How floods add to Pakistan's economic woes

Pakistan has witnessed catastrophic flooding over the past few weeks that have affected more than 33 million people — some 15% of the nation's population — and submerged a third of the country.  

The natural disaster has killed over 1,500 people and caused damage worth billions of dollars, compounding the woes of an economy already beset by a raft of problems, ranging from a heavy debt burden and ballooning current account deficit to a tumbling currency and skyrocketing inflation, particularly food prices.

The rains have damaged vast swaths of rich agricultural land and crops.

Parts of Pakistan were cut off from the rest of the country as flooding rendered roads and bridges inaccessible. Crucially, this included areas in the nation's southern breadbasket.

Finance Minister Miftah Ismail said at the end of August that the price of onions, a common ingredient in Pakistani meals, had increased more than fivefold.

The price of tomatoes — another essential ingredient in Pakistani cuisine — also soared following the destruction of most of the crop, according to official statistics.

Khaqan Najeeb, a former adviser to the Finance Ministry, said crops like cotton, rice and tomatoes have been seriously damaged.

The damage to the agriculture sector is likely to widen Pakistan's trade deficit from the current 2.4% of GDP to more than 3.5%, as the country is forced to import more foodstuffs and other goods from abroad, he pointed out.

Rising costs, low growth

Pakistan will import more tomatoes, rice, wheat, cotton and other food items, said Qaiser Imam Shaikh, a leading businessman in the country. And rising freight costs mean the prices of these items will continue to surge, making life very difficult for poor and middle-class Pakistanis, he told DW, adding that imported items cannot be sold at discounted rates.

"So, of course, there will be more inflation in coming days because of the destruction of agriculture," he said.

Shahida Wizarat, a Karachi-based economist, said Pakistan finds itself in a tough spot.

"If we do not import industrial raw materials, then manufacturing would be hit and if we do, the import bill will rise exponentially. We are in a very difficult economic situation," she stressed.

The expert called on advanced Western economies to waive Pakistan's debts and help. "After all, it is their obsession with growth that has destroyed the environment, punishing countries like Pakistan, which contributes very little to carbon emissions," she said.

In June, the Pakistani government set a 5% growth target for this year, while the International Monetary Fund forecast that the economy would expand by 3.5%. But after the disastrous floods, many expect zero growth in 2022. 

"Given the current economic and financial hardships, the zero percent growth prospect is not unrealistic," a renowned economist, who asked not to be named, told DW.

Finance Minister Ismail, however, told DW that the growth will be "around 2%."

"We forecast growth of 5% and expect growth of 2% now, hence a loss of 3%. But this is our model. The IMF predicted growth of 3.5% but hasn't shown yet, to the best of my knowledge, what the reduction will be. It is wrong to use our reduction number in the IMF model. We still think growth will be around 2%," he said.

Help only with strings attached

Pakistan's foreign exchange reserves currently stand at about $8.6 billion, only enough for about a month of imports. The year-end target was to increase the buffer by up to 2.2 months.

The country was able to bring an IMF program back on track after months of delay, thanks to tough policy decisions.

Salman Shah, a former finance minister, said Pakistan will likely have to increase its borrowing in the coming months to service its foreign debts and finance essential imports. 

The South Asian nation needs a total of $33.5 billion (€34.5 billion) in the year through June 2023, Bloomberg reported in July. Its next big payment — $1 billion in international bonds — is due in December.

Shah said funds from bodies like the IMF to service the debt will come with strings attached, such as conditions to increase electricity prices, impose additional taxes or cut fuel subsidies.

"Such measures will raise the cost of doing business, affecting manufacturing and growth. With the political uncertainty looming large, the country is not likely to attract foreign and local investment," he added. "Given all this, even a 2% growth is not possible let alone 3% or more."

Vow to take 'prudent decisions'

Despite the challenging financial circumstances, Ismail said Pakistan will "absolutely not" default on debt obligations.

"The path to stability was narrow, given the challenging environment, and it has become narrower still," he told Reuters on September 18. "But if we continue to take prudent decisions — and we will — then we're not going to default. Absolutely not."

He acknowledged that global markets were "jittery" about Pakistan, given the economy's massive losses after the floods, but noted that external financing sources were secured, including over $4 billion from the Asian Development Bank, the Asian Infrastructure Investment Bank and the World Bank.

"Yes, our credit default risk has gone up, our bond prices have fallen. But ... I think within 15 to 20 days, the market will normalize, and I think will understand that Pakistan is committed to being prudent."

Edited by: Srinivas Mazumdaru