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Pakistan

'Repercussions of $4bn': flash floods create havoc as Pakistan's economy remains under stress

  • Report by brokerage house says while too early to accurately quantify, preliminary estimates suggest repercussions may include more than $4 billion
  • Economy to be affected by lower agriculture production, slowdown in exports, higher inflation and imports
Published August 26, 2022
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Ongoing flash floods in Pakistan, arising from historic rains during July and August, could trigger losses to the tune of billions for the country, led by an increase in imports and export slowdown and higher inflation, warned brokerage house JS Global.

As per its report titled, 'Floods – An initial assessment of the calamity' released on Friday, rains have turned into flash floods this year, expected to be among the worst floods Pakistan has seen in the last 30 years, with Sindh and Balochistan, constituting 38% of total agri production in the country, being the worst hit.

The report comes a day after the Ministry of Finance also warned on Thursday that recent floods/torrential rains have adversely affected the standing Kharif crops, specifically cotton, which may impact economic outlook through agriculture performance.

Pakistan has been ravaged by torrential rains that have resulted in hundreds of deaths, while causing large-scale infrastructure damage.

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Meanwhile, the JS Global report noted that Pakistan, with direct agri contribution to GDP of 23%, could reach a vulnerable position in the aftermath of these floods.

"While too early to accurately quantify, our preliminary estimates suggest that repercussions may include more than $4 billion, higher-than-estimated imports in FY23, and a possible slowdown in exports from absence of cotton and partially rice,

"Current account deficit levels may increase by $4.4 billion (1% of GDP) – assuming no counter measures are taken, while around 30% of CPI basket is exposed to threat of higher prices.

“Moreover, unplanned expenditures for relief, restoration and subsidies to affected segments may exert fiscal pressure in a year where Pakistan would already be under strict International Monetary Fund (IMF) targets,” the report added.

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The report highlighted that amid ongoing flash floods, household groceries such as onion, tomatoes and chillies are also expected to face a supply deficit.

“These items, together with wheat, edible, milk and meat hold 18% weight in the CPI basket. This is a high risk to the already sticky food inflation (at 28%; 13-year high) and high WPI (at 38.6%, all-time high),” it said, while alerting that any risk to food security, shortages and bottlenecks in supply would exceed our existing FY23E CPI estimates of 21%.

“Any risk of sharp increase in inflation may lead to the resumption of monetary tightening, where only recently the SBP took a breather after an 800bp tightening spree,” it said.

Pakistan is already under stress with inflation hitting a 14-year high, and foreign exchange reserves depleting to an alarming level. While it has managed to secure commitments on investment and external funding, its economic position still puts it in a vulnerable position in the face of external shocks.

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