Floods leave Pakistan in dire economic straits

Even before this summer’s catastrophic floods, Pakistan’s economy was teetering on the brink. The government’s debt had ballooned to $55 billion. The tax base is anemic, and a third of the population fell below the poverty line.

Now, in the aftermath of the flooding, officials face the daunting task of preventing complete fiscal collapse. Pakistan’s economic bulwark, agriculture, has been ravaged by the surging waters, which submerged nearly a quarter of the country’s farmland. Experts doubt that the situation will improve in time for the fall wheat sowing season, which if missed would trigger massive food shortages in 2011.

In affected areas, floodwater has swept away 70% of the roads and bridges. More than 10,000 schools and 500 hospitals have been destroyed or damaged.

Moreover, millions of Pakistanis who were barely scraping by before the floods now find themselves homeless and unsure of how to regain the means to provide for their families.

Analysts fear that an economic meltdown could set off waves of unrest that the current government, led by President Asif Ali Zardari, would struggle to contain.

“The likelihood of public protests and a degree of anarchy does exist; these are genuine fears,” says Hafiz Pasha, a former commerce minister and now an analyst at the Institute for Public Policy in Lahore. “We’ve already had two or three years of high inflation and loss of growth, and there’s already discontent within the population. So you have a dangerous combination.”

So far, flood victims have suffered largely in silence, though small impromptu protests have broken out in places where supplies of food, drinking water and medicine have been inadequate. However, the prospect of extended economic stagnation, joblessness and sky-high food prices could spark a collective anger that would threaten Pakistan’s stability.

The United States and other Western nations see a stable Pakistan as vital to the stability of South Asia. The region faces the shadow of Pakistan and India’s long-running rivalry, the presence of Al Qaeda and other Islamic militant groups in Pakistan’s volatile tribal belt, and the United States’ nine-year war against Taliban insurgents in Afghanistan.

The United States and other countries have poured hundreds of millions of dollars into flood relief efforts. Washington has said it probably will have to redirect toward flood recovery a portion of its five-year $7.5 billion non-military aid package to Pakistan, money that was supposed to troubleshoot the country’s electricity and water crises.

It’s expected, however, that Pakistan will need even more. Prime Minister Yousuf Raza Gilani recently said the losses from the flooding could reach $43 billion. As borrowing increases, the inflation rate, which before the floods was projected to reach 9.5% in 2011, now is expected to climb as high as 20%. Economic growth is expected to plunge from a projected 4.5% rate this year to 2.5% in 2011.

Finance minister Hafeez Shaikh recently warned that in two months the government may not have enough money to pay its employees. The economy, Shaikh declared, was “heading toward the abyss.”

How well Pakistan survives the worst natural disaster in its 63-year history will depend largely on how quickly its farmers can get back to work. Agriculture accounts for 43% of the country’s jobs, but a fifth of Pakistan’s irrigation infrastructure, livestock and crops have been destroyed. Hundreds of miles of irrigation canals must be cleared of silt; seed and fertilizer lost in the floods needs to be replaced; and hundreds of thousands of homes and silos must be rebuilt.

Experts say the biggest priority in the coming sowing season is the wheat crop, which accounts for 80% of the farmland.

“If we can’t sow wheat in time, can you imagine what kind of shortfall of food we will have? It will be enormous,” says A.B. Shahid, a Karachi-based economist.

If farmers can’t work the land this fall, their first post-flood harvest would come in August 2011, which would mean a full year without income.

Faced with the prospect of no farm or home to return to, many of the 7.5 million Pakistanis displaced by the flooding and now living in camps in cities such as Karachi could choose to stay. That, says Pasha, could strain already overpopulated urban areas, and ultimately stoke the kind of widespread discontent that fuels unrest.

“That’s already happening to some extent in Karachi,” Pasha says. “Once they congregate in one or two big locations, you have a flashpoint. If we can’t provide for rehabilitation down the road, you may see a large scale exodus to the cities. And that could increase the potential for a breakdown.”

Zardari has been wrestling with a fragile economy from the moment he became president.

After Pakistan’s longtime military leader, Gen. Pervez Musharraf, left office in 2008, Zardari took over an economy reeling from the worldwide financial crisis and on the verge of default. A $7.6-billion bailout loan issued in November 2008 by the International Monetary Fund was later ramped up to $11.3 billion.

That loan came with strings attached, including a condition that the government institute tax changes in a country where most people do not pay income taxes. The government has yet to make any inroads in improving its tax base, a failure that experts say has hampered the country’s ability to cope with the recovery tasks ahead.

Unable to tackle reconstruction without outside help, Pakistan is hoping for another helping hand from the IMF and other international financial institutions. The terms attached to that assistance, says Samina Ahmed, South Asia project director for the International Crisis Group, will help determine whether Pakistan’s economy can hold up during post-flood recovery. On Wednesday, the IMF said it would provide relief in the form of an emergency $451-million loan with an interest rate of 1.28%.

“It’s important for the international financial institutions to understand that increasing the debt burden of Pakistan won’t pay any dividends,” Ahmed said.

Even if new loans come with soft terms, Pakistan still must repay its existing IMF loans, a tall task for a country facing economic stagnation.

“Unless the economy really starts growing and exports start moving again, I really don’t see us having the capacity to repay this debt,” said Pasha, the economist. “So in that sense, we’ve already reached an unsustainable level of debt, particularly after the floods. I’m not sure we have the capacity to borrow more.”