The October 8 tragedy - the worst ever earthquake in the country's history - has shaven off 1.5 percentage points from measured economic growth, Social Policy and Development Centre (SPDC) special report said here on Friday.
The SPDC report titled 'The economy in the Aftermath of Earthquake' said that the earthquake caused capital stock destruction, loss of human lives, damage in labour force, fall in employment and a short-lived loss of cultivated land.
"The country's economy faces this damage during fiscal year 2005-06," said the SPDC report emulating from its unique model.
"To make the model simulations as realistic as possible, the special report matches the assumptions of the relief and reconstruction scenario as closely as possible to those laid out in two companion studies undertaken by the United Nations (UN) and the Asian Development Bank (ADB)/World Bank (WB) in November 2005," added the report.
It said, "These assumptions seem to be guiding the government's rebuilding plans at the moment and the only exception to those assumptions is that SPDC has assumed reconstruction outlays of $5.8 billion, rather than the $5.2 billion assumed by the studies of donor agencies, since the former is the amount that was pledged at the donors conference in Islamabad on November 19, 2005."
SPDC report says that under the rebuilding scenario, which involves outlays of $5.8 billion over a five-year period, growth in years subsequent to 2005-06 will in fact be higher than it would have been in the absence of the earthquake.
"However, this subsequent higher growth will be enough to bring the economy back after five years only about half-way to the path where it would have been in the absence of the October 8 disaster," it said, adding that the reconstruction activity is likely to add significantly to inflation for about two years, roughly 2 percentage points in 2005-06 and one percentage point in 2006-07.
This is not because the rebuilding efforts would put inordinate pressures on the budget deficit--such pressures are rather modest because of the confessional nature of the financing involved. Rather, inflation goes up because the reconstruction activity restores aggregate demand much faster than it restores the lost capacity of the economy to produce output, the report remarked.
Concluding, the report highlighted that the government "has an important trade-off to evaluate" in that a higher amount of reconstruction spending disbursed faster would restore the economy back to its original path sooner, but would also be substantially more inflationary with its attendant problems.