Pakistan floods: disaster of epic proportions raises the spectre of systemic collapse


By Yousuf Nazar


August 20, 2010

3.5 millon children at risk , economy and exports to contract as losses could exceed $10bn

Pakistan seeks restructuring of $10bn IMF loan as the United Nations urges help and raises $500 million

Given
the initial reports about crop and other losses, it now appears that
Pakistan’s economy may contract in the next twelve months and total
output, property and other losses would exceed $10 billion and Pakistan
could borrow as much as $8bn in new loans in the next six months.

This
would be another mistake. Pakistan’s lenders must start considering
debt cancellation as a form of assistance because it might be a more
effective and sustainable solution. Adding the debt burden is unlikley
to prevent another default or restructuring in the next couple of
years.  The US and the European Union should also eliminate all tariffs
on imports from Pakistan to help its hard-hit and critical textile
exports.

The
destruction in the agriculture sector would seriously hurt cotton and
textile sector that accounts for over 50 percent of Pakistan’s
exports.  Pakistan will need to mobilise all international and local
resources to face the catastrophe which has caused the greatest damage
to the country since 1971 war. 

Already, parallel is being drawn with October 1970 cyclone
in the former East Pakistan that was neglected and mismanaged by the
Generals in Pindi to a degree that added fuel to the secessionist
sentiment and contributed to further alienation from West Pakistan.

These
floods may ultimately lead to greater political and social upheaval as
the alienation of the people from the state seems to be reaching new
heights as a humanitarian disaster unfolds, millions sleep under open
skies virtually abandoned by the state and the world, the aid slowly
arrives, and the rulers and leaders show no sign of urgency or sincere
concern.

The initially slow international response for aid appeals is now building up.  Thus
far, about 60 percent of the United Nations’ $459 million funding
appeal has been met.  The plenary session of the UN General Assembly
(GA) on Aug. 20 entered its second day, calling for international
solidarity in mobilizing support and funding for flood-hit Pakistan.
Unanimously adopted at the start of the high-level meeting, a
resolution stressed the "urgency of undertaking a massive rescue and
relief operation and supporting the efforts for rehabilitation and
reconstruction." "Make no mistake: this is a global disaster, a global
challenge, " UN Secretary-general Ban Ki-moon told the 192-member body
on Aug. 19. "It is one of the greatest tests of global solidarity in
our times."

Pakistan
will need aid to the tune of billions of dollars because the economic
fall-out is certain to be devastating. Specifically, it seems likely
that:

1. Food inflation would cross 20%

2. The economy as a whole will contract by as much as 1%

3.
Exports could plunge by $3-4bn, causing balance of trade to widen, and
rupee to fall to Rs 100 by the year-end. Capital flight could happen
again like in 2008 when people transferred abroad about $3 billion over
a period of six months.

4.
Pakistan would need foreign assistance of as much as $8-$10bn to
rebuild the infrastructure, and to deal with loss of exports and crops
and to stave off another possible balance of payments crisis.

5.
In absence of growth in the local revenues and the inevitable rise in
flood related expenses, the fiscal deficit will cross 6-7% of the GDP.

6.
A secondary implication is that since the textile sector will be hurt
the most, the banking sector will come under pressure. This would hurt
the much needed growth in private sector credit.

Pakistan’s finance minister will go to Washington next week to ask the International Monetary Fund
to ease restrictions on a $10bn loan it received in 2008.  Pakistani
officials believe that the recent devastating floods has made the
conditions attached to the lending programme impossible to meet. The
IMF can restructure the existing $10.66bn IMF loan out of which
Pakistan has received about $7.3bn so far or can replace the current loan with funds from another financing facility that imposes fewer restrictions.

The United Nations warned Aug. 17 that 3.5m Pakistani children were
at risk from cholera and other diseases because of the slow and
inadequate delivery of flood relief, as raging waters from the bloated
Indus river marooned dozens more villages.
Hundreds
of thousands of survivors are still cut off from rescue more than two
weeks after Pakistan’s worst-ever flooding hit the country, killing at
least 1,600 people. Many survivors are forced to drink contaminated
drinking water, relief workers said.
The death toll could rise from disease and hunger if the aid effort is not stepped up, the U.N. warned.

