TAHIR AMIN

ISLAMABAD: Fitch Solutions has stated that the severe floods in Pakistan to weigh on agricultural production and exacerbate the country’s external imbalances, and revised real GDP growth forecast for the fiscal year 2022-23 down to 0.2 percent from 0.6 percent previously. Fitch Solutions in its latest report on Pakistan stated that a reduction in crop production will also likely lead to higher inflation, which could in turn prompt the State Bank of Pakistan (SBP) to tighten monetary policy even more aggressively than we currently expect.

Economic hardship due to adverse weather poses an additional downside risk to social stability in the country too.

“We at Fitch Solutions expect floods in Pakistan to exacerbate the already weak economic outlook and political situation. A harsh monsoon season and melting glaciers have caused rainfall in Pakistan to come in at 44.3 percent above normal, and the country has been grappling with floods and mudslides since June,” it added.

According to government estimates, 33m people across the country have been impacted, with close to 1,200 people killed since June 14, and the authorities have declared at least 72 districts (out of 160) as calamity-stricken. In addition, almost 720,000 livestock have been killed in the flooding while 3,500km of roads and 150 bridges have also been damaged. We expect that conditions will remain challenging in the near term as rains are set to continue, falling on already-sodden land, further increasing the likelihood of flash floods and landslides.

“On the economic front, we have lowered our real GDP growth forecast for Pakistan to 0.2per cent for 2022-23 (July – June), from 0.6per cent previously, as adverse weather conditions will not only reduce agricultural production which accounts for 19per cent of GDP, but also weigh on exports and exacerbate Pakistan’s external imbalances. Meanwhile, Prime Minister Shehbaz Sharif has stated that floods would result in at least USD10.0bn (3.0per cent of GDP) hit to the economy,” it added.

Fitch Solutions expects the flooding to negatively impact Pakistan’s agricultural production, as a share of the current crop is damaged and future plantings will likely be delayed. Planning Minister Ahsan Iqbal has stated that as much as half of Pakistan’s current cotton crop has been damaged, while the outlook for Pakistan’s rice crop is also bleak. This will likely see the country’s trade deficit widen as agricultural exports fall and as food imports rise. In 2021, Pakistan was the third largest global exporter of rice, accounting for 8.2per cent of total sales by value, behind India (36.7per cent) and Thailand (12.8per cent).

Meanwhile, food imports typically account for about 10per cent of total merchandise imports, and that share looks set to rise as Pakistan’s agricultural output declines. The flood will also have negative implications for the downstream manufacturing sector. For instance, cotton is a key input component for the textile industry which accounts for about 56.5per cent of overall exports.

It further stated that Pakistan was facing a potential balance of payments crisis before the floods hit, and a widening of the country’s trade deficit would further weigh on the dwindling foreign reserves and the Pakistani rupee. We see downside risks to our forecasts for the current account deficit to widen to 4.0per cent in FY2022/2023, and highlight that foreign reserves are also falling. As of August 26, the country’s foreign reserve holdings fell to around an eight-year low of USD13.4bn. This amounts to about 2.7 months of import cover which is less than the three months minimum recommended by the IMF.

On August 29, the IMF approved a USD1.1bn disbursement, as part of a broader USD6.5bn assistance package initially secured in 2019. While this will help Pakistan access additional external sources of funding, we note that the economy faces significant challenges. According to Bloomberg, Pakistan needs to service USD3.0bn of debt through June 2023, including a USD1.7bn repayment due in December.

“We also expect a decrease in agricultural production to further fuel inflationary pressures in Pakistan. As a result, we have revised our average FY2022/2023 headline inflation forecast to 25.0per cent, from 20.0per cent previously.