Floods to spur massive job losses

Islamabad :  Pakistan's unprecedented floods threaten to hobble the economy with a surge in unemployment, a spike in inflation and billions of dollars in crippled infrastructure, the country's prime minister said.

"There will be massive job losses, serious social implications and a snowball effect on manufacturing and services," Yousuf Raza Gilani said in a speech from the capital, Islamabad.

Inflation may almost double to 20 per cent after damage of as much as $6 billion to transportation and agriculture, the government APP news service reported, with Gilani citing some estimates spiralling as high as $43 billion.

Rising prices may put pressure on Pakistan's central bank to boost its benchmark interest rate, already one of the highest in the world, and hammer household spending power in a country where a quarter of the population lives on less than $1 a day. As Pakistan appeals for aid, World Bank President Robert Zoellick said the nation must demonstrate the ability to ensure funds will be channelled to those most in need.

"Renewed commitment to governance and fiscal reforms will be important to mobilise domestic revenues and ensure that funds reach the poor people it is intended for," Zoellick said in a statement after meeting with Pakistan's Finance Minister Hafeez Shaikh in Washington yesterday.

"The response of donors to the floods will also depend on the government's ability to deliver in this area."

The cost of insuring Pakistan government debt jumped to a three-month high. Credit-default swaps on Pakistan government debt had increased by 331 basis points to 832 basis points between July 31 and yesterday, according to data provider CMA. The last time they traded at a higher level was on May 26, when the contracts closed at 841 basis points.

Monetary tightening

Gilani estimated gross domestic product growth at 2.5 per cent in the current financial year, two percentage points less than the government's target. By comparison, Pakistan's neighbour India may expand as much as 8.75 per cent in the year through March, its finance minister said last week.

Higher borrowing costs in Pakistan may be unavoidable given prospects for higher consumer prices.

Inflation in July stood at 12.34 per cent, and the State Bank of Pakistan on July 30 increased its discount rate to 13 per cent from 12.5, boosting the benchmark for the first time in four meetings.

"The central bank may not have much of a choice, and will tighten the policy," said Sayem Ali, an economist at Standard Chartered Pakistan Ltd in Karachi.

"The pace of inflation is definitely moving north, and the central bank is expected to react accordingly."

The inflation rate may climb as the government estimates the floods to have damaged $1 billion of crops, causing shortages.

Pakistan will harvest 4.4 million metric tons of rice in the marketing year that starts November 1, down 35 per cent from the previous year, according to a report by a unit of the US Department of Agriculture.