Debts pushing Pakistan to the brink of ruin

The flooding crisis has weakened an economy already struggling to cope with its heavy financial burden. Omar Waraich reports from Islamabad

Pakistan's already creaky economy has been pushed to the verge of ruin by the devastating floods of the past month.

With foreign aid only now beginning to trickle in, the impoverished country has been forced to take out further loans while pleading for outstanding ones to be restructured.

Already burdened by heavy debt, the country's economy has suffered a major setback. Funds will have to be poured into reconstruction efforts while many sectors of the economy, especially agriculture, will suffer losses for up to several months, if not years. So far, the floods have covered a fifth of the country, cost at least 1,600 lives, displaced 4.6 million people, destroyed roads, bridges and schools, damaged power stations and dams, and swamped millions of acres of agricultural land.

About 150,000 Pakistanis were forced to move to higher ground yesterday as water from a freshly swollen Indus River submerged dozens more towns and villages in the south. Officials expect the floods to recede across the country in the next few days as the last river torrents empty into the Arabian Sea. Survivors may find little left when they return home. Already, 600,000 people are in relief camps set up in Sindh during the past month. The floods have affected about one-fifth of Pakistan's territory; at least six million people have been made homeless, and 20 million affected overall.

A top-level delegation from Pakistan's Finance Ministry will travel to Washington this week to ask the International Monetary Fund to ease the restrictions imposed on its $11.3bn (£7.3bn) support package. Before the floods, Pakistan was struggling to meet the fund's requirements. Meeting those conditions now will be impossible.

Some officials estimate that the cost of rebuilding infrastructure could be $15bn, money that Islamabad simply doesn't have. As of July, Pakistan had a debt of $55.5bn. That figure will jump to $73bn in 2015-16, as debts that were rescheduled after 9/11, in exchange for Pakistan's co-operation in the "war on terror", will come back into play.

The finance delegation's aim will be to persuade the fund to relax its conditions or draw up a fresh agreement, taking into consideration the toll exacted by the worst natural disaster the country has faced in living memory. As a result of the tragedy, the budget deficit will grow, inflation will rise, and economic growth will slow – all areas where the fund had wanted to see progress in the opposite direction.

At the same time, Islamabad has secured loans of $1bn from the World Bank and $2bn from the Asian Development Bank to help relief efforts and begin the task to rehabilitation and reconstruction. Government officials say that they were left with no option but to approach the banks as foreign aid has generated only a fraction of what's needed.

At the start of last week's special session of the UN General Assembly, only half of the Secretary General's call for $459m had been received in pledges. After impassioned appeals by Ban Ki-moon and the US Secretary of State, Hillary Clinton, that figure rose. New pledges arrived of $60m from Washington, raising its contribution to $150m, $50m from the UK, $32m from Germany and $38.5m from the European Union. By the end of the session, Pakistan's Foreign Minister, Shah Mahmood Qureshi, said he was confident that the target of $459m "is going to be easily met". After days of hand-wringing, Islamabad finally accepted New Delhi's offer of $5m, soothing anxieties on both sides of the border between the arch-rivals.

But Pakistani economists say that the aid from abroad still falls short of the funds required, forcing Islamabad to resort to expensive borrowing that it cannot afford. "It's indicative of a far greater problem within Pakistan," said Akbar Zaidi, a leading economist. "The donors don't trust the government to come up with the money."

Government officials reject the criticism that Islamabad suffers from a credibility problem. The newly appointed Finance Minister, Abdul Hafeez Sheikh, is a widely respected figure who enjoys support across the political spectrum and who served as a successful minister in the government of Pervez Musharraf. Mr Sheikh has the task of setting up a system of rigorous checks to ensure that all the money goes where it is needed.

The political opposition has seized on the slow arrival of aid and the new borrowing to accuse the government, led by President Asif Ali Zardari, of failing to burnish its image abroad and plunging Pakistan into a spiralling debt crisis. "The money that's come in so far is peanuts," said Mushahid Hussain, an opposition leader. "There is a yawning credibility gap between the government and how it is perceived by not just the international community but also its people. It is seen as too corrupt to deal with."

Nawaz Sharif, a former prime minister, has even proposed that Pakistan has no need for foreign aid. But a senior government official said that Mr Sharif's stance was an unhelpful attempt at courting and stoking nationalist sentiment amid tragedy. "It's a nutty approach," the official said. "If people are there to help you, and they want to help you, why do you want to make them uncomfortable?"

"The debt-servicing burden will just kill the country," said Ahsan Iqbal, a leading member of Mr Sharif's right-of-centre party. "We won't be able to build anything in this country of our own." Mr Iqbal says that the government could have opted instead to generate up to $3.76bn by reappropriating development budgets and slashing government funding.

Critics say that such measures would involve cuts on a scale so fearsome that it would leave George Osborne blushing, depriving the country's poorest of basic development schemes.

The disaster has revealed decades of infrastructural neglect that damns successive governments. However efficiently the current government may have been able to mobilise resources, the state's capacity was woefully lacking in the first place.

Before setting off for Washington, Mr Sheikh said that he was not prepared to put a figure on the scale of damage to the economy. "It's still too early to assess the full impact of the disaster, but the damage is colossal. It's still unfolding. It will run into billions and billions of dollars. There is a massive loss of infrastructure. Dams will have to be repaired. In the north-west, not a single bridge has survived along the Indus River. Roads will have to be rebuilt. And schools in the countryside need repair."

Some 17 million acres of agricultural land have been submerged by the floods, which are still raging in the southern province of Sindh. Key crops including wheat, cotton and rice have been affected. "We had plans to export surplus wheat," said Mr Sheikh. "It was an economic opportunity since Russia has stopped exporting wheat, raising its price. We cannot export wheat now because we have to feed our own people."

Pakistan's economy has long suffered problems because of its embarrassingly narrow tax base. Broad sections of the wealthy, including senior politicians, pay little or no tax. But Mr Sheikh said that the crisis could be an opportunity to take tough economic decisions the government has long wanted to. "We could push through a sales tax, introduce a flood surcharge on well-to-do people and get some leeway from the IMF."

There are other silver linings, Mr Sheikh said. The reconstruction effort could lead to "a spur of economic activity". For agriculture, the silt left behind by the floods will make the land in some areas more cultivable.

Start your day with The Independent, sign up for daily news emails
News
people
News
Ed Miliband received a warm welcome in Chester
election 2015
Life and Style
Apple CEO Tim Cook announces the Apple Watch during an Apple special even
fashionIs the iWatch for you? Well, it depends if you want for the fitness tech, or the style
News
Astronauts could be kept asleep for days or even weeks
scienceScientists are looking for a way to keep astronauts in a sleeplike state for days or weeks
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Recruitment Genius: Project Implementation Executive

£18000 - £23000 per annum: Recruitment Genius: They work with major vehicle ma...

Recruitment Genius: Chiropractic Assistant

£16500 per annum: Recruitment Genius: A Chiropractic Assistant is needed in a ...

Recruitment Genius: Digital Account Executive - Midlands

£18000 - £26000 per annum: Recruitment Genius: They work with major vehicle ma...

Recruitment Genius: Web Developer

£28000 - £30000 per annum: Recruitment Genius: This company provides coaching ...

Day In a Page

NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Beige is back: The drab car colours of the 1970s are proving popular again

Beige to the future

Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own