IMF talks on $1bn climate funding kick off today

• Fund’s team to engage with key ministries, FBR, disaster agencies, provincial govts
• Policy review to follow next week to assess govt’s performance under Extended Fund Facility
• All but one structural benchmark ‘complete as of now’, sources say

ISLAMABAD: A technical mission from the International Monetary Fund (IMF) begins discussions in Islamabad today (Monday) on Pakistan’s request for over $1 billion in additional financing for climate resilience.

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).

The technical team will engage mostly with key ministries, including planning, finance, climate change, petroleum, and water resources, as well as 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, although some indicative targets had been missed 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, though other sub-conditions of these entities regarding governance structure and financial safeguards have already been met.

The planning ministry has also, of late, informed all the stakeholders, including federal ministries and provinces, about the criteria and methodology for the selection of projects in the future Public Sector Development Programme (PSDP) projects.

Starting the upcoming budget, factors to be considered for project selection for PSDP would include strategic and core ongoing projects, ongoing projects with over 80 per cent expenditure with realistic completion estimate, exceptional and high-scoring infrastructure projects, pre-scrutinised approved projects at working-party levels, foreign-funded projects with adequate rupee cover allocation and provincial projects in 20 least-developed districts. On top of this, climate-responsive and resilient projects would also be part of the PSDP.

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 a 30-year period, 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 $7bn EFF with another $1.2bn RSF.

Climate resilience funding

The Fund had already advised Pakistan to invest 1pc of GDP per year (over Rs1.24 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 believed.

The IMF noted that about 1pc 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.

Enhancements in public investment efficiency in line with the C-PIMA Action Plan would further improve such resilience, particularly in the immediate aftermath of the shock.

The C-PIMA has been adopted by the government based on which Pakistan has already shared its desire for more financing from the IMF under the climate resilience window and is looking at international capital market options.

The IMF has assessed that the additional investment needed to bolster resilience would lead to moderately higher debt levels. A scenario in which fiscal instruments — consumption and income taxes — responded to such a shock would put public debt on a downward path following recovery, although such a policy may not be feasible or desirable in the face of a large natural disaster.

As such, further progress on fiscal consolidation and fiscal structural reforms are critical to maintaining the fiscal space that would be necessary to weather such a shock, the Fund believed.

Structural weaknesses

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 $29.3bn in economic losses over 1992-2021, equivalent to 11.1pc 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 4.8pc 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.

Published in media, February 24th, 2025