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Assessing the tragedy of the Pakistan floods August 31, 2010

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Mohsin Khan, PIIE and Shuja Nawaz, Atlantic Council, Washington

This article first appeared here in the East Asian Forum on 29 August 2010.

The floods in Pakistan have affected one-fifth of the country (an area roughly the size of England) and engulfed large parts of all four provinces—Punjab, Balochistan, Sindh and Khyber-Pakhtunkhwa (formerly the North West Frontier Province). The vast scope of the damage makes this a truly national disaster with long-term economic and political consequences. With waters still rising, it is far too early to assess the economic costs; a proper assessment will be made in time by the Government of Pakistan, assisted by the UN and the World Bank. But on the basis of early indicators, a preliminary and admittedly impressionistic view of the damage can be formed.

The immediate impact on the population is truly staggering—20 million people affected with 8 million in need of water, food and shelter; 1500-2000 killed; 4 million left homeless; and 15 million displaced. The devastation has hit virtually all sectors of the economy. The Pakistan government estimates total economic damage to be near US$15 billion, or about 10 per cent of GDP. Damage to infrastructure alone (roads, power plants, telecommunications, dams and irrigation systems, and schools and health clinics) amounts to around US$10 billion. Agriculture, which represents 25 per cent of the Pakistan economy and provides employment to 50 per cent of the workforce, is extremely hard hit. At least 30 per cent of the cotton crop has washed away, which is bound to devastate the textile industry, the mainstay of Pakistani manufacturing and exports. Adding to this is the loss of wheat, rice and maize crops, and about 10 million head of livestock. Altogether agricultural production this year could fall by as much as 15 per cent.  Even next year’s production is likely to show a further decline because the spring wheat crop that needs to be planted in October-December this year will not be possible.

The overall growth of real GDP, which prior to the floods was projected to be in the 3-4 per cent range for 2010, will now turn negative. Estimates of the fall in real GDP are in the 2-5 per cent range, although it is conceivable that the decline could be far greater as more information on the losses of both physical assets and production becomes available. Reconstruction activity could provide some boost to the growth rate, but it is likely that any positive effects will only show up in 2011 and beyond, and even then it may not be sufficient to bring the growth rate back to the 2009 level of 4 per cent for several years.

Inflation, which is already in double digits, will rise with the increase in food prices and the destruction of the food supply distribution networks. Furthermore, the government will need to finance the reconstruction effort, and absent sufficient foreign assistance and with an inability to divert domestic revenues towards reconstruction, the increased expenditures will necessarily widen the fiscal deficit to well above the government’s budget target of 6 per cent for this year. As is customary in Pakistan, this deficit will be financed by borrowing from the central bank, leading to an expansion of the money supply, pushing inflation higher. Indeed inflation could very easily touch 20 per cent by the end of this year.

This is a dismal macroeconomic scenario.

The current IMF program, which was already in serious trouble before the floods, will have to be abandoned and a new program based on a completely different economic reality will have to be negotiated. The United States aid program, under the five-year Kerry-Lugar Bill, will also now need to be reframed; aid must be front-loaded to speed up relief and reconstruction work.

The political consequences of the floods are no less dire. Since Pakistan’s provinces are largely language-based and contain different ethnic groups, they are riven by tensions that sometimes erupt into violent conflicts. Sectarian conflicts concentrated in central and southern Punjab are certain to be exacerbated by the economic hardship the floods have produced. The central government led by the Pakistan Peoples’ Party (PPP) of President Asif Ali Zardari is weak and often seen as ineffective. But it may survive the turmoil caused by the floods if the opposition remains divided on regional grounds, and the largest opposition group, former Prime Minister Nawaz Sharif’s Muslim League, remains largely a Punjabi party. This is Pakistani politics as usual. And as the politicians bicker and fight, the army’s position in the polity strengthens and it gains more public support for its flood relief activities.

The country’s weak central coalition government, often accused of inefficiency and corruption, will need to prove that it can manage the flow of flood-related aid. It must ensure that aid is equitably distributed and effectively used at the provincial level. This may be difficult for a government that has been loath to decide quickly on tough political and economic issues. Even weaker coalition provincial governments will face similar tasks, and will have to clamor for more of their share of resources.

The floods have dealt Pakistan a severe body blow while it was still reeling from the economic crisis, political infighting, and the war against terror. The diversion of resources and attention to the flood relief and reconstruction work will undoubtedly affect social spending and the drive against the Pakistani Taliban, whose fighters have been dislocated from their tribal bases in the Northwest Frontier region and have taken the war back into the Pakistani hinterland.

How quickly the country recovers from the floods will depend not on the generosity of foreign donors, although this will be important, but on the ability of the Pakistan government to generate the domestic resources and public support to undertake massive reconstruction. Even if all goes well, it will still take several years for full recovery to be achieved. If not, the country will limp along in a semi-crisis state both economically and politically, an undesirable prospect for Pakistan and for the world.

Mohsin Khan is Senior Fellow at the Peterson Institute for International Economics in Washington DC; Shuja Nawaz is a director of the South Asia Center at the Atlantic Council of the United States in Washington DC.

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