The
floods in Pakistan – the world’s sixth most-populous country of 170m
– have casued a disaster of epic proportions that can cause more grief
and suffering if the aid effort, rehabilitation, and reconstruction
process are not timely and effective.  The United Nations
Secretary-General Ban Ki-moon met August 15 with Pakistan’s president
and said the "enormous disaster" would require a huge international
response. 

The UN Secretary-General
Ban Ki-moon said that while he has visited sites of natural disasters
around the world, he has never seen anything like the devastation
created by flooding in Pakistan
. "The scale of this disaster
is so large — so many people and in so many places, in so much need,"
Ban said, speaking alongside Pakistan President Asif Ali Zardari. 

So far the people have faced the disaster bravely with remarkable endurance,
so characteristic of ordinary Pakistanis, that keeps them going despite
the heavy odds. But the public anger is rising as incompetent leaders
like Prime Minister Gilani and the opposition leader Nawaz Sharif move
at a glacial pace (as if Zardari’s blunders were not enough) after days
of inaction whereas the swift action was needed yesterday. Aid vehicles
were besieged by an angry mob in
the southern province of Sindh on Aug. 15 as eyewitnesses reported
people ripping at each other’s clothes in their frenzy. The food
handout descended into such chaos the aid distribution had to be
abandoned.

A
section of the US and local media has unwisely raised the subject of
the role of aid in fighting militancy. The aid discussion should not be
in terms of US and some militants trying to compete to win the ‘hearts
and minds". This is a distasteful, reprehensible, and disgusting twist
to the public discourse in the wake of a huge disaster and may prove to
be counter-productive.  Beyond the question of immediate relief, more
relevant issue is that of threat of a breakdown of Pakistan’s already
fragile political and administrative system and of more anarchy and
chaos in days, weeks, and years to follow. 

One-fifth
of Pakistan — or an area about the size of Florida — has been flooded
in relentless monsoon rains, according to the United Nations
.
Millions
of people are still at peril as the bloated Indus River is cresting
this weekend in parts of Sindh province. In some areas, the Indus has
expanded from its usual width of one mile to as much as 12 miles. 
 Homes,
crops, trees, livestock, entire villages and towns have been
transformed into vast lakes, forcing thousands of flood victims to
huddle in sludgy camps or in jam-packed public buildings. Others are
sleeping under the stars next to the cows, sheep and goats they rescued
from rising waters.

The
earthquake of 2005 hit the mountainous and relatively thinly populated
areas in 2005 but the recent floods have hit villages, towns, and
cities across Pakistan including its agricultural heartland and have
destroyed hundreds of thousands of homes. Latest figures estimate 20
million people are affected by the floods, more than 700,000 homes are
damaged and destroyed.

Rebuilding
Pakistan after the worst floods in decades could take five years, and
foreign donors are in danger of reacting too slowly, said the Red Cross.
"Crops are gone. Infrastructure is gone, including canals. Community
canals. Irrigation canals. To bring that back is going to take a long
time. It could end up being five years," said Bekele Geleta,
Secretary-General of the International Federation of Red Cross and Red
Crescent Societies (IFRC).

Jacques
de Maio, who heads operations for South Asia for the International
Committee of the Red Cross, said the full magnitude, scope and nature
of the catastrophe is not yet known. The different humanitarian
agencies working in Pakistan believe that there might be a second wave
of deaths induced by the floods under the shape of water-borne
diseases, diarrhea-related problems," he said. "And, this is something
that needs to be addressed from the very onset of the humanitarian
response."
 

