'Quake to have diverse impact on economy

By Ansar Abbasi

The World Bank and the Asian Development Bank have warned Pakistan that the October 8 earthquake will have an adverse impact on the country’s economy hitting the official GDP, fiscal deficit, balance of payment, economic growth, current account, poverty reduction besides considerably shaking the budget 2005-06.
"The earthquake will have an adverse impact on the economy, most notably on the fiscal deficit of the Government of Pakistan," said the WB-ADB draft report on preliminary damages and needs; assessment of Pakistan’s earthquake 2005, a copy of which was provided to The News.
Assessing the macroeconomic effects of the earthquake on the country’s economy, the report said in the absence of any offsetting revenue increases and expenditure reductions, the earthquake is projected to increase the financial year 2006 (FY06) of the government of Pakistan by 0.6 per cent of GDP, from a projected 3.8 per cent of GDP to 4.4 per cent of GDP.
On quake’s impact on external sector, the report said, "There will be a negative impact on the balance of payments, but pressures on the external sector are arising from strong aggregate demand and factors not directly related to the earthquake."
"A delay in PTCL privatisation and of aid inflows to finance GoP earthquake expenditures could aggravate these pressures," the report added. About the real sector, the report said that the impact of the earthquake on Pakistan’s official GDP (which excludes GDP from AJK) is expected to be relatively small, in the order of 0.3 per cent.
"FY06 GDP growth was projected in June at 7 per cent; however, recent data on the outcome of the cotton and sugarcane suggests that growth will be around 6.5 percent. The additional impact of the earthquake is likely to bring output growth further down, to around 6.2 percent. This loss is due to a projected reduction in NWFP output for FY06."
The impact of the earthquake on the budget of the government of Pakistan, the report said, is expected to be considerable. "Based on this preliminary assessment of damages and assuming a certain pace of relief and reconstruction activities, the earthquake is likely to increase the 2005-06 fiscal deficit to 4.4 per cent of GDP (ie by $730 million). This includes (i) about $20 million in lost revenue, (ii) as escalation of $185 million in operating budgets of administration for the overheads of relief and future reconstructions work; (iii) a minor increase in pension (and G P Fund) payments for government employees who died in the earthquake; (iv) an increase of $665 million in grants for deaths and injuries, livelihood, housing and a $42 million grant for AJK; (v) a $30 million increase in provincial (NWFP) expenditure; and (vi) a $100 million increase in development expenditure for reconstruction work. On the other hand, the government has indicated that some of the development funds (about $253 million) could be reallocated from the development budget towards financing the reconstruction programme."
The report said that the earthquake has created additional expenditure needs for relief, reconstruction and rehabilitation cost.
"These pressures could pose difficulties for the country’s macroeconomic balances and may impact on long-term development goals, unless additional concessional financing is made available by the international community. The government has indicated that it would be prepared to absorb the impact of the budget by making appropriate adjustments in the budget2005-06. Increasing the pass-through of energy prices to consumers and the tax-to-GDP ration by redoubling efforts on tax administration and policy could make an increased contribution to reconstruction. These adjustments would be needed irrespective of the amount and type of financing that may be available from the donor community. Nonetheless, given the magnitude of resources that would be required to rehabilitate the affected areas, it would be difficult for the government to neutralise the fiscal impact of earthquake without significantly affecting the public sector development activities and therefore reducing future economic growth and poverty reduction."
The report added that Pakistan’s trade balance is projected to deteriorate over the coming year. "Relief and reconstruction needs will have some additional impact on import demand, due to higher demand for fuel, steel and possibly cement. This, in addition to the strong import growth arising from an overheating economy, will place an additional strain on reserves.
"The impact on the current account could also be considerable. Although both remittances and forcing direct investment have shown healthy increases during the first months of the current fiscal year, during July-September 2005, gross official reserves have declined by $0.5 billion to $9.5 billion. To help the government meet immediate needs, the World Bank made available $200 million of program loans as well as $230 million of project loans. Even with this immediate emergency assistance, a significant financing gap will remain in the balance of payments. The delay in privatisation of PTCL, which was expected to add $2.7 billion in financing, may also affect the current account negatively."
"In the absence of additional international assistance, and of much needed actions by the government to curb demand, additional funds raised by the government through a possible Eurobond issue will be insufficient to finance the current account and keep imports at a level of at least 3 months of imports." The News