Karachi, January 10, 2023 (PPI-OT): Pakistan secures commitments worth over 3% of GDP
As per news reports, Pakistan has secured commitments worth ~US$11bn (~3.3% of GDP) at the International Conference on Climate Resilient Pakistan for rehabilitation of 2022-flood affected areas. This amounts to ~69% of estimated US$16bn recovery needs. In comparison Pakistan received US$4.5bn vs reconstruction cost of US$7bn post 2010 Floods.
While funds would materialize in SBP’s foreign exchange reserves gradually, any inflows are a good omen for Pakistan which carries an import cover of ~4 weeks with loans and deposits worth ~1x of SBP reserves maturing in the short term.
The underlying question in the funding comes towards local sources, which would be the remaining 31% of the requirement, estimated broadly to be funded from PSDP reallocations.
Around US$11bn commitments received from the world
Pakistan, along with the United Nations, co-hosted the International Conference on Climate Resilient Pakistan that was held to bring leaders of nations, private sectors and public sectors to support Pakistan post the catastrophic floods that struck in Aug-2022. To recall, the floods were among the worst floods Pakistan has seen in the last 30 years, affecting 33 million citizens of the country. At the conference, the government presented its Resilient Recovery, Rehabilitation and Reconstruction Framework (4RF) and secured multi-billion dollars’ worth of support from participants to rebuild the flood affected areas.
As per latest reports, Pakistan has successfully managed to secure funds ~US$11bn (3.3% of GDP), where prominent commitments came from World Bank (US$2bn), Islamic Development Bank (US$4.2bn), Asian Development Bank (US$1.5bn), Asian Infrastructural Investment Bank (US$1bn) and Saudi Arabia (US$1bn). This totals to 69% of the estimated reconstruction costs of US$16bn post floods, vis-à-vis planned funding of 50% from foreign sources. As per the 4RF report, the remaining will be sourced locally (initially estimated 30% PSDP/Annual Development Programme, 15% PPP and 5% Civil Society Organizations) by conducting a reallocation of existing PSDP and ADP funds and through a multi-year plan.
The much-needed dollar inflow
While the funds would materialize in SBP’s foreign exchange reserves gradually, any fresh inflows are a good omen for Pakistan that carries an import cover of ~4 weeks with loans and deposits worth ~1x of SBP reserves maturing in the short term. When compared to foreign commitments in floods-2010, Pakistan received cumulative US$4.5bn from World Bank and ADB, in addition to IMF and UN. To recall, reconstruction cost post floods-2010 were estimated around ~US$7bn.
Trickling some impact to the listed space
The US$16bn will be spent on mobilization, rescue, relief, reconnecting and recovery. These areas involve work on the Agri, Housing, Transport segments etc. Hence, from the listed space, the funds deployment would bode well for the Constructions and Allied sectors, Attock Petroleum, Fertilizer and Consumer sectors.
PSDP spending rise on the cards
The underlying question in the funding comes towards local sources. Pakistan’s 1QFY23 fiscal and primary balance worsened to -1% and +0.2% of GDP, respectively, missing performance criteria defined by IMF in the latest Staff Report of a primary surplus of Rs339bn (0.4% of GDP).
Due to floods and economy consolidation, however, Federal PSDP spending contracted by 38% YoY during the period, while total PSDP spending was down 16% YoY. We believe reallocating PSDP to meet the target of 30% of the US$16bn (Rs1trn – 1.3% of GDP) would not be a difficult task for the government given the country’s annual total PSDP budget has been allocated at Rs2trn, while Rs1.6trn was spent in FY22 alone under the said head. Nonetheless, key risk to IMF’s FY23 primary surplus projection of 0.2% of GDP emits from the higher PSDP spending coinciding with ‘election year’ spending expected this year.