The disease outbreaks pose
grave risks to victims of Pakistan’s worst floods in decades, aid
agencies said Aug. 13, causing fresh concern about already complicated
relief efforts. An epidemic could create another disaster for Pakistan.
Cases have cholera have been reported. A health crisis would tax aid
agencies which are facing vast logistical challenges because of the
damage and illness caused by the widespread flooding.
The
United Nations is worried about water-borne diseases. There have been
36,000 suspected cases of potentially fatal acute watery diarrhoea
reported so far.
The government and aid agencies said they are unable to reach or help many of the millions uprooted so far.

Floods
in Pakistan have affected more people than those displaced in the 2005
Asian Tsunami and the deadly earthquakes in South Asia and Haiti
combined, the United Nations

said. The United Nations said the number of people affected have
surpassed that of a 2005 earthquake in Kashmir. In many places, whole
farming villages have been wiped off the map and the UN estimates that
around six million people may be in need of immediate food or shelter. 

The United Nations estimates that flooding has destroyed 1.4 million acres of crops in Punjab province, Pakistan’s agricultural heartland.The World Bank estimates total crop losses to be around  $1bn. This may be an understatement as according
to Khursheed Ahmed Khan Kanjo, president of the Pakistan Kissan Board,
a farmers’ group, the floods have destroyed 30 percent of the cotton
crop which was estimated to be around 10.5m bales (480 lbs/bale) or worth over $5bn at current market prices. Pakistan earned around $208m from raw cotton exports last year.

17
million acres of farm land have been inundated. Some 100,000 cattle and
more than one million tonnes of privately stored wheat have been lost,
while 3,000 fish farms, 2,000 poultry farms and 1,000 tractors had been
destroyed. Losses so far have amounted to three per cent of GDP,
according a report in the daily Telegraph.

The International Monetary Fund (IMF)
said on August 9 the floods will cause major economic harm as donor and
investor concerns grow over the disaster’s impact on an already fragile
economy. 
The disaster may cut the nation’s economic growth in half, Pakistan’s Finance Secretary
Salman Siddique said in an interview, with expansion falling up to 2.5 percentage points short of a 4.5 percent target.  Pakistan’s GDP is around $176bn and a cut of 2.5 percentage points  would amount to over $4.4bn in output losses.

Initially,
Kyber-Pakhtunkhwa province in the northwest, already a victim of
terrorist attacks and suicide bombings, was hit hard and many parts of
the province, including the Swat valley, were cut off as the waters
washed away roads and bridges. 

According
to estimates of the Relief International, an international agency,  98%
of water and sanitation facilities in the affected areas of Peshawar,
Charsada, Nowshere, and Swat districts were severely damaged or have
been rendered unusable due to heavy silting and heavy water flow. 
Throughout the province fields are flooded with expected production
damage to rice, sugarcane and corn by an estimated 10 percent to 15
percent. 

The
floods after reaching the south wrecked havoc in the plains of Punjab,
Sind, and Balouchistan submerging entire areas of some cities.
Twelve
districts of Balochistan are badly affected. Due to floods and
torrential rains, at least 250,000 people have been directly affected.  The
floods in Balochistan started from Barkhan, where 50 people died.
Thousands of flood victims are stranded in Naseerabad, Jafarabad, and
Sibi and are in need of food, tents and medicines.

Pakistan’s
Qadirpur gas field – one of its largest – was shut down after being
submerged in floodwater, causing six power plants to shut down and thus
deepening Pakistan’s electricity deficit by 1,500 megawatts, according
to Power Minister Raja Parvez Ashraf.

Flooding
also damaged 20 percent of the rice crop in Sindh, said Abdul Majeed
Nizamani, president of the Sindh Abadgar Board. Half the red chilli and
tomato plantations and 70 percent of the onion crop were also damaged.
The
 floods have  damaged more than a million acres of sugar cane, cotton
and rice fields and caused 250bn rupees ($2.9bn) of agricultural
losses, a farmers’ group said August 12.

Flood-waters
ravaged 700,000 acres of planted cotton, and 200,000 acres each of rice
and cane, Mohammed Ibrahim Moghul, chairman of Agri Forum Pakistan, 
told Bloomberg by phone. Rains also destroyed 500,000 metrics tons of wheat, 300,000 acres of animal fodder and 100,000 head of livestock, he said. Wheat
prices gained in Chicago after five days of declines and sugar rose in
New York and London on speculation the losses may force Pakistan to
import the staples. 

