POST FLOOD IMPACT
ON
PAKISTAN ECONOMY
PREPARED BY :
ASAD WAZIR ALI (0958136)
NAVEED KHAWAJA (
ABDUL AHAD SIDDIQUI
RAVI KUMAR LASSI
SUBMITTED:
SYED QAMAR ALI ZAIDI
DATE:
26TH DECEMBER 2010
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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.
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TABLE OF CONTENTS:
1. EXECUTIVE SUMMARY
2. MAP: FLOOD AFFECTED AREAS
3. PAKISTAN FLOOD 2010 OVERVIEW
4. BACKGROUND
5. PRE-FLOODS ECONOMIC SCENARIO
6. ECONOMIC IMPACT
7. DIRECT AND INDIRECT DAMAGES:
8. ESTIMATE OF TOTAL DAMAGE COSTS BY SECTOR
9. TABULATION OF DAMAGES
10.PERCENTAGE DAMAGE BY PROVINCE / AREA
11.AGRICULTURE
12.LIVESTOCK
13.INDUSTRY
14.INFLATION
15.GROSS DOMESTIC PRODUCT
16.BALANCE OF PAYMENTS
17.CONCLUSION
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EXECUTIVE 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
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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.
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FLOOD AFFECTED AREAS
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Pakistan Flood 2010 OverviewOver 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.
BackgroundThe 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
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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 ScenarioPakistan'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
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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 IMPACTThere 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
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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
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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.
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Percentage Damage by Province/Area
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Agriculture: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.
LivestockLivestock 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,
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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.
IndustryIndustrial 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.
InflationInflation 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
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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
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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.
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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.
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ConclusionThe 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.
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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.
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21
GlossaryAJK: 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
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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
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Appendix
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Bibliography
Magzines Jadeed Mahana Bankari (in local language) Economic Horizon - September 2010 TIME
o September 13, 2010o September 20, 2010o October 18, 2010
The Economisto August 21-27, 2010o August 28-3 September, 2010
T- Magazine o November 7-13, 2010o November 14-20, 2010
Newsweek Pakistano August 23 & 30, 2010o October 11 & 18, 2010
Internet Websites news.dawn.com (Article By Qurat ul ain Siddiqui Friday, 03 Sep, 2010) www.wikipedia.org (Pakistan Floods) www.ofpblog.com www.sbp.org.pk (monetary policy) www.tradingeconomics.com www.brecorder.com (Post Flood Pakistan – Lubna Malik) siteresources.worldbank.org www.statpak.gov.pk
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