Pakistan is often portrayed as the future Sri Lanka, a nod to this tiny South Asian nation’s resounding bankruptcy more than four months ago. In fact, the torrential rains that have hit the country represent an economic catastrophe for Islamabad and come at the worst possible time for the country’s finances. But the parallel has its limits.
More than 1,000 casualties, torrents of water washing away everything in their path, destroying roads, buildings and inundating hundreds of thousands of hectares of plantations in a country that still relies heavily on agriculture for its economy.
For more than three months, Pakistan has been bowing under the weight of the relentless rains. Should the humanitarian catastrophe become ever more apparent, authorities warn that this historic-strength monsoon will also leave deep economic scars.
The price of rice and cotton
“It will be very expensive for us. Preliminary estimates suggest that the economic impact [des inondations] will surpass $10 billion,” Ahsan Iqbal, Minister for Planning and Development, said Monday, Aug. 29, when interviewed by Portal news agency. This amount only covers the reconstruction effort, which “should take at least five years,” Ahsan Iqbal specified.
But the summer monsoon is also likely to cause prices to explode. According to Pakistan’s National Disaster Management Agency, more than 800,000 hectares of plantations have been destroyed since the heavy rains began. This disappearance of part of the crops of rice, dates or even chickpeas “will have a major impact on food prices, when inflation was already the number one problem,” said Subhan Ullah, an economist at the University of Birmingham. Inflation exceeded 20% before the start of the monsoon season.
“The floods have particularly hit the Punjab and Sind regions, considered Pakistan’s food baskets, and the country’s markets are beginning to feel shortages, leading to rising prices,” notes Portal. And that is just the beginning. “We will have to import these fruits and vegetables, which means an additional increase,” adds Subhan Ullah.
But these wasted harvests don’t just have a negative impact on food costs. “Nearly 45% of the cotton plantations were destroyed,” says Ahsan Iqbal. Very bad news for the national economy as it is an essential raw material for the textile industry which accounts for more than 60% of Pakistan’s exports.
A new Sri Lanka?
The bad weather is therefore an economic catastrophe in itself for Islamabad. But they also intervene at the worst possible time for the country’s finances. High in debt, with almost empty coffers and runaway inflation, Pakistan finds itself in an economic situation not dissimilar to that of Sri Lanka, which went bankrupt in April 2022.
Islamabad has to repay almost $24 billion in debt this year to various international creditors such as the International Monetary Fund (IMF), the World Bank or the Paris Club (an informal group of public creditors). Problem: Foreign exchange reserves in the Treasury fell below the $10 billion mark in June. “This is a threshold below which a country is generally considered to have entered a serious crisis,” notes Juvaria Jafri, specialist in economic policy for developing countries at City University in London.
The roots of Pakistan’s economic evil are diverse and can be traced back “to years of poor economic management as well as to structural problems with tax collection,” emphasizes Subhan Ullah. But after the Covid 19 pandemic and above all because of “the war in Ukraine, the consequences of which were particularly serious”, the situation has deteriorated significantly, adds the economist from the University of Birmingham.
The explosion in energy prices in particular hit Pakistan’s finances because the country “imports most of its electricity needs,” Subhan Ullah recalls.
Another factor comes from the IMF: Pakistan negotiated a $6 billion financial aid plan in 2019 that remained blocked for three years. The international body asked Islamabad to end subsidized gasoline prices, which were very expensive for the state, but allowed the government to limit the impact of rising prices at the pump.
There is debt and debt
Last May, the government finally accepted the terms of the IMF. As a result, petrol prices have suddenly and massively increased, reducing the purchasing power of millions of Pakistanis. This is enough to slow the pace of already weak growth.
But the economic horizon is not entirely bleak: the IMF has agreed to release an initial $1 billion tranche of the 2019 bailout plan on Monday, August 29, removing the risk of default,” Subhan Ullah said.
Certainly, that billion dollars may seem paltry compared to Pakistan’s mountain of debt. But “if we look more closely at how this debt is structured, we realize that the parallel to Sri Lanka is probably exaggerated because the risk of default is not that great,” says Juvaria Jafri. In fact, there is only about $1 billion in debt that desperately needs to be paid off by the end of the year. “Payment dates for everything else can be renegotiated,” says Jawwad Farid, a Pakistani public finance expert who is very active and is being followed on twitter.
In addition, “there are always friendly countries like Saudi Arabia or Qatar that can lend more money,” Subhan Ullah explains. The Financial Times assures that Riyadh will use this to renew a three billion dollar loan to Pakistan. Islamabad hopes Qatar, China and the United Arab Emirates will lend Pakistan more than $4 billion, the British financial daily adds.
So many traces that Islamabad should not let go under. But it also goes back to jump better. In particular, we must expect very tense negotiations with the IMF in the future, says Juvaria Jafri. The organization “should be demanding more austerity measures in exchange for its loans, and the government will be very reluctant to accept them,” she said.
The reason: the Pakistani parliamentary elections in 2023. Prime Minister Shehbaz Sharif is “currently under pressure, especially because of his handling of the floods,” Subhan Ullah recalls. The last thing he would want was to implement the austerity measures imposed by the IMF and therefore inevitably unpopular. Shehbaz Sharif has no intention of giving such a gift to his main political rival, former Prime Minister Imran Khan, who hopes to return to power thanks to these elections.