‘Flash floods in Pakistan have destroyed thousands of acres of crops in Punjab, the country’s largest producer. About 60 percent of the province’s rice crops and 30% of its sugarcane have been lost, while cotton production is expected to decline by 35 percent compared to its production target for the year, according to preliminary assessments by the Pakistan Business Forum.
Flood-related damages may worsen fiscal pressures and disrupt food supplies, the finance ministry warned in its latest monthly economic report. Wheat harvests stored in Punjab’s warehouses have also been damaged and may lead to the need for additional imports… Prices of the crop have gone up by 20% in the past few weeks due to lower output, supply chain disruptions brought by the rains and lack of government controls…’ – An excerpt from a September 2, Bloomberg published article ‘Pakistan’s flash floods damage rice, sugar in key areas’
As the article rightly points towards production losses of important crops, along with substantial damage done to infrastructure, as far as the rural economy is concerned, there is an added negative impact of floods in terms of significant loss to livestock.
Whereas such large-scale damage, primarily to rural economy, which holds a significant share in gross domestic product (GDP, or simply national income) is likely to bring down an already feeble economic growth rate forecasts for the current fiscal year, whereby downward revision may pull it back below the 3 percent plus forecasts, and in line with overall medium-term performance of economic growth rate around the population growth rate of around 2.6 percent. Having said, more precise estimates are likely to come to fore in the coming months as floods recede, and there is better understanding of damage.
One important impact, which is very much expected is the rise in inflation, which although is quite low currently – where CPI for August year-on-year stood at 3 percent — is likely to pick up strong pace; where a significant jump could be seen by the end of September. It should be understood very clearly that increase in inflation will be basically due to aggregate supply-side shock, and therefore, increase in inflation in no way should involve monetary policy, which should not be a problem as the real interest rate has a lot of cushion — although unwarranted that such a high level of positive real interest rate is kept as inflation in developing countries is at least equally a fiscal phenomenon, with a meaningful level of determination coming from the aggregate supply/governance related aspects – whereby policy rate being 11 percent means that real interest rate stands at a yawning 8 percent!
In fact, policy rate should be slashed significantly so that the burden of interest payments could be lowered to allow government greater fiscal space to invest towards the rehabilitation, and support rural economy through subsidized loan schemes.
Given the exceptional impact of floods on economy, the government should take on board International Monetary Fund (IMF), with regard to the conditionalities in this regard in the currently ongoing Extended Fund Facility (EFF) programme, to reduce the imprint of monetary-, and fiscal austerity, in terms of agreeing for significantly reducing the level of positive real interest rate, and doing away with the requirement of primary surplus, respectively.
Likely lack of economic growth as a consequence of floods will most probably suppress revenues, especially due to expected reduction in purchasing power of people reducing in terms the extent of economic exchange, with likely negative impacts on both income tax- and consumption tax related channels.
Also, the country should re-negotiate the current envelope with IMF in terms of significant upward revision is the amount allocated under the Resilience and Sustainability Facility (RSF) loan programme, given the high climate change vulnerability Pakistan is facing; made more glaring by recent catastrophic flooding, and cloud burst incidents a bit before that.
Also, lower cost of capital would allow greater private sector investment in the rural economy to rebuild, and support operating costs. This is all the more important, given absence of government support/indicative price had already brought a lot of economic hardship to farmers before the floods. Significant reduction in policy rate is also important to give much-needed impetus to large-scale manufacturing, which has been struggling for a number of years, especially the agriculture-based industry.
At the same time, better governance should check the recent price hike of wheat in the wholesale market; and in this regard, it may be a good idea to adopt a price control policy for agricultural commodities of strategic nature – wheat, and rice for instance –that has been badly impacted by the floods.
In addition to inflation, floods of catastrophic nature that have been induced by the fast-unfolding climate change crisis over the last decade or so in particular – as for the first time global warming crossed the dreaded threshold of 1.5C was breached during February 2023 and January 2024, and which needs to be curtailed to avoid this from happening on long-term basis, and eventually kept down from this ceiling – have likely pushed upward the agriculture sector unemployment level; where unemployment overall was already at historic levels by reportedly being a little above 20 percent. For instance, Pakistan has a huge level of glaciers and global warming has already significantly increased the level of glacier-melting, and even has led to cloud bursts, which happened a number of times in recent weeks, just before the catastrophic flooding.
There are two ways to approach the topic of climate change, with regard to how it is impacting the economy of Pakistan, and what needs to be done by the country, and international community.
First way being that climate change has resulted from global warming, mostly due to the carbon footprint of rich advanced countries, and that more finances need to be provided by international community, especially those rich countries that have, and have had significant carbon footprint.
In addition, the government needs to plan and execute better in terms of a wholistic, long-term plan, including making big dams, along with heavy front-loaded, short-term initiatives, especially building multiple small-scale water containing reservoirs, or small dams, enhancing overall revenue, and increasing the budgetary allocation related to climate change ministry/provincial departments.
This, on one hand, is just scratching the surface of the problem in terms of climate change crisis facing the country, and the performance of different stakeholders in this regard. On the other hand, it does not go deep enough to indicate the heart of the problem, including possibly, a self-serving politico-economic extractive institutional design, including understanding the framework of this design both in terms of its fundamentals, and its complementarities.
In this regard, in addition to building dams – small and large – it is important to reduce the impact of global warming – both in terms of playing greater advocacy role at the international level, including with regard to pushing for significant enhancement in climate finance – to check the increasing supply of water being received primarily through increasing speed of glacier-melting, and greater precipitation leading to much more rains.
Second way is to take a more wholistic approach to dealing with climate change crisis, whereby discussion in policy circles, and in media should including reforms of global financial architecture away from neoliberal, and over-board austerity policies.
Moreover, there is need for doing active diplomacy/advocacy to push rich, powerful countries to come together to improve the sovereign debt restructuring, and global tax reforms – including introducing steps to roll back offshore tax heavens that reportedly allow corruption money from countries to be kept hidden from public scrutiny, which is especially damaging for poor, developing countries like Pakistan – to overall increase the level of climate finance from billions to trillions.
Current estimates reportedly indicate that while only a few hundred billion dollars are being provided annually as climate finance, more than a trillion dollars are needed every year; while around four trillion dollars are needed if sustainable development goals – which include the goals related to climate change – are included for enhancing overall adaptation/resilience of countries against climate change, and related ‘Pandemicene’ phenomenon.
Copyright Business Recorder, 2025
The writer holds a PhD in Economics degree from the University of Barcelona, and has previously worked at the International Monetary Fund. His contact on ‘X’ (formerly ‘Twitter’) is @omerjaved7