The agriculture
sector losses have serious implications. Even though agriculture
constitutes 22 percent of the economy, it employs two-thirds of the
country’s population and cotton and textile exports accounted for over
50 percent of Pakistan’s merchandise exports of nearly $20bn last year.
The
trade deficit is expected to worsen, as Pakistan will need to increase
imports of food and other necessities and agriculture and textile
exports are likely to plunge. Cotton and textile exports were around
$10bn last year and assuming a drop of 20 percent,  cotton and textile
exports alone could drop by $2bn.
 

Analysts at Citigroup
predicted Aug. 10 that a contraction in agricultural production could
lower GDP growth rate for 2011 from an estimated 4.4 percent to 3.1
percent but this may prove to be a low estimate. 
The
Economist Intelligence Unit says Punjab, in particular, is crucial for
growing both wheat and cotton; widespread destruction of cotton would
affect the textile industry, a mainstay of the national economy.

While
it will require months to make a full assessment of the losses from the
devastating floods, it might be recalled that the flood events of 1950,
1973, 1992, 1998, and 2003 caused hundreds of deaths and huge losses to
the economy. In the year 1973, more than three million homes were
destroyed and 160 persons lost their lives. The 1976 floods demolished
over 10 million houses while 425 lives were lost with losses amounting
to Rs. 6bn. In 1988, an unprecedented flood occurred towards the end of
September inflicting about Rs. 17 billion worth of damages to the
country. The catastrophic
flood of 1992 surpassed
all the previous records with damages estimated at Rs. 50bn or US 2.1
billion which represented about 3.6% of the GDP.

Given
the initial reports, damages to crops, past history of losses, and the
fact these are the worst floods that have not only damaged
infrastructure and crops but are would cause prolonged disruption of
normal activities across the country, it is quite probable that the
damages could exceed 5 to 6% of the GDP or $8 to $10 bn.

In terms of total aid needed, Martin Mogwanja, United Nations Humanitarian Coordinator for Pakistan,
had said August 5, $150 million to $200 million for relief and recovery
efforts in the coming weeks and months, and possibly more if the impact
of flooding was severe in south Sindh. The UN had to revise its initial
estimate quickly. 

Donors
have come forward with nearly 500 million dollars to meet an emergency
appeal for flood-hit Pakistan, with the United States, Saudi Arabia and
Britain leading the way, figures showed as of Aug. 20. The Financial
Tracking Service, a UN database that aims to track all donations,
showed late Friday that 490.7 million dollars in funding has come in
for Pakistan’s floods, with another 325 million dollars promised.
 

The Asian Development Bank will offer Pakistan a $2bn emergency loan
to help repair massive damage to infrastructure caused by the country’s
recent floods. Juan Miranda, the bank’s director-general for central
and west Asia, told the Financial Times Aug . 18
that the ADB would also set up a trust fund to channel donor
contributions for reconstruction. The pledge comes amid rising concern
over the sluggish nature of the international response to the flood
disaster which began three weeks ago.

The U.S. Agency for International Development initially pledged $55 million to international organizations involved in the aid effort. On
Aug. 19. the United States led a stream of new aid pledges for
flood-stricken Pakistan, promising a further $60 million to rectify a
humanitarian response that has been criticized as too slow. "With a new
pledge that I am making today of $60 million, the United States will be
contributing more than $150 million toward emergency flood relief," US
Secretary of State Hillary Clinton told the U.N. General Assembly.

The World Bank has decided
to convert about $900 million in project lending towards flood relief
assistance and informed the government that the joint WB-Asian
Development Bank (ADB) Damage Need Assessment (DNA) of Flood 2010 would
be completed by mid-October. The ADB has decided to send its director
general to Pakistan to assess the country’s needs and to discuss
avenues for further support to meet the challenge posed by the recent
floods. 
 

