The country's economic growth
may slip by half a percentage point and the inflation to accelerate
faster than expected in the fiscal year to June 30 because of last
month's earthquake that devastated northern parts of the country.
"The pressure on the
economy will be felt mainly on the government's budget, trade balance,
GDP and inflation,'' said Dr Ishrat Husain, Governor of the State Bank
of Pakistan, in an interview.
"Initially, there would be
more pressure on the government's budget, especially in the wake of slow
response of the international community for the relief work.''
The 7.6 magnitude earthquake
killed more than 80,000 people, injured many more thousands and left 3.3
million people homeless in 25,000 square kilometers (9,653 square miles)
area in Kashmir and the North West Frontier Province. Pakistan said it
will need $5 billion over the next five to 10 years to rebuild cities
and rehabilitate quake-affected people. The country's fiscal deficit may
widen this year as the country steps up spending on rebuilding areas
damaged by the Oct. 8 earthquake, the central bank said.
"The fiscal space will be
sorely tested in the aftermath of the recent earthquake that severely
damaged infrastructure in the affected areas,'' said the 2004-05 annual
At present it appears that the aid is
coming slowly whereas huge funds are required for reconstruction and
rehabilitation, which means it will create pressure on our economy.
Yes, it is true that aid is flowing in slowly. The response of the
international community has not been very encouraging despite calls from
the UN. The commitments/donations made so far are about US$ 1.8 billion,
which is obviously quite less than the requirement. Initial assessment
of future needs has been estimated at US$5 billion by the government,
but some other private estimates are hovering around US$ 10 - 12
billion. A more realistic assessment being done by the government, WB
and the ADB would be available by mid November.
The pressure on the economy
will be felt mainly on government's budget, trade balance, GDP and
inflation. The intensity of the pressure, however, will vary over the
time and would be related with the three stages to combat the earthquake
effect i.e. relief, rehabilitation and reconstruction. Initially, there
would be more pressure on the government's budget especially in the wake
of slow response of the international community for the relief work.
Inflation is also likely to increase as the supply from those areas has
vanished and their demand needs to be met from other areas. Trade
balance and GDP will be more affected once the phase of reconstruction
begins which may take some time but the financing sources of imports and
new investment will determine the magnitude of changes in these
variables. During FY06, GDP growth is likely to slow down by half a
percent due to the loss in contribution by the affected areas of NWFP.
The current pressure on the economy is due to the on-going relief efforts and partly the
rehabilitation work that has now been initiated in the form of some
financial support to the relatives of the victims or the injured or the
reopening of schools for children. In this stage, the pressure will be
more on government's budget, trade balance and inflation. Though the
foreign aid and domestically generated resources are helping the
government, most of funds are likely to be diverted for the
reconstruction phase and therefore the government would bear most of the
expenses in this relief phase that may raise the budget deficit for this
year significantly. The trade deficit will widen due to the import of
tents, blankets and medicines. Inflation is likely to rise as the supply
of food items like vegetables, meat, poultry and milk that was produced
within the affected areas is no more available and will now be procured
from the adjoining areas.
The major pressure of
rehabilitation and reconstruction would come late in the current fiscal
year and onwards and would be on all the areas identified earlier.
The rehabilitation activities,
such as (i) provision of school or hospital services; (ii) welfare
services to the permanently disabled, destitute women and the orphans;
and (iii) financial support for the poor to begin their own businesses
will put relatively more pressure on the government budget.
During the reconstruction
phase, the major impact will be on GDP, trade balance and inflation. Its
impact on budget would depend on the extent of resources generated
through foreign aid and the external borrowings. Given the funds
generation pace so far, government is more likely to depend on external
borrowings. Though external borrowing will not increase budget deficit
on one-to-one basis but it would create debt servicing burden in the
coming years. The extent of such burden would depend on the terms and
conditions associated with such loans.
The reconstruction activities'
major impact would be on GDP growth as the construction activity is
likely to boost the construction sector itself, its allied industries
and the services sector. These activities would trigger import of raw
material and machinery thereby widening the trade deficit. Imports may
also rise if the government decides to import pre-fabricated houses from
abroad. The impact may be diluted given the recent increase in cement
manufacturing capacity by almost 1/3rd of the existing production and
the recent decision by the government to allow import of cement.
