Daily Times

KARACHI: The expected water shortages in the country, weighing on the hydropower generation, may depress the industrial production, while the situation will result in higher prices, mainly via pass-through to consumer goods, said the State Bank of Pakistan (SBP).

Climate change and the consequent global warming have been postulated to lead to extreme weather conditions, causing droughts, floods, famine and cyclones.

According to Long-Term Climate Risk Index (CRI) 2018, during the last two decades, Pakistan experienced 141 climate-related events and remained the 7th most affected country in terms of human and output losses. Concretely, the country suffered a 0.605 percent GDP loss due to extreme weather conditions.

Recently, the Indus River Systems Authority (IRSA), country’s water resources management body, projected 40 percent shortage of water during the upcoming Kharif season, mainly due to a reduced amount of snow-melting, lower river flows and rainfall as compared to previous year.

The expected water shortages could also weigh on the hydropower generation, which, during FY17, constituted around 30 percent of the total electricity generation. The stressed energy conditions may depress the industrial production causing a drop in domestic output, the SBP warned.

To meet the shortfall, among other alternatives, thermal sources of power generation could be used. However, such a remedy may lead to higher import of oil and coal, thus amplifying the already high import bill. Besides pressures on the external account, the situation will result in higher prices, mainly via pass-through to consumer goods, it added.

During 1999-2002 period, when the country experienced one of the longest and worst episodes of drought, Pakistan’s economic growth slowed down to 1.97 percent in FY01 and exports fell by 2.25 percent. Agriculture output also witnessed a negative growth with some lags.

The SBP sees substantial fall in agriculture output, mainly due to crops failure, however, some recovery can take place on account of relief packages expected from the government.

In view of the post-disaster relief initiatives of the government, the SBP assumed that the government’s current expenditure would rise. At the same time, inflationary pressures could also rise in response to the supply shock. With a drop in agriculture output, it is assumed that agri-exports, that constituted around 20 percent of total exports in December 2017, would fall. The imports of raw material and food could rise, which in turn would further aggravate country’s current account balance.

Moreover, investor confidence is assumed to shake resulting in bearish sentiments in the stock market, while the Pakistani rupee-US Dollar parity may experience some adjustment. In response to these vulnerabilities, interest rates may also adjust accordingly, it added.

Published in Daily Times, August 8^th 2018.