Floods push Pakistan to edge of bankruptcy

The gap between what Pakistan spends and what it earns overseas widened by a remarkable 48.6 per cent in July and August. The current account deficit in the first two months of the financial year ending next June widened to US$ 944 million from US$ 635 million over the same period 12 months earlier. With inflation at 12.5 per cent in August and expected to rise by 13.5 per recent over the entire fiscal year, analysts expect Islamabad to go back to the International Monetary Fund (IMF) cap in hand to cope with its foreign debt.

Recent flooding, which displaced 20 million people, wiped out harvests in the most productive regions of the country. The country must now import sugar and wheat, when until recently it was self-sufficient. Even cotton, which it exported, has to be brought in from abroad.

Just coping with immediate food needs will require a huge outlay. The cost of rehabilitating farmland and helping millions of homeless who lost everything will be staggering. This week, the International Monetary Fund provided US$ 451 million in emergency assistance, but much more is needed.

Prime Minister Yousuf Rasaf Gilani said that his country suffered US$ 43 billion in losses, a figure that represents about 25 per cent of its GDP in 2009. However, experts believe that to be a conservative estimate and that more time is needed before losses are fully accounted. Agriculture, the most affected sector, represents 21 per cent of the GDP and 45 per cent of the workforce. About 8 per cent of all farmland was flooded.

In November 2008, the government had to turn to the IMF for a US$ 11.3 billion standby loan to meet overseas debt payments. So far, 6 billion have been released, but the IMF is holding back on US$ 2.6 billion because of Pakistan's failure to make adjustments as required under the funding agreement such as introducing a value added tax, reform electricity tariffs, curtail expenditures and cut the fiscal deficit, which are still in the planning phase.

Critics say Pakistan's government has refined the art of relying on charity and assistance from foreign countries, to the point where the country cannot survive without such aid. They note that higher imports of oil and food have so far favoured higher consumption rather than development.

The trade gap widened to US$ 1.24 billion in August from US$ 1.07 billion a year ago, but the data do not take into consideration the flood emergency.

The worsening current account deficit reverses the trend of the last fiscal year, when it had narrowed by 63 per cent to US$ 3.5 billion, especially due to a record inflow of remittances by overseas Pakistani workers.

In any event, the cost of rehabilitation will likely push the fiscal deficit to between 6 per cent and 7 per cent of GDP in the current fiscal year against an original target of 4 per cent agreed to with the IMF.

At the same time, the international community is unwilling to let Pakistan go because of its key role in the fight against Afghan Taliban who have bases in the country and who are trying to infiltrate it further.