PAKISTAN’S pursuit of climate resilience and low-carbon development is inextricably linked to its macroeconomic stability. The country needs to undertake structural reforms to accomplish climate-compatible development. Just as macroeconomic stability depends on the seriousness of reforms, access to international climate finance and investments is linked to internal systemic reforms.

Pakistan’s climate finance landscape is at a critical juncture. As the country’s needs for additional finances have increased, traditional sources have become inadequate. Short-term borrowing has created a mountain of internal and external debt. Policymakers are frustrated by the shrinking pipeline of humanitarian assistance, grants, concessional loans, and budgetary support. As the need for investment in climate resilience and low-carbon development has become urgent, we must adopt a multifaceted approach that addresses policy, institutional and market barriers, as a recent study by the UK’s Foreign, Commonwealth and Development Office on Accelerating Green Climate and Resilient Financing in Pakistan has pointed out. Lethargic attitudes must be shed and equity investments, de-risking projects, leverage-blended finance, and facilitating debt-swaps for climate action focused on.

Blended finance is a promising avenue for leveraging limited public funds to mobilise private capital. Pakistan should actively seek partnerships with development finance institutions to design blended finance vehicles which are tailored to our climate priorities. They could focus on renewable energy, climate-smart agriculture, water-resource management, public health, or energy and urban infrastructure projects.

In fact, the country needs expertise to structure complex financial deals, conduct robust climate impact assessments and navigate international climate funds. De-risking climate projects is crucial for attracting private capital, and the government has to play a pivotal role through partial risk guarantees, first-loss provisions, and other credit-enhancement mechanisms. These tools can transform high-risk, high-impact climate projects into bankable investments.

A stable economy would unlock several critical options for climate action.

A dedicated climate finance unit that has just been set up at the finance ministry can focus on a single issue: spearheading climate investments. The government can catalyse private sector involvement by demonstrating its own commitment through co-financing arrangements. The Public Sector Development Programme has outlived its utility in its present functioning. There will be no shortage of finances if the PSDP is recast to support co-financing, equity investments, and de-risking climate-smart investments.

In the present political context, domestic and international climate investments would follow reforms, and not the other way round. Yet, we are caught in a vicious cycle — climate vulnerabilities erode our economic gains, while economic instability hampers our ability to invest in climate action. Potential investors and funders shy away from countries with volatile economies. A stable economy with a respectable growth rate, controlled inflation, manageable debt, and a strong fiscal position would unlock several critical options for climate action. It would, for example, enhance our creditworthiness, which is necessary to attract climate finance and investments.

Achieving macroeconomic stability in the midst of climate shocks is not easy. It requires a paradigm shift in economic planning. We have still not integrated climate risks into our policy planning, PSDP, or fiscal and monetary policies. The path forward demands that the climate, finance, and planning ministries jointly work on issues such as climate-responsive budgeting, green banking regulations, public-private partnerships, and incentives for low-carbon industries.

Macroeconomic stability and climate resilience are mutually reinforcing. A stable economy provides the resources and confidence needed for bold climate action, while climate-smart development reduces economic shocks. By pursuing macroeconomic stability through a climate lens, we can aspire to a cycle of resilience and sustainable growth in the provinces and at the community level. The time for such integrated action is now — our economic future and our climate future are one and the same. It is important to understand that the fiscal space created by economic stability will allow the government to allocate more resources to climate adaptation and mitigation.

An almost exclusive focus on macroeconomic stability has distracted our policymakers from another pillar necessary for an economic turnaround: accessing international climate finance. Investments in climate-resilient and low-carbon development can help stop the economic bleeding and create fiscal space. For this, we will need to recognise that there is no shortcut to success. We have to understand that we need to develop an institutional ecosystem that is fit for attracting international finance. The private sector must be brought to the forefront of this transition.

The annual report on climate finance of the Climate Policy Initiative, a California-based think tank, shows that in 2021-2022 (the last year for which data is compiled), globally, international climate finance flows exceeded $1.27 trillion and that, except for a very small percentage ($100 billion, $93bn, $33bn respectively for public sector, multilaterals, and bilateral sources), most of it was private sector finance. Grants and low-cost debt constituted a miniscule share ($69bn, $76bn respectively) and most of the remaining finances went to project-level market rate debt, balance-sheet financing, or equity.

A stable macroeconomic environment would encourage private sector investment in renewable energy and green technologies. We have seen in recent years that potential investments in green hydrogen, carbon trading, and waste management could not get off the ground. Businesses need predictability to make long-term investments in low-carbon solutions. A fluctuating currency or high inflation rate deter such commitments. Since international climate finance and investments have become viciously competitive, each aspirant will need to jump high to clinch its share. Pakistan has the potential to be a leader in innovative climate finance.

The path to creating a conducive environment for climate finance is challenging but necessary. It requires coordinated action across government departments, the financial sector, and others. By addressing these systemic issues, Pakistan can position itself as a potential destination for climate investments, unlocking the finance needed to build a resilient, low-carbon future. The stakes are high, and the time for action is now.

The writer is an Islamabad-based climate change and sustainable development expert.

Published in Dawn, August 29th, 2024