The higher demand of food and other raw materials would result into
increase in prices, thereby raising inflation rate.
The overall demand for food is
not going to increase other than annual increase in population. The
supply of food items, however, is definitely affected since items
produced within the area and the stocks of other items have been
destroyed and may take some time to resume. This demand-supply gap would
have a regional impact since the demand for food by the affected would
be met from the nearby areas especially of items like vegetables,
fruits, meat, milk, poultry etc. Impact on other items like wheat and
rice is unlikely to be very significant as these items are mostly
procured from various of the country and the extra pressure would only
be to the extent of lost stocks.
The pressure due to the raw
material demand would raise once the reconstruction phase begins and it
will definitely affect inflation.
If our local industries failed to meet the demand, import bill would go
up leading to the widening of trade deficit?
DR ISHRAT: "As
I said earlier, the trade deficit would be affected both at the relief
stage and following the reconstruction phase. The relief stage effects
would be temporary but could be significant. The reconstruction stage
effects would be spreading over a number of years and depend on the
nature of demand and the readiness of the domestic industry to meet the
demand, which would decide about how much this is going to impact trade
is a remote possibility that the economy will go unscathed and GDP rate
"Our economy is unlikely to go through a major dislocation due to
the great tragedy. As I mentioned earlier, the loss in contribution by
the people in affected areas of NWFP and the impact on economic
activities of other areas due to temporary migration of people related
to the affected areas will weigh on the economy but only marginally. At
the same time, however, production of items like tents, medicines or
other required items may increase offsetting this decline to some
extent. Based on our estimates the loss in GDP growth could be to the
tune of 0.5 percent for FY06.
The government has to utilize public
sector development fund which means development works on other major
projects will halt such as construction of roads, dams and airports.
The infrastructure and the government building losses due to the
earthquake are massive and the resource requirement to repair or rebuild
these is enormous. This process of rebuilding/repair would be spread
over a number of years and would be financed in collaboration with UN
and international donor agencies, domestic private sector, NGOs, etc. To
the extent these sources of financing fall short of the actual
requirements and there will be a need for some reallocation from low
priority development projects, containment of non-essential
non-development expenditure and mobilization of tax and non-tax
revenues. If the government remains unable to generate enough resources
through foreign aid, domestic revenues and external borrowings then this
would squeeze the existing development budget for other areas/projects.
Initially the government will have to re-prioritize the projects giving
top priority to the affected areas' projects. All this may entail
postponing some of the projects for the time being. The government may
also begin a drive to save on account of current expenditures, which
would be a welcome step. One of the encouraging steps by the government
is to postpone the buying of F-16 planes.
What the government should do or avoid
in this national disaster to sustain economic growth in this fiscal year
and coming years because the rehabilitation work will take as much as
DR ISHRAT: "This
is a tough time not only for the economic managers of the country but
the whole nation. To sustain economic growth during the coming years,
there is a number of things the government needs to do such as:
An optimal utilization of the scarce resources - optimal utilization of
resources entails prioritizing projects and an efficient usage of
resources. Setting up of priorities for reconstruction and their timing
must be done very cautiously to avoid a skewed distribution of resource
requirement over the time and geography. For efficient usage of
resources, appropriate planning of activities and coordination among the
various implementing bodies must be ensured. Redundancies must be
eliminated and the government must ensure that the resources are not
spent lavishly or more on the operations than the affected people for
whom these resources are meant for.
Accountability and transparency must be ensured in all operations.
Government must keep a vigilant eye on the utilization of available
resources and must not sacrifice accountability and transparency in its
operations. Due to the massive scale of operations, there would be a
tendency of leniency tempting to misappropriation of resources or
neglect. To win the confidence of the foreign as well as the domestic
donors various processes of resource utilization must be transparent and
the authorities having control on these must be accountable to the
I would like to add here
further that this difficult time is for the whole nation and the public
must not leave the government alone in this time of need as without the
help of the nation, it will be difficult for the government to
accomplish this gigantic task.