Pakistan's response to floods mired in "doom and gloom"

by reuters | Thomson Reuters Foundation
Wednesday, 8 September 2010 13:14 GMT

By Sahar Ahmed KARACHI, Sept 8 (Reuters) - Pakistan, whose economy has been battered by the worst floods in its history, needs to abide by terms of an IMF bailout loan by enforcing fiscal austerity, the chances of which happening appear close to zero.

The World Bank and Asian Development Bank are still assessing damage but three things are clear -- the fiscal deficit target will be missed, inflation will rise and annual economic growth could be knocked back to between zero and 2 percent.

Before the floods, which killed more than 1,700 people, displaced millions and caused an estimated $43 billion in damage -- almost one quarter of the South Asian nation's 2009/10 gross domestic product -- Pakistan had forecast growth of 4.5 percent.

The floods have impacted 30 percent of all farmland, a massive blow to a mainstay of the economy. The economic problems are of concern to the United States which relies on a stable Pakistan in its fight against terrorism.

"The future of the economy is a big question mark, as there is no policy response from the government so far," said Muzzamil Aslam, an economist at JS Global Capital Ltd.

"Doom, gloom and despair are spreading fast," said Ashfaque Hasan Khan, dean at NUST Business School in Islamabad.

Part of the problem, he said, was the government's focus. "The economy is not on the radar screen," said Khan.

But the government has to abide by International Monetary Fund demands that focus on narrowing the fiscal deficit and raising tax revenue. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

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The IMF said last week it would give Pakistan $450 million in emergency flood aid and disburse funds in September but the status of the release of the sixth tranche of an $11 billion bailout loan is unclear. It seems to have been delayed at least until November.

There's no evidence that Pakistan will be able to meet the reform targets soon as the government has already overshot its target of zero net borrowing from the central bank by 133.6 billion rupees from July 1 to Aug 20 which is another target set by the IMF.

"There are no shortcuts available for the government to quickly lift the country's economic growth rate," said Asif Qureshi, director at Invisor Securities Ltd.

"The logical sequence should be to build credibility through aggressive fiscal reforms to generate resources, and then use them effectively to stimulate growth."

The government must implement a value added tax by Oct. 1 which is supposed to replace the general sales tax and is also linked to the IMF's next tranche.

It must also remove energy subsidies and eliminate commodity and energy circular debts so that it can contain its fiscal deficit and build credibility with donors.

If Pakistan doesn't put its financial house in order, it will not be able to attract foreign aid and investment.

"The government does not have any fiscal space to kick-start the economy while its poor governance image is inhibiting external aid inflows," said Qureshi.

The IMF last week stressed the need for a commitment to reforms.

"In this regard, the IMF has given no concessions to the government," said Sayem Ali, an economist at Standard Chartered Bank. "If the government fails to meet these reforms, then the IMF funds will not be released."

(Editing by Chris Allbritton and Nick Macfie) (For more Reuters coverage of Afghanistan and Pakistan, see: http://www.reuters.com/places/pakistan)

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