Floods to cause a loss of $1.6b in trade

Latest assessment by IMF shows exports expected to shrink while imports will rise following the floods.

ISLAMABAD: Floods are likely to make a dent of $1.6 billion in Pakistan’s trade as exports are expected to shrink while imports will rise, shows the latest assessment released by the International Monetary Fund (IMF).

The IMF in the post-flood assessment, the first of its kind, says that in the wake of the floods the growth in imports of goods is likely to be 8.7 per cent over the previous year, 1.8 per cent more than the estimates made before the floods.

In absolute terms, imports are expected to be registered at $33.8 billion, $600 million more than the estimates before July 28, the day floods started wreaking havoc in the country. High imports of food items and construction material to repair and revive the damaged infrastructure will contribute to the increase in total imports. Besides, imports of services are projected to increase by another $600 million.

On the contrary, exports of goods may drop to $20.2 billion compared to pre-flood estimates of $20.6 billion, a growth of 3 per cent against pre-flood estimate of 4.7 per cent.

Consequently, trade deficit in goods may widen to $13.6 billion compared to estimates of $12.6 billion before the floods, according to the IMF assessment which is based on discussions with government officials.

A delegation, led by Finance Minister Hafeez Shaikh, visited Washington in the last week of August to seek emergency assistance for flood-stricken areas and the release of a $1.7 billion loan tranche of the bailout package. The delegation managed to get relief assistance of $450 million but failed on the other side due to a lack of progress on tax reforms. The IMF assessment shows that the current account deficit, the gap between international receipts and payments, will widen to $5.9 billion or 3.1 per cent of Gross Domestic Product (GDP). Before the deluge, the gap had been estimated at $4.6 billion or 2.4 per cent of GDP. The IMF advises Pakistan that in order to avoid inflationary pressure and restrictions on private sector credit it should rely on external financing for rehabilitation work. This will lead to an increase in the external debt to 31.8 per cent of GDP from earlier estimates of 30.7 per cent.

The IMF estimates that the floods will prompt more government borrowing from outside which will add an extra $1.8 billion (Rs154 billion) to the foreign debt against earlier estimates. Now for the first time the external debt will exceed $60.4 billion.

Before the floods, foreign debt was estimated to rise to $58.6 billion, an increase of $3.3 billion compared to the level in 2009-10. External public and publicly guaranteed debt will then amount to 169.4 per cent of exports of goods and services. Around 14.6 per cent of the export receipts will be utilised for debt servicing.

The government on Tuesday revealed that total debt - domestic and foreign - for the first time crossed Rs9 trillion and to service that Rs717 billion will be required this year. The debt servicing cost will be three times the federal development budget.

Published in The Express Tribune, September 23^rd, 2010.