 'HAZUS-MH Flood Loss Estimation Methodology' is based on estimated property damage.
This model estimates shelter needs and direct and indirect economic losses arising from floods. 'Loss of life estimation in flood risk assessment' method estimates economic losses on the basis of loss of life due to flood. 'GIS-based distributed technique for assessing economic losses from flood' is another method to estimate economic losses by floods; this method is more appropriate where industrial assets were damaged because of flood.
'Elsevier Mathematical Model' is used for rapid estimation of economic losses by floods in the urban catchments. 'Input-output method' and the 'Aggregate Macroeconomic Cost Estimation' are the other possible techniques to estimate the economic losses by floods. All these methods have been used to assess the economic losses in different times in various regions.
The basic problem with the available estimation techniques is that they cannot be used at the earlier stage because non-availability of required data. However, an approximation has been attempted to get some idea of the economic impact of present flooding in the country.
Government officials have estimated only public sector infrastructure losses, which range from $10 to $15 billion, which the country will have to spare for rehabilitating and reconstructing of the infrastructure. The donor organisations, including World Bank, Asian Development Bank, and the United Nations, are also measuring the economic impact of the floods. All sources are agreed that Pakistan's economy would likely grow slower than predicted because of the extent of the damage caused by the flooding. According to the Asian Development Bank's estimates, now Pakistan is unlikely to meet its 4.5 percent economic growth rate target.
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.
Agriculture accounts for 20 percent of Pakistan's gross domestic product (GDP). Flood has damaged crops sown over 1.93 million acres. It estimated crop loss at one billion dollars, saying the full impact on soil erosion and agriculture could only be assessed when the water recedes around mid-September. The country has lost around 20 percent of its cotton crops.
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 may negatively affect large-scale manufacturing and exports by 25 percent.
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 fulfil 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.
It may be noted that the government is planning to launch convertible bonds to collect money to finance the loss making business entities in public sector. According to the Privatisation Commission's feasibility, after investment of the funds raised by these convertible bonds, the loss making institutions would become profitable.
This strategic move at the time of present crisis gives signals that government is intending to transfer the funds from the previously announced bail out package to the flood relief fund, and the gap will be filled by the issuance of convertible bonds. However, the assumption of transforming the loss making institutions into profit earning centers is questionable. This is against the history of the public sector business entities in Pakistan.
Those institutions have been consuming huge public funds, but their crises have always been becoming more severe. Moreover, the successful launching of those bonds in the present state of affairs is against the economic rationale. Moody's Investors Service, which had expected Pakistan's economic growth to expand to 4.5 percent this fiscal year, may lower its estimate.
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.
However, positive inflow of foreign direct and portfolio investment and subscription of Pakistan's bond at abroad are the indicators that foreign investors do not have any apprehension about default risk. It is a sign that investors anticipate IMF and US support to prevent any fiscal crisis. Pakistan's equity market index (KSE-100) is in line with other emerging market indexes.
The average magnitude of foreign remittance in recent years is around 10 percent of GDP, however it is strongly expected that it may rise to help the families at home by the expatriate Pakistanis. Before the floods, the country had a healthy foreign exchange reserve of 16.45 billion dollars, though these reserves were achieved by IMF rescue package to save Pakistan from balance of payment crisis.
Losses of public and private assets and properties: There is no doubt that the flooding in Pakistan will inflict serious damage on the present economic growth, pubic finances and socio-economic conditions, but the long-term effects will come from the damages assets and properties. Floods have inflicted widespread damage on infrastructure. In cities, floodwaters have destroyed electricity installations, roads and phone lines.
The shutting down of one major gas field and six power plants will compound the consumer's misery by adding another 1500 MW to the already 4500 MW of power shortfall. The total number of bridges, roads and railway tracks washed away will be calculated when the crisis will be over. The quantification of losses in communication sector is currently impractical. The World Bank, which has announced a 900 million dollar loan for Pakistan, expects the economic impact to be huge, indicating that direct damage was greatest in housing, roads, irrigation and agriculture.
According to an estimate, the reconstruction in northern areas alone could cost 2.5 billion dollars. 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.
Effects on poverty and regional imbalances: No financial compensation is possible for these great private losses. Even no mechanism is possible to verify and quantify these private losses. Such losses have a long-term social cost. They may change the economic ranking of the families which will create social and economic complication and restructuring in the society.
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.
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 peoples in search of employment will affect the entire country.
Effects on charity institutions and urban poverty: In the last, two important implications of present crisis are considerable. Fairly a large number of urban poor, needy persons and white collars wait for the holy month of Ramazan on the hope of their help by the affluent peoples in the form of charity and Zakat. Their entire annual activities are based on the inflow of funds during this month. Many humanitarian and welfare organisations and NGOs expect the extraordinary jump in their collection of funds for charitable purposes.
It is very much likely that their expectations will be badly hit at this stage of abnormality, particularly when accelerating inflation and shrinking in economic activities badly damaged the economic status of a large number of urban households. This situation may further deepen the crisis and social unrest.
The justifiable utilisation and genuine transfer of the funds collected from the general public in the name of flood affected peoples is another important concern. Thousands of the political and non-political groups are busy in collection of cash and goods for flood affected peoples in every town and street. There is no possibility to create transparency in the collection and distribution of those public funds.
Helping the needy peoples by own pockets is not questionable, but utilisation and transfer of those funds which have been collected from general public must be questionable. They must be audited. Particularly, transparency and audit is required when big political parties, large NGOs, trade organisations, and business associations are competing and claiming for their role in human welfare activities. Their certified rankings may lead a positive and transparent environment.
