IMF negotiations for $1 billion climate funding commence today

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

These discussions will be followed by a policy evaluation early next week to review the country’s performance under the ongoing $7 billion Extended Fund Facility (EFF). The IMF technical team will primarily engage with critical ministries, such as planning, finance, climate change, petroleum, and water resources, along with the Federal Board of Revenue, disaster management agencies, and provincial governments.

Mahir Binici, the IMF resident representative in Islamabad, confirmed that these engagements are scheduled to take place over the next three weeks. “An IMF staff team is scheduled to visit Pakistan in early to mid-March for discussions regarding the first review of Pakistan’s Extended Fund Facility-supported programme and the authorities’ request for assistance under a Resilience and Sustainability Facility (RSF) arrangement. In this context, a technical team will be present in Pakistan starting in late February to discuss technical issues related to a potential RSF arrangement,” he stated.

According to Dawn, the relevant authorities, particularly the ministries of planning and finance, have formulated documentation for the Climate-Related Public Investment Management Assessment (C-PIMA) for upcoming budgets, aligning with the policy advice provided by the IMF and the World Bank.

Discussing the initial biannual review of the 39-month EFF, Pakistan has satisfied all but one structural benchmark to date; however, some indicative targets have not been met due to shifting domestic and international macroeconomic conditions.

The only remaining benchmark relates to the necessary amendments to the Sovereign Wealth Fund (SWF) by the end of December, with other sub-conditions regarding governance structure and financial safeguards already fulfilled.

Recently, the planning ministry has informed stakeholders, including federal ministries and provinces, about the criteria and methodology for selecting projects in the forthcoming Public Sector Development Programme (PSDP).

For the upcoming budget, the criteria for project selection in the PSDP will prioritise strategic and core ongoing projects, those with over 80 percent expenditure and a realistic completion estimate, exceptional and high-scoring infrastructure projects, pre-scrutinised approved projects, foreign-funded projects with appropriate rupee cover allocation, and provincial projects in the 20 least-developed districts. Additionally, climate-responsive and resilient projects will also be included in the PSDP.

The funding under the RSF is available to countries that commit to implementing high-quality reforms aimed at enhancing resilience to climate-related disasters through adaptation. This funding is repayable over a 30-year period, including a 10-year grace period and is generally more affordable than EFF terms. In October of the previous year, Pakistan formally sought an increase of $1.2 billion to its existing $7 billion EFF under the RSF framework.

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Climate Resilience Financing

The IMF has already recommended that Pakistan invest 1 percent of its GDP annually (over Rs1.24 trillion as per the current year’s estimate) in climate resilience and adaptation measures. This is deemed essential in preparing to tackle recurrent and intensifying cycles of extreme weather, particularly floods, while sustaining economic growth and addressing inequalities.

Such investment in climate-adaptive infrastructure can mitigate the negative growth impact of natural disasters by one-third, facilitating quicker and more thorough recovery, according to the IMF. The organisation noted that employing 1 percent of GDP for adaptation infrastructure would enhance Pakistan’s climate resilience and buffer against climate shocks. These investments are believed to lessen the growth impact of a disaster by approximately one-third and expedite a return to previous GDP levels.

Enhancements in public investment efficiency, consistent with the C-PIMA Action Plan, would further bolster this resilience, especially in the immediate aftermath of such shocks. The government has adopted the C-PIMA, and Pakistan has expressed its intention to seek supplementary financing from the IMF through the climate resilience window, while also exploring options in the international capital markets.

The IMF has assessed that the additional investments needed to strengthen resilience may result in moderately elevated debt levels. Should fiscal measures—such as consumption and income taxes—adapt to recover from such shocks, public debt could trend downward following recovery. However, implementing such a policy may not be feasible or desirable in the context of a significant natural disaster.

Hence, the Fund emphasises that advancing fiscal consolidation and structural fiscal reforms is critical to maintaining the fiscal space required to withstand such shocks.

Structural Challenges

The IMF has pointed out that Pakistan’s living standards have been declining for decades. Despite starting from a similar economic point in the early 1980s, incomes in Pakistan have stagnated and fallen below those of regional peers. Concurrently, poverty rates have remained high, and social development indicators lag behind those of comparable nations.

These challenges are coupled with inadequate human capital outcomes, limited fiscal capacity, protection of favoured industries, and a significant state presence. Contributions to economic growth from human capital and efficiency gains have been minimal, with health and education indicators, although improving lately, still trailing those of regional and lower-middle-income countries. Notably, the share of human capital spending relative to GDP has consistently declined.

The repercussions of these structural weaknesses have been further intensified by increasing vulnerability to climate change.

Pakistan’s climate is warming at a rate significantly higher than the global average, leading to more severe climate variability and extreme weather events. This includes reduced water availability, prolonged and intensified droughts, accelerated glacial melt, more unpredictable and intense monsoons associated with floods and landslides, as well as rising sea levels affecting coastal settlements and infrastructure.