Economic Impact of Floods

Pakistan is suffering from the worst flooding disaster in living memory. What will be the economic effect, in the short, medium and long terms of this tragedy? How it will affect the government’s budget deficit and the growth rate? What can be done to mitigate the economic crisis? Following are some critical analysis of the economic impact of floods.

The sharp cutback in demand for a range of goods and services by those affected will largely be neutralized by the heightened demand for certain basic goods being provided through the relief effort – particularly food items like drinking water, dry rations like pulses, sugar, cooking oil, biscuits, etc., thereby maintaining a momentum of growth in the economy. However, unless some of the food items are imported from abroad (which could worsen the trade deficit unless these goods come in form of aid), we could witness higher food price. Inflation of this kind would hurt the poor badly throughout Pakistan and more so in non-agricultural population in rural areas which has to purchase its food from the market.

A large additional demand for some goods like tents, blankets, cotton sheets, etc., and construction materials – like cement, steel and wood and bricks will push up production in these sub-sectors of industry, thereby stimulating growth.

The allocations for aid operations financed from government funds, the compensation that will eventually have to be paid for every dead or injured person, displaced families, lost animals plus the cost of restoring some basic communications infrastructure will increase the budget deficit by atleast half a percentage point of the GDP, which should be affordable and might scale the inflation to more frightening heights. The deficit would have had to be raised further but for the overwhelming response of Pakistanis (both at home and abroad) and the international community and the capacity limits of the system to absorb and efficiently utilize large inflows of funds over the remaining part of the present financial year.

The long term economic impact poses other serious challenges. Rehabilitating shattered and displaced families and generating economic activity through restoration of the ramshackle infrastructure, considering the decades over which it had been built, will require massive sums of money. If the bulk of this funding is not provided by external sources, the government will have to increase its budget deficit to much higher levels over the next few years (which will keep the rate of inflation high) unless it can mobilize adequate resources by raising taxes, which is a politically daunting task.

The restoration of the destroyed infrastructure will be a long haul, partly because of the scale of the task and the volume of resources that will be required. And partly because of the absorptive capacity of the government machinery and the time and effort that will be needed.

While the impact on economic growth and related indicators (barring inflation) is not likely to be super serious in the short term; the long term requirements for alleviating the pain of this devastation are daunting and their outcomes are uncertain and difficult to predict.

Moreover, the indirect impact has already started appearing on the common life of people, as millions of people have donated their savings to help their brethren who are facing the devastation of the floods. Newspaper reports indicate that Eid shopping in the month of Ramadan, considered as best month for business and economic activity, has slowed down considerably. A huge burden on government’s spending can be perceived that would certainly hit a lot of new and ongoing projects. This would result in slowing down of the economy, besides increasing the budget deficit.

What Can Be Done?

No institution or country is perfect. There is always a scope for improvement in every sphere of life. Economic stability by itself is a gigantic task, specially, in a society so used to financial and fiscal indiscipline, socio-political disorder, corruption and mal administration sponsored by political elite of sitting governments.

Today Pakistan is in grave economic crisis and immediate measures need to be taken in order to come out of financial debacle the country is now facing. These measures must be home grown and not taken at the behest of pressure of international donor agencies. Visionary and revolutionary macroeconomic stabilization policies are needed to be taken to turn this disaster into an opportunity. Start by cutting defense expenditures. Downsize the inefficient and large cabinet. Cut the expenditures of Presidency, Prime Minister and ministers. End the nonsense foreign visits by national dignitaries. Promote and implement good governance and eradicate corruption. Introduce and implement comprehensive land reforms. Introduce structural reforms to remove distortion in the economy. Widen the tax net. Empower the institutions and remove their decay. Last but not least, learn to stand on our own feet instead of begging. Ask for trade not aid.