Flood impact not as bad as expected

Analysts say initial estimates about negative impact of flood on Pakistan’s economy appear to have been exaggerated.

KARACHI: Initial estimates about the negative impact of the flood on Pakistan’s economy appear to have been somewhat exaggerated, according to several analysts.

In a preliminary assessment of the impact of the floods on the Indus plains, analysts at JS Global Capital estimate that while the natural disaster is expected to slow down economic growth by up to one percentage point of GDP, it has not damaged the economy to the degree that had initially been feared when news of the floods first broke.

“We believe the country’s major economic activity areas (industrial & agricultural) are safe from significant destruction and work is continuing as usual,” writes Muzammil Aslam, an economist at JS Global Capital, an investment bank.

Analysts at the investment bank are basing their conclusions on a series of conversations they have had with industrial leaders across the country.

According to a map of the affected districts compiled by the United States Agency for International Development, the agricultural and industrial heartland of Punjab and Sindh has thus far been spared the worst of the flooding. While the impact of the flooding on Sindh has yet to be fully estimated, some analysts feel that reports of impending calamity overstate the potential damage.

Production at most major oil and gas fields has either continued uninterrupted or been restored fully. Most private power plants, including Kot Addu Power Company’s plant, have managed to remain unaffected. While some publicly-owned plants have been affected, the impact of those has yet to be fully felt.

Most of the major cotton-producing areas remain safe from the flooding, which is expected to inoculate the textile sector from the most severe of the impact from the flood.

There has, however, been significant damage in several agricultural districts. As much as 1.5 million acres of agricultural land has been inundated by the flooding. This is likely to depress farmer incomes in the region and will likely have a spill-over effect on the rest of the economy. Nevertheless, most major highways are fully operational, which has led some observers to believe that food shortages should not become a major problem.

There are other causes of concern as well. Dealing with the victims of the natural disaster, as well as financing reconstruction efforts in flooded zones, is likely to have a severe negative impact on the government’s budget deficit.

The fiscal balance had already been precarious before the floods, with the IMF refusing to release tranches of its loans and the Karachi bond market forcing the government to scrap a long-term bond sale due to low interest rates being offered.

Analysts expect the government to try to raise as much as Rs150 billion to deal with the crisis. This is likely to increase the budget deficit from the projected 4.1 per cent to closer to 6 per cent of GDP. While this is likely to constrain private sector borrowing even further than it already is – and may also impact inflation – it is also like to temporarily boost domestic demand even as private sector demand falls due to the economic afflictions of the flood victims.

The cement sector in particular is expected to be boosted by any future government spending on infrastructure.

Published in The Express Tribune, August 12^th, 2010.