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Pakistan’s receding floodwaters leave its economy in chaos

Submerged graveyards in Pakistan in the aftermath of deadly floods, Matiyari - REHAN KHAN/EPA-EFE/Shutterstock
Submerged graveyards in Pakistan in the aftermath of deadly floods, Matiyari - REHAN KHAN/EPA-EFE/Shutterstock

Pakistan’s economy is in disarray following devastating flooding, the Asian Development Bank has warned, which could undermine efforts to tackle the “gigantic” damage caused.

In an exclusive interview Albert Park, the Bank’s chief economist, warned that the crisis hit when the country was already in turmoil. Without external support, the country could now struggle to stay afloat.

“The government has estimated damage valued at $30 billion but these estimates could increase, this is a huge figure for an economy the size of Pakistan,” said Mr Park.

“Just the human toll, with a million houses destroyed and one-third of land underwater, these are huge challenges. It is too early to tell who is going to pay for it all or what the plan will be. Everybody will have to work together.”

Pakistan only narrowly avoided a default as recently as August, after securing a $1.1bn (roughly £1bn) bailout from the International Monetary Fund and new loans from strategic partners, including Saudi Arabia.

But, many analysts were still concerned that Islamabad could follow countries including Sri Lanka and default on debt this year. Then the floods hit, described as the “worst in the history of Pakistan” by Prime Minister Shehbaz Sharif.

A young girl plays outside her tent at a relief camp, in Jaffarabad, a district in the southwestern Baluchistan province, Pakistan - Zahid Hussain/AP
A young girl plays outside her tent at a relief camp, in Jaffarabad, a district in the southwestern Baluchistan province, Pakistan - Zahid Hussain/AP
People affected by floods wait for relief at a temporary shelter on the outskirts of Dera Ismail Khan district, Khyber Pakhtunkhwa, Pakistan - SAOOD REHMAN/EPA-EFE/Shutterstock
People affected by floods wait for relief at a temporary shelter on the outskirts of Dera Ismail Khan district, Khyber Pakhtunkhwa, Pakistan - SAOOD REHMAN/EPA-EFE/Shutterstock

Over 33 million people have been displaced and while the floodwaters, which have killed over 1,600 people, are subsiding, Islamabad must also budget for a range of secondary challenges including a nationwide outbreak of deadly water-borne diseases.

“Pakistan is a risky scenario as we still assess the damage from the floods but it looks like it will be gigantic based on preliminary indications, so everyone will have to work together,” said Mr Park.

“We also need to look down the road – the daily impact it will have on the population, in terms of their household income and the mass repairing of infrastructure given Pakistan's current tight fiscal space.”

Islamabad owes around $100bn (£90bn) to external debtors, including China, to whom it owes $30bn (£27bn), and multilateral lenders, including the World Bank.

Aid for recovery

While the UN Development Programme has instructed Pakistan’s debtors to suspend or restructure repayments until the country finances urgent disaster relief, Beijing is yet to directly respond to the request.

“The floods came at an unfortunate time for Pakistan. They had worked with the IMF to develop a solid plan to manage their debt and inflation issues, but the floods mean that all of the plans will have to be reassessed,” said Mr Park.

He added that it’s still not clear where the country will get funding to aid its recovery from the flooding.

“I still don’t think this means Pakistan will default on its debt, but it will be reliant on further support from multilaterals and other countries to support their recovery.”

Meanwhile the country’s finance minister, Miftah Ismail, resigned on Sunday. While credited with securing the IMF bailout he was facing rising public criticism over his failure to curb the cost of living.

Like many South Asian countries, Pakistan is heavily dependent on importing essential goods, like food and fuel, from abroad.

Driven by the ongoing war in Ukraine, import costs have surged this year and caused Islamabad to burn through half of its foreign exchange reserves while its currency, the rupee, has depreciated by 30 per cent against the dollar.

This, in turn, resulted in a sharp rise in the cost of living in Pakistan. The cost of petrol increased by 66 percent between May and June, for example.

Mr Ismail's replacement, Ishaq Dar, has experience in his favour having already acted as the country’s finance minister on three occasions. But, analysts say it will take time for him to get up and running and attempt to tackle both the flooding damage and rampant inflation.

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