Drowning hopes

Recent floods have spoiled Pakistan’s economic gains achieved after harsh decisions. Its external financing needs are projected to increase which could aggravate its chronic balance of payments crisis. Millions of people face the risk of falling into abject poverty. Hopes of betterment are drowning after the country faces worst political instability.
It is a pity that Pakistan starts facing problems when it appears it has come out of them. The economic indicators had started improving in the last PTI government until rates of fuel and electricity were frozen for political gains. It would not have happened if a no-confidence motion had not been tabled against former Prime Minister Imran Khan. The performance of his government would have been even better if Pakistan had not been hit by the pandemic, like the rest of the world.
The present coalition government has withdrawn subsidies on fuel and electricity, because they were not feasible. The country expected to perform better on the economic front when floods hit it. The situation has exposed the country to internal and external risks. As the country needs huge funds to rehabilitate flood victims, its ability to fulfill its international commitments will be badly hit. Its revenue will also decrease, which would add to its economic woes.
The new fears have surfaced after economic indicators were improving. Pakistan’s current account deficit (CAD) fell to $0.7 billion in August, compared to $1.2b in July. It shows a decline of 41.67pc month-on-month. According to the State Bank of Pakistan, the current account deficit narrowed by $0.5b to $1.9b in the first two months of the current fiscal year compared to the corresponding period in FY22. It was primarily due to exports increasing by $0.5b and imports declining by $0.2b. SBP data shows the balance of trade in goods and services also declined by 0.54pc month-on-month to $3.98b. Workers’ remittances reached $2.72b compared to $2.52b in August.
Pakistan’s rupee has become the world’s best performing currency in the week that ended on October 7, as it made the largest gain of 3.9pc over five working days to 219.92 to a dollar on expectation of significant foreign currency inflows. New Finance Minister Ishaq Dar has promised to bring back the rupee to its original value, which is less than 200 against a US dollar. The rupee, which had fallen close to an all-time low of Rs239.71 on September 22, has been recovering since Dar replaced Miftah Ismail as finance minister.
However, Pakistan’s vulnerabilities have increased despite the economic gains. Floods are projected to harm the country and its people more than initial estimates. Moody’s Investor Service has cut Pakistan’s sovereign credit rating, citing increased government liquidity and external vulnerability risks, following the devastating floods. The floods will also raise Pakistan’s external financing needs, raising the risks of a balance of payments crisis. The decision to downgrade the ratings is driven by increased government liquidity and external vulnerability risks and higher debt sustainability risks, in the aftermath of devastating floods that hit the country in June 2022. The floods have exacerbated Pakistan’s liquidity and external credit weaknesses and vastly increase social spending needs, while government revenue is severely hit, the international rating agency said.
It warned that debt affordability and a long-standing credit weakness for Pakistan will remain extremely weak for the foreseeable future. Pakistan will remain highly reliant on financing from multilateral partners and other official sector creditors to meet its debt payments, in the absence of access to market financing at affordable costs. “In particular, we expect that Pakistan’s IMF Extended Fund Facility (EFF) program will remain in place and provide an avenue for financing from the IMF and other multilateral and bilateral partners in the near term,” it added.
“The floods will also raise Pakistan’s external financing needs, raising the risks of a balance of payments crisis. Pakistan’s weak institutions and governance strength add uncertainty around whether the country will maintain a credible policy path that supports further financing. The negative outlook also captures risks that, should a debt restructuring be needed, it may extend to private sector creditors,” the statement said.
Explaining its reasons for the downgrade, Moody’s said Pakistan’s economic outlook in the near and medium term had sharply deteriorated because of the floods. “We have lowered Pakistan’s real GDP growth to 0-1pc for fiscal 2023 (the year ending in June 2023), from a pre-flood estimate of 3-4pc. The floods will affect all sectors, with the impact likely more acute in the agriculture sector, which makes up about one-quarter of the economy. Even if the economy recovers from the floods, the growth next year would stay below trend,” it noted.
On the other hand, the World Bank has warned that between six and nine million Pakistanis are set to be dragged into poverty as a result of floods. Pakistan’s poverty rate is expected to rise between 2.5 and 4 percentage points as a direct consequence of the floods. Loss of jobs, livestock, harvests, houses, and the closure of schools — as well as spread of disease and rising food costs — threaten to put between 5.8 and 9 million in poverty. Reversing these negative socio-economic effects is likely to take considerable time. Before the deluges began Pakistan’s coffers were already in dire shape, with a cost-of-living crisis, a nose-diving rupee, and dwindling foreign exchange reserves, it added.
The projections for Pakistan show that it faces an even bigger challenge than the pandemic. In the situation, the government will have to take measures to save livelihoods besides helping flood-hit people. Steps should also be taken to reduce prices of electricity, food and essentials, which have skyrocketed in recent months.