Floods swamping Pakistan's budget

One per cent could be knocked off GDP after torrential rains inundate 1.5 million acres of farmland, depriving victims of food and work.

Pakistani flood survivors fight for a food bag airdropped from a Pakistan navy helicopter in Khairpur district on August 12, 2010. Water levels receded in Pakistan on August 12 but survivors of record floods endured grim conditions in makeshift tent cities, as the UN appealed for 460 million dollars in urgent foreign aid. Pakistan's government says 14 million people face direct or indirect harm from the floods. The United Nations believes 1,600 people have died in the floods, while Pakistan has confirmed 1,243 deaths. AFP PHOTO/ AAMIR QURESHI *** Local Caption ***  177472-01-08.jpg

ISLAMABAD // Flood-stricken Pakistan will have to radically reduce government spending and seek further budgetary support from the International Monetary Fund to keep its economy afloat because of declining revenue, officials and economists said.

Ministry of finance officials on Wednesday told Yousaf Raza Gilani, the prime minister, that government spending would have to be drastically reduced to meet what they described as a "war-like situation". "The budget might have to be re-prioritised because of damage caused by heavy rains and floods," the ministry of finance said in a statement issued after the briefing. The floods have killed an estimated 1,600 Pakistanis, left two million homeless and inundated 1.5 million acres of farmland, depriving victims of vital food and employment.

The United Nations on Wednesday issued an emergency appeal for US$460 million (Dh1.68 billion) in donations to meet the urgent humanitarian needs of the six million people affected most by the floods, which the Pakistani government says has had a direct impact on 14 million of the country's 170 million people. Mr Gilani last week ordered a freeze on development spending by the federal government and he has asked the country's four provincial governments to follow suit, refusing their requests for emergency funding until the World Bank and Asian Development Bank carry out a nationwide damage assessment survey.

The prime minister's decision to turn down appeals for emergency funding has caused considerable friction between Islamabad and the governments of Khyber Pakhtunkhwa and Punjab, both of which have been hard hit by the floods. Economists in Karachi, Pakistan's commercial capital, yesterday predicted that the floods could knock about 1 per cent off the government's growth forecast of 4.5 per cent for Pakistan's gross domestic product (GDP) because of the destruction caused to crops.

That is far less than had initially been feared, because flood damage has largely tracked the path of the Indus River, which is located to the west of Pakistan's major agricultural and textile industry centres in central Punjab province, and to the east of Karachi on the Arabian Sea coast. The price of many food commodities, particularly seasonal vegetables and fruits, has increased dramatically since the floods devastated growing areas in the northern Khyber-Pakhtunkhwa province.

Agriculture accounts for 21 per cent of Pakistan's GDP, ranking third after the services and manufacturing sectors, but employs 45 per cent of the labour force. "We believe the country's major economic activity areas, industrial and agricultural, are safe from significant destruction and work is continuing as usual," said Muzammil Aslam, head of research for JS Global Capital, an investment bank, in a report published yesterday.

Pakistan has very limited room for economic manoeuvre because it has been struggling since 2008 to tackle a fiscal crisis resulting from a painful transition from military to democratic government, and the cost of mounting military operations against Taliban insurgents in the north-west. A 42 per-cent slide in the value of the rupee against the US dollar, and the spiralling of budget deficit to 7.5 per cent of its total spending forced Islamabad to turn to the International Monetary Fund (IMF) in October 2008 for emergency funding to avoid a balance-of-payments crisis and shore up rapidly depleting foreign-exchange reserves.

The $11.33bn in budgetary support the IMF agreed to provide, under a 23-month programme that ends in December, came with strict conditions. They included the withdrawal of subsidies on fuel, electricity and food meant to reduce the budget deficit to five per cent in the fiscal year that ended in June. The withdrawal has had the counterproductive effect of reigniting inflation, which rose from a five-year low of 8.9 per cent in October last year to 12.7 per cent in June, the Federal Bureau of Statistics said on Tuesday.

The austerity measures by the federal government also failed to achieve the fiscal targets set by the IMF. Poor financial management by the provincial governments and a shortfall in federal revenue collection pushed the deficit to 6.2 per cent, according to revised estimates issued by the ministry of finance in July. Economists said Pakistan would need further international assistance to avoid a budgetary crisis.

"To help Pakistan meet its economic challenges, aid from its international partners and an additional loan from the IMF will be imperative in the next 12 months," said Arpitha Byekre, a senior Asia analyst for Roubini Global Economics, an economic think tank based in New York, in a report published last week. Pakistani finance officials are scheduled to travel to Washington on August 23 for discussions with the IMF to talk about ways of managing the economic impact, following a telephone conversation last week between Asif Ali Zardari, the president, and the managing director of the IMF, Dominique Strauss-Kahn.

The IMF has already agreed to disburse a $1.1bn tranche from its existing programme. The IMF acknowledged on Monday that the floods "are very likely to cause major harm to the [Pakistani] economy in terms of loss of output and budgetary consequences. "In these circumstances, support from the international community will be critical," an IMF spokesman told Reuters. The US, Pakistan's largest donor, is leading an international aid drive and has signalled that it would tweak its $7.5 billion, five-year programme to target the reconstruction of infrastructure destroyed by the floods.