As flood ravages through Pakistani lands, the countrys economy is set for a pause; uncertainty abounds as the government and international agencies including UN, World Bank and ADB are still working to assess the damage.
Initial estimates, quoted by sources in the Ministry of Finance and State Bank suggest that GDP growth will be lower by at least 1.5 to 2 percent from the target of 4.5 percent.
According to the UNs Secretary General every tenth person in Pakistan is affected by the natural calamity, while other sources cite that over 20 million people or 13 percent of the population is displaced one way or the other.
This means that the labour force of a similar proportion might remain unproductive for nothing less than two months, which will have its own repercussions on GDP value addition.
This affect is apart from the damage of around $3 billion or 1.7 percent of GDP of ready crops mainly cotton and rice, as one third of the countrys agriculture land is weeping under the water.
Consumption, which comprises the lions share in GDP, is likely to be reduced by some extent as well. Firstly, the 20 million people who are displaced at the mercy of aid are going to live at subsistence level for a month or two. And even later, say for the rest of this year, they will likely be busy in rebuilding their lost or damaged assets, which implies lower levels of consumption ahead.
Then the depression in air in the aftermath of the natural calamity, ethnic conflicts in Karachi and sporadic extremist activities amid falling purchasing power is going to affect the consumption of non-affected people as well. People might slash spending on dining out, travelling, Eid festivities and the wedding season shopping bonanza.
Investment-to-GDP, which hit an abysmally low level of 16.6 percent of GDP last year, might improve marginally this year. The infrastructure - roads and bridges - washed away by water are now required to be rebuilt on a priority basis to streamline food distribution and raw material supply chain for the industries.
This might boost investment in construction and allied sectors to marginally lessen the impact of loss in output. However, this is unlikely to continue. Besides, the impact of output loss and funds which are going to be deployed in reconstruction of damaged infrastructure will eat the much required new development projects given the governments tight fiscal conditions.
In essence, this will not only question the thesis of improved investment-to-GDP ratio this year but will also hurt growth prospects in the coming years.
Moreover, the loss in crops is going to worsen the trade and current account external balance by virtue of higher food imports and lower cotton value added exports. However, a chunk of food imports might be in the form of aid, and therefore its impact on the exchange rate will be negligible.
On the inflation front, food shortages owing to crop and supply chain disruptions might result in higher-than-expected inflation in the coming two to three months, but it might converge to initial expectation in the second half of this fiscal year. Hence, SBPs inflation target of 11-12 percent might slip marginally.
The loss in aggregate demand owing to lower consumption might deter SBP from raising interest rates further in its upcoming review despite slightly higher inflation.
Overall, the damage to the economy will be huge, but manageable if dealt by means of good governance; fiscal reforms and restructuring of public sector entities are even more imperative for stabilizing the macroeconomic fundamentals in the aftermath of floods.