So
far the aid has fallen short of what is needed. The international
community must act fast and mobilise resources on a huge scale as the
political fall out and huge human and  economic costs could destabilize
the whole country and not just a weak government.  The Zardari
government  – with its credibility at its lowest since it was voted
into power in 2008 – is in disarray and the Army is stretched.  The
NGOs and other private organizations are trying to reach out with their
limited resources.

The
floods did not stop the politicians or sections of the media from the
usual squabbling or finger pointing but toned down after Gilani and
Nawaz joint press conference to form an independent commission to
manage the aid. But no progress has been made so far since that
announcement. The response of the political leadership has bewildered
the people and Pakistan’s media.             

Munizae Jahangir, a TV Correspondent writes in a column for the Express Tribune:

"Our
province has been eaten away by terror and now these floods. We need
help and we need it fast. We do not see the same spirit of caring that
was there during the earthquake in 2005. Where is Pakistan?" asked the
Kyhber-Pakhtunkhwa minister for excise and taxation, Liaquat Shabab, as
he stood next to his sinking home. Back in Islamabad, as I watch the
coverage of the floods, all I see is politicians bickering and talk
show hosts expounding media freedom. I switch to the international
networks and floods in Pakistan are headline news. Some have posted
appeals for aid. I too wonder, "Where is Pakistan? "

It
remains to be seen if Pakistani nation shall rise to the challenge as
it did in the aftermath of 2005 earthquake and would the
international community come
to her rescue in the same way it did then? So far, the US and the Obama
administration have been in the forefront with both monetary and
physical assistance and American effort has received positive
reaction in Pakistan but the top level response from other traditional
friends like Saudi Arabia and China has been lukewarm though both the
countries have pledged aid with Saudi Arabia’s contribution of over
$100 million.

Aid
fatigue, Pakistan’s image distorted by an obsessive focus on Talibans,
low death toll, and not the least, fears that the aid money would be
stolen or misused have been cited as possible reasons for the
disappointingly low level of aid announcements. But the government
itself has not given any indication that it is ready to lead by
example and make sacrifices by making deep spending cuts in military
and civil expenditure. Both Zardari and Nawaz are widely believed to
have hundreds of millions of dollars abroad and the people in the
streets and angry commentators on TV talk shows often ask why don’t
they bring some of it back?  

If the international aid fails to meet the huge amounts required for relief and reconstruction work, the World
Bank and the IMF together with the Asian Development Bank (ABD) would
likely play the lead role in economic assistance but that would almost
certainly increase Pakistan’s debt burden. Hence the international
donors and the west should consider cancellation a part of Pakistan’s
$55bn external debt. Pakistan’s spent about $5.6bn or 23% of its
exports on debt-servicing last year. In the near term, higher food
inflation and a probable fall in rupee value to 100 per US dollar are
likely to add to the miseries of the people.

I
hope I am wrong about the extent of the damages to the economy. My
previous two forecasts about Pakistan’s economy published in DAWN on January 1, 2007 (Economy: challenges ahead) and May 30, 2008 (The Coming Economic Tsunami) turned
out to be unfortunately right. It does not give me any pleasure but
most local and foreign analysts as well as institutions had failed to
anticipate the adverse developments, as well as their magnitude, that
were to follow during 2007-2008. But still, I wasn’t that much worried
then. This time, it is more than the economy. The future of Pakistan is
at stake.

There
is an increasing risk of widespread social unrest in the aftermath of
the floods but the odds of a military coup are low because the Army
leadership does not seem to have any illusions about its capacity to
face the grave situation Pakistan is in today. But a rapid and serious
deterioration in the overall political and economic situation would
increase the pressure on the Army chief Parwez Kayani "to do something".

Given
the Lilliputian character of Pakistan’s current military and political
leadership, the poor quality of governance, and extreme incompetence
shown by the federal and provincial governments inspite of the gravity
of the situation, Pakistan faces the spectre of a massive political,
economic, and administrative collapse and its future seems bleaker than
it ever did since 1972
.
  

 www.yousufnazar.com

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