Pakistan’s unprecedented floods threaten to hobble the economy with a surge in unemployment, a spike in inflation and billions of dollars in crippled infrastructure, the country’s prime minister said.
“There will be massive job losses, serious social implications and a snowball effect on manufacturing and services,” Yousuf Raza Gilani said in a speech from the capital, Islamabad, yesterday. Inflation may almost double to 20 percent after damage of as much as $6 billion to transportation and agriculture, the government APP news service reported, with Gilani citing some estimates spiraling as high as $43 billion.
Rising prices may put pressure on Pakistan’s central bank to boost its benchmark interest rate, already one of the highest in the world, and hammer household spending power in a country where a quarter of the population lives on less than $1 a day. As Pakistan appeals for aid, World Bank President Robert Zoellick said the nation must demonstrate the ability to ensure funds will be channeled to those most in need.
“Renewed commitment to governance and fiscal reforms will be important to mobilize domestic revenues and ensure that funds reach the poor people it is intended for,” Zoellick said in a statement after meeting with Pakistan’s Finance Minister Hafeez Shaikh in Washington yesterday. “The response of donors to the floods will also depend on the government’s ability to deliver in this area.”
Credit-Default Swaps
The cost of insuring Pakistan government debt jumped to a three-month high. Credit-default swaps on Pakistan government debt had increased by 331 basis points to 832 basis points between July 31 and yesterday, according to data provider CMA. The last time they traded at a higher level was on May 26, when the contracts closed at 841 basis points.
Gilani estimated gross domestic product growth at 2.5 percent in the current financial year, 2 percentage points less than the government’s target. By comparison, Pakistan’s neighbor India may expand as much as 8.75 percent in the year through March, its finance minister said this week.
Higher borrowing costs in Pakistan may be unavoidable given prospects for higher consumer prices. Inflation in July stood at 12.34 percent, and the State Bank of Pakistan on July 30 increased its discount rate to 13 percent from 12.5, boosting the benchmark for the first time in four meetings.
Monetary Tightening
“The central bank may not have much of a choice, and will tighten the policy,” said Sayem Ali, an economist at Standard Chartered Pakistan Ltd. in Karachi. “The pace of inflation is definitely moving north, and the central bank is expected to react accordingly.”
The inflation rate may climb as the government estimates the floods to have damaged $1 billion of crops, causing shortages. Pakistan will harvest 4.4 million metric tons of rice in the marketing year that starts Nov. 1, down 35 percent from the previous year, according to a report by a unit of the U.S. Department of Agriculture.
The Food and Agriculture Organization has called for funds to replace half a million tons of wheat seed stocks destroyed by the floods, with planting of the staple due to take place over the next three months.
The World Bank yesterday increased its flood-related support to the nation to $1 billion from $900 million, the Washington-based development lender said in a statement on its website.
Gilani yesterday said the natural disaster has destroyed 4,000 kilometers of roads and 1,000 bridges, pushing up the cost of delivering goods and services. He estimated the inflation rate to climb to between 15 percent and 20 percent.
Flows in the Indus River basin reached 10 times their normal monsoon season levels, racing south through Punjab and Sindh provinces and wreaking destruction. At their peak they the floods covered an area the size of England.
To contact the reporter on this story: Farhan Sharif in Karachi at fsharif2@bloomberg.net
Pakistan Floods Threaten `Massive' Job Losses, Inflation Jump, Gilani Says - Bloomberg
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