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Lopsided economic reforms
A RECENT article by Nathan Porter, IMF’s Pakistan mission chief, on ‘Revitalising Pakistan’s economy’ in Dawn provided a comprehensive overview of the key considerations and decisions vis-à-vis the Extended Fund Facility (EFF) that will guide our economic reform challenges up to October 2027. However, a crucial element was overlooked — climate change.
Pakistan cannot afford to delay climate action any longer. The absence of any mention of climate risks highlights a significant gap in the Fund’s approach to Pakistan’s economic turnaround. This oversight is particularly of concern since our fiscal policy is not designed to support climate resilience and mitigation efforts while pursuing macroeconomic stability.
Despite the success of the recent Stand-by Agreement (SBA), we still grapple with resource scarcity, which makes it challenging to address development and climate resilience. We have thus far not integrated climate considerations into budgetary processes, revenue generation, and expenditure management.
The article rightly mentions that Pakistan faces significant fiscal constraints, including high public debt, budget deficits, and limited revenue collection — constraints that limit our ability to allocate resources for climate adaptation and mitigation.
Pakistan needs to implement reforms that balance economic growth with climate resilience.
Given its high vulnerability to climate disasters, Pakistan faces further straining of its fiscal resources. The floods of 2022 vividly illustrated this vulnerability, affecting over 33 million people and causing damage estimated at $30 billion, equivalent to nearly 10pc of GDP. This single event underscores the magnitude of climate-related fiscal risks. More floods on this scale would wash away any gains made under the SBA and promised under the EFF.
There is a clear link between fiscal policy and exposure to climate-triggered disasters, chiefly manifested through fiscal policy trade-offs. The binding constraints force policymakers to prioritise between the immediate financial crunch and long-term resilience investments. This necessitates integrating climate risk into all aspects of policymaking, while seeking innovative financing mechanisms, and strengthening capacity to access and utilise domestic and international climate finance to expand the narrow fiscal space. Instead of pursuing a blindfolded reform agenda, a case can be made that Pakistan needs to implement well-planned fiscal and institutional reforms that balance economic growth with climate resilience.
The linkages between climate vulnerability and climate finance are many, and reflect our need to address immediate exposure while building long-term resilience. Recognising and leveraging these linkages can lead to more effective and integrated approaches to building overall resilience. Both vulnerability reduction and climate finance need to prioritise community resilience. The challenge is to balance the immediate response to extreme weather events with long-term resilience investments.
Integration of climate considerations into fiscal risk management has become increasingly important. Pakistan’s Post-Disaster Needs Assessment, developed by the Planning Commission after the 2022 floods, created a bridge between immediate recovery efforts and longer-term resilience building. Why, then, was the EFF not climate-proofed?
Likewise, the debt management office at the Finance Division should incorporate climate-related fiscal risks into its debt sustainability analyses and long-term projections. This could involve scenario planning that accounts for potential climate shocks and their impact on Pakistan’s ability to service its debt. There may still be an opportunity for the Planning Commission and DMO to engage the IMF for their Climate Change Capacity Building and Management Programme that is designed to enhance the capacity to address climate challenges effectively in countries like Pakistan.
Under the SBA, Pakistan signed the Climate-Public Investment Management Assessment in December 2023. It is an IMF-designed framework to evaluate a country’s capacity to manage climate-related public investments; it seeks to integrate climate considerations into the existing public investment management assessment framework that has traditionally focused on general public investment processes.Under C-PIMA, the Planning Commission is now mandated to climate-proof development and embed resilience in the PSDP. A handbook on climate risk screening has already been notified but implementation has not begun.
Likewise, the debt strategy still isn’t fully aligned with climate-smart fiscal policies. Pakistan’s approach to debt and climate finance requires a paradigm shift that recognises the intricate connections between fiscal policy, debt management, and climate resilience. For starters, the government must integrate climate considerations into all aspects of economic planning. Also, new and innovative financing mechanisms should be explored to bridge the gap between climate finance needs and fiscal constraints.
By adopting this holistic approach, Pakistan can focus not only on its immediate economic challenges but also on long-term resilience against the slow onset of climate change. Our economic future depends on the ability to harmonise its fiscal, debt and climate strategies.
The IMF is a late entrant in the climate space but has made some impressive strides in shaping the global climate discourse, particularly in taking forward the debate on debt trap and debt restructuring, as raised by Barbados Prime Minister Mia Mottley, whose Bridgetown Initiative seeks to reform international financial systems to better support developing nations facing debt stress and climate vulnerabilities. While Barbados is implementing its EFF agreement with the IMF, it has also negotiated its access to the Fund’s Resilience and Sustainability Trust, which provides long-term financing to build resilience against climate impacts. Pakistan also needs to find ways of addressing its economic reform challenges while enhancing resilience to climate-related risks.
Kristalina Georgieva, IMF executive director, has moved to link macroeconomic stability with climate shocks. Her mission, it seems, has not reached our policymakers, or not impressed the IMF team negotiating the EFF with Pakistan. They need not view the engagement in climate-proofing as a risky distraction but, instead, as an essential asset for deeper national ownership and the ticket to success of the EFF reform agenda.
Health, education, sanitation, and service delivery through local governance institutions has been off the table for too long, further marginalising several regions, and pushing people into poverty. Climate vulnerability cannot be brushed aside; not addressing it would mean that the proposed economic revitalisation would be nothing but a lopsided, if not flawed, strategy.
The writer is an Islamabad-based climate change and sustainable development expert.
Published in Dawn, October 10th, 2024
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