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

Posted on Aug 11, 2010 | 1 comment

3.5 millon children at risk , economy and exports to contract as losses could exceed $15bn

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

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By Yousuf Nazar

On Aug. 21, around 150,000 Pakistanis in Sindh province were evacuated to higher ground because of the swollen Indus River, a government spokesman said. Officials expect the floodwaters to recede nationwide in the next few days as the last river torrents empty into the Arabian Sea. But survivors may find little left when they return home – the waters have washed away houses, roads, bridges and crops, and leaving millions homeless and penniless. In Sindh, there are already 600,000 people in relief camps set up during the flooding.

The International Monetary Fund said Aug. 21 the floods that have struck Pakistan pose a “massive economic challenge” and it will review the country’s budget and financial prospects. The IMF will start talks with Pakistani officials in Washington on Aug. 23 to assess how best to give help.

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 then Army Generals to a degree that added fuel to the secessionist sentiment and contributed to further alienation from West Pakistan.

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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 arrives slowly as the extent of destruction becomes apparent, and the rulers and leaders show no sign of real urgency or genuine concern.

The initially slow international response for aid appeals is now building up. Thus far, United Nations’ $459 million funding appeal has been met and nearly $500 million have been committed. 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% , prices are already shooting up.
  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 – was flooded in relentless monsoon rains, according to the United Nations. Millions of people are still at peril. In some areas, the Indus 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.”

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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 to eight 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.

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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 [then equivalent to 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  7 to 8% of the GDP or $12 to $15 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 came 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 $1bn 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 relief effort has fallen short of what is needed, the enormity of challenge notwithstanding. 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.

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© UN Financial Tracking Service

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 contributing over $100 million compared to a paltry $9.5 million from China.

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.

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