Finance for climate disasters

Published October 6, 2022
The writer is an expert on climate change and development.
The writer is an expert on climate change and development.

THE recent floods have exhausted Pakistan’s ability to meet its international climate commitments. Pakistan’s policy trade-offs have become a painful paradox: the more the government spends to help the flood-affected communities, the less resources it is left with to meet its climate mitigation and adaptation obligations made under the Paris Agreement. Emergency relief through cash disbursements and humanitarian dimensions have completely drained the country of its financial resources and development budgets.

The ‘repurposing’ of the ongoing projects has robbed the country of many strategic-level development projects designed and negotiated over years. The floods have derailed the country where its growth target is concerned as well. Pakistan’s foremost challenge is to redesign and redevelop institutions that can enhance its ability to directly access international climate finance.

Read: 2022 floods, a living nightmare

Pakistan needs international finances not only for economic considerations, but also to cope with the consequences of climate risks and disasters. The growing economic costs of extreme weather events, together with sovereign debt default risks, have added to the cost of available capital.

The financial cost of climate risks has been on the rise for Pakistan. The existing heavy level of borrowing, weak economic performance and climate vulnerability, all add up to weaker sovereign ratings and higher borrowing rates. The leading rating agencies do not specifically attribute their ratings to climate risks but cover their indexing higher insurance premiums, lack of reserves, reduced economic outputs, crop failures, stranded assets, social conflicts, commodity prices, and trade disturbances. All this makes the investments needed for enhanced resilience expensive.

As a Joint UN Environment and Imperial College study pointed out in 2018, the developing countries have paid $40 billion in additional interest payments over the past 10 years on government debt and $62bn in higher interest payments across the public and private sectors. This amount was expected to more than double over the next decade.

Exact data about Pak­istan is not available, but these figures have an indicative value. As Erum Sattar of Harvard University asked during the Law and Justice Conference organised by the Supreme Court of Pakistan in Islamabad two weeks ago, can capital markets, donors and other bilateral and multilateral lenders recognise the benefits of cheaper and early investments?

The financial cost of climate risks has been on the rise for Pakistan.

Paradoxically, the resilience achieved can possibly bring down the cost of borrowing. Pakistan needs to access international climate finance for investments aimed at reducing climate risks and vulnerabilities.

A very high percentage of Pakistan’s present borrowing is often focused on governance and institutional reforms, instead of directly contributing towards economic productivity, accelerated economic growth, or strengthening foreign exchange earning capacity. This borrowing policy is neither desirable nor sustainable.

Pakistan needs a two-track strategy for accessing international climate finance: First, it must prioritise borrowing that helps reduce the cost of development by reducing climate vulnerabilities. Second, it must augment national and provincial capabilities to directly access climate-specific financing that often includes grants, concessional lending, leveraging and hybrid financing with the private sector.

A recent directory has listed more than three dozen active climate finance windows supporting projects of varying sizes that our South Asian neighbours have routinely availed. Pakistan has not accessed any of them. In fact, Pakistan has not even applied for accreditation of the largest and most famous Green Climate Fund or the Adaptation Fund, both set up by UNFCCC. Two Pakistani NGOs that secured GCF accreditation for small projects several years ago have not brought home any projects. Pakistan’s access to GCF is limited only to third parties who have accreditation and now work as intermediaries. Three such organisations developed a project each and won on Pakistan’s behest. Except for the Bus Rapid Transit for Karachi, the other two projects have a chequered history, plagued by inordinate delays, cancellations and even reputational damage.

Multilateral development banks have a multibillion portfolio in the country, but Pakistan has not availed their specialised, climate-related financing facilities. This includes concessional financing available through climate investment funds on energy, forestry, technology and resilience, managed by the World Bank on behalf of all MDBs. The ADB has also created at least five specialised funds on urban resilience, environmental infrastructure and climate finance. Policymakers have left it to the ADB to access these funds for us, based on its internal considerations.

Several developed countries have, likewise, created their own celebrated bilateral funding windows. These include the International Climate Initiative by Germany and the International Climate Finance by the UK. They are both large and competitive where Pakistan can bid. The ICF, for example, is a £5.2bn fund covering areas of Pakistan’s core concern — agriculture, energy and resilience. France has moved to take a particular interest in solar leadership, in partnership with India. Pakistan has thus far not accessed any of these funds. Pakistan has probably left it to international intermediary organisations to write projects for us and secure funding on our behalf.

Editorial: Post-flood economy

In a similar vein, post-disaster assessments are typically undertaken jointly by MDBs and they, understandably, catalogue the damage to state-built infrastructure. Such assessments can be lopsided particularly since sectoral ministries and departments do not always issue their independent assessments. Likewise, the loss of individual properties or private sector losses are rarely accounted for, be it loss of their infrastructure or workdays or absentee employees to reach the full cost estimates of disasters to the economy. Government departments have an unutilised capacity to estimate sectoral costs of climate change. They also have the tools to undertake rapid damage assessment after extreme weat­her events. Any initial assessment is an important building block of accessing international climate finance.

In the past, several attempts by various ministries to create special cells and units aimed at accessing climate finance have failed. The present renewed interest at the federal and provincial levels is an opportunity to learn lessons first rather than rushing things. Accessing international finance is not easy and it will require serious preparations. After all, it will take decades to rehabilitate communities, reconstruct the lost infrastructure and recoup estimated economic losses.

Clearly, Pakistan needs to abandon this suicidal path whereby all our remedial measures for climate-induced disasters add further to the cost of disasters. They are reducing our climate resilience and sustainability. No measures should reduce our social and economic viability. Can the National Economic Council, the apex economic decision-making body chaired by the prime minister, take clear and firm decisions and guide the country on financing climate disasters?

The writer is an expert on climate change and development.

Published in Dawn, October 6th, 2022

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