Scenarios: Political and economic impact of Pakistan’s floods

By Robert Birsel

ISLAMABAD (BestGrowthStock) – The most serious floods in Pakistan in decades will compound economic and political problems for the nuclear-armed U.S. ally.

Following are some scenarios for what might unfold in coming weeks.

POLITICAL OUTLOOK

The government is in no immediate danger of being brought down. The ruling coalition, led by President Asif Ali Zardari’s party, has a comfortable majority in parliament and the military, which unlike the government is seen to have responded effectively to the disaster, is not going to stage a coup. But anger with a government already unpopular is likely to intensify. The economic impact of the floods will be severe and food shortages and rising prices could spark protests. The opposition, led by former prime minister Nawaz Sharif, has been critical of the government but has not called street protests. Analysts say the opposition is content to let the government struggle but opposition leaders could come under pressure from their rank and file to take advantage of growing discontent to go on the offensive. A well-organised opposition taking the lead of popular protests over prices and food shortages could be explosive. In a worst-case scenario, the military might feel compelled to step in if protests got out of hand. But analysts say the opposition is loathe to create the conditions which would precipitate military intervention, which would block its bid to gain power through a general election, due by 2013.

ECONOMIC PROSPECTS

The International Monetary Fund (IMF) has warned of major economic harm and the Finance Ministry said the country would miss this year’s 4.5 percent gross domestic product growth target though it was not clear by how much. Growth was 4.1 percent last year. Apart from damage to people’s homes, the floods have caused extensive damage to roads, bridges and irrigation works. The United Nations has said long-term rehabilitation costs would run into the billions of dollars. Of most concern is damage to agriculture, the mainstay of the economy. About 500,000 tonnes of wheat stocked with farmers has been lost. Sugar output will also be hit by a similar amount, according to initial estimates. Up to 2 million bales of cotton, out of targeted output of 14 million bales, had been lost, industry officials said. That will mean the textile sector, which accounts for about 60 percent of exports, will have to import more cotton to feed mills. With higher transport costs and food shortages, inflation, and the public anger that will spark, is a major worry. The consumer price index came in at 12.34 year-on-year in July and will head higher.

The government has already been struggling to meet an IMF target for a fiscal deficit 4 percent of gross domestic product this year. The flood crisis will mean more strain. One analyst said he expected a fiscal deficit of 8 percent this year. If that is financed by borrowing from the central bank, inflation will be pushed up further.

The government will come under domestic pressure to slide on IMF requirements under its $11.3 billion loan programme. Moves to cut subsidies, to increase taxes, including introduce a value-added tax, and to reform the public sector enterprises are all likely to be delayed.

Pakistan could also see some capital flight as people move funds to safe havens but that is likely to be off-set by higher remittances from workers abroad, sending more of their pay home to help relatives.

Pakistani and IMF officials are due to meet on August 23 to discuss a sixth tranche of the loan. Given Pakistan’s role as a major U.S. ally in the global campaign against militancy and in trying to suppress the Taliban insurgency neighbouring Afghanistan, the IMF is likely to cut Pakistan some slack and approve the $1.13 billion tranche.

(Additional reporting by Sahar Ahmed; Editing by Miral Fahmy)

Scenarios: Political and economic impact of Pakistan’s floods