IMF to begin discussions on Pakistan's request for climate resilience loan

Islamabad: A technical mission from the International Monetary Fund (IMF) will begin discussions on Monday on Pakistan’s request for a loan on climate resilience, a media report said.

This will be followed by a policy review early next week to assess the authorities’ performance under the ongoing $7 billion Extended Fund Facility (EFF), Dawn News reported.

Pakistan had requested $1 billion to address the impact of climate change. The technical team will mainly engage with key ministries, including planning, finance, climate change, petroleum, water resources, the Federal Board of Revenue, disaster management agencies, and provincial governments.

Without going into specifics, the IMF resident representative in Islamabad, Mahir Binici, confirmed the engagements spanning over three weeks from now.

“An IMF staff team is scheduled to visit Pakistan in early to mid-March for discussions around the first review under Pakistan’s Extended Fund Facility-supported programme and the authorities’ request for assistance under a Resilience and Sustainability Facility (RSF) arrangement. In this regard, a technical team will be in Pakistan starting in late February to discuss technical issues related to a possible RSF arrangement,” he said.

Official sources said the relevant authorities, particularly the ministries of planning and finance, had prepared documentation for the Climate-Related Public Investment Management Assessment (C-PIMA) for coming budgets in line with policy advice of the IMF and the World Bank.

Talking about the first biannual review of the 39-month EFF, the sources said Pakistan had completed all but one structural benchmark as of now. However, Pakistan missed several indicative targets given the changing domestic and international macroeconomic conditions.

The only outstanding benchmark pertains to the required amendments to the Sovereign Wealth Fund (SWF) by the end of December. However, other sub-conditions of these entities regarding governance structure and financial safeguards have already been met.

The funding under RSF is made available to nations who commit high-quality reforms to build resilience against climate catastrophes through adaptation and is repayable over 30 years, including a 10-year grace period and is normally cheaper than EFF terms.

In October last year, Pakistan formally requested the IMF to top up its USD 7 billion EFF with another $1.2 billion RSF.

The Fund had already advised Pakistan to invest 1 per cent of GDP per year (over Rs 1.24 trillion at the current year’s estimate) in climate resilience and adaptation reforms to be ready to fight repeated and increasing cycles of extreme weather conditions, particularly floods and sustain economic growth and reverse inequalities.

Such an investment in climate-adaptive infrastructure can reduce the negative growth impact of a natural disaster shock by one-third while ensuring a quicker and more complete recovery, the IMF suggested.

The IMF noted that about 1 per cent of GDP investment in adaptation infrastructure would increase Pakistan’s climate resilience and buffer climate shocks.

These investments would reduce the growth impact of a natural disaster shock by about a third and return Pakistan to its previous GDP level more quickly.

According to the IMF, Pakistan’s living standards have been declining for decades, and despite a similar starting point in the early 1980s, Pakistanis’ incomes had stagnated and fallen behind regional peers.

At the same time, poverty rates remained elevated, and social development indicators also lagged behind those of peers.

This had been accompanied by weak human capital outcomes, low fiscal capacity, protection for favoured industries, and a large state footprint. Contributions to growth from human capital and efficiency gains were low, and health and education indicators, while improving in recent years, still lag behind regional and lower-middle-income peers. Human capital spending as a share of GDP has steadily declined.

The consequences of these structural weaknesses have been exacerbated by increasingly high climate vulnerability.

“Pakistan’s climate faces a rate of warming significantly higher than the global average. This will bring increasingly greater climate variability and extreme events, including reduced water availability, more severe and longer droughts, accelerated glacial melt, more variable and intense monsoons accompanied by floods and landslides, and sea-level rise encroaching on coastal settlements and infrastructure,” it said.

The negative macroeconomic consequences of such a shift have already been felt.

Climate and weather-related disasters, which have increasingly been exacerbated by climate change, resulted in $29.3 billion in economic losses over 1992-2021, equivalent to 11.1 per cent of 2020 GDP, which slowed developmental gains.

More recently, the floods of 2022 killed 1,700 people, displaced eight million, increased the poverty rate by up to four percentage points, and brought economic losses equivalent to 4.8 per cent of FY22 GDP, with reconstruction needs estimated at 1.6 times the budgeted national development expenditure of FY23.

The disaster was exacerbated by Pakistan’s weak urban planning, infrastructure and water resource management, according to Dawn.