Climate change-induced disasters may significantly set back uplift plans: World Bank

ISLAMABAD: Climate change-induced disasters could significantly set back Pakistan’s development ambitions and its ability to reduce poverty, said the World Bank.

The bank in its latest report, “Country Climate and Development Report (CCDR) for Pakistan”, stated that external imbalances, together with the continued political and policy uncertainty, had contributed to a loss of investor confidence and a weakening currency.

To foster people-centric climate adaptation and resilience, the country needs fundamental shifts in its development path and policies, requiring substantial investments including international support, according to the released issued today.

This year’s climate change-induced heatwave followed by devastating and unprecedented floods have caused more than 1,700 deaths and displaced more than 8 million people. The destructive effects on infrastructure, assets, crops, and livestock have also been massive, with over 33 million people affected across the country and more than $30 billion in damages and economic losses.

The report noted that the combined risks of extreme climate-related events, environmental degradation, and air pollution are projected to reduce Pakistan’s GDP by at least 18 to 20 percent by 2050. This will stall progress on economic development and poverty reduction.

Pakistan has made significant progress over the past two decades in reducing poverty and has reached middle-income status, but it continues to face considerable macro-fiscal fragility, which could place significant constraints on its ability to sustain growth and further enhance equity, it added.

The country’s per capita gross national product (GDP) reached $4,877 in 2020, but annual per capita GDP growth has been volatile and low at two percent—less than half of the regional average. The recent hikes in global commodity prices have exacerbated the macro-fiscal risks facing the economy and highlighted its underlying structural fragility. Investment rates and the tax-to-GDP ratio remain low, with investment accounting for just 14 percent of GDP in 2021 and tax revenues accounting for only 10 percent of total GDP. Public expenditure on health and education has also remained low at just 1.2 percent and 1.8 percent of GDP in 2021, respectively.

Additionally, there are large and unproductive subsidy regimes in the energy, agriculture, and irrigation sectors, which underlie the chronic fiscal stress faced by the country. The current account deficit worsened significantly in FY22 reaching US$17.4 billion (or 4.6 percent of GDP) due to the sharp increase in global commodity prices, exacerbated by the Ukraine-Russia war, as well as higher domestic energy demand.

These external imbalances together with the continued political and policy uncertainty have contributed to a loss of investor confidence and a weakening currency. In July 2022 alone, the rupee depreciated 14.4 percent against the US dollar and fell a total of 23.1 percent in FY22. Foreign reserves have also dwindled. The weakening exchange rate, together with the high energy and commodity prices as well as the overheating economy, has raised inflation to an average of 12.1 percent in FY22, an 11-year high. The high inflation rate prompted the government to implement an energy price relief plan from March to June 2022. As a result, fiscal expenditures that were already high ballooned further, and fiscal space has been shrinking rapidly. Accordingly, public debt has risen to more than US$200 billion, equivalent to more than three-quarters of annual GDP.

Considering the difficult economic and fiscal conditions, rating agencies have downgraded Pakistan's government bonds, while bond yields have risen sharply. These factors, combined with the country's low investment rate and low export volume, have limited growth, and pose long-standing challenges to its ability to grow sustainably and further reduce poverty.

Rising risks from climate change are poised to significantly compromise Pakistan's development ambitions. At the macro level, these shocks will impact all aspects of the economy and could have cascading impacts that further dampen growth projections in a country that is already fiscally constrained and that has seen relatively low growth, especially over the past few years.

The GDP losses that Pakistan is already facing owing to the degradation of its environment and its low human capital will only be magnified if extreme climate-related events unravel development gains and divert limited public financing toward recovery efforts. In particular, the agriculture sector is likely to be severely impacted, increasing the risk of extreme poverty, food insecurity, and malnutrition. This will make sustained progress on poverty reduction and human development far more challenging than it is today. These interrelated risks could also set the stage for major societal disruptions, including the displacement of people and greater pressure on cities that are unprepared for the influx of displaced migrants on top of those they currently host.

The report noted that distortionary and inequitable fiscal policies, highly unequal land ownership, tenure insecurity, and vested political interests have locked smallholder farmers in low-value, low-nutrition production and hindered the large-scale adoption of improved agronomic practices, crop diversification and water conservation.

“The recent flooding and humanitarian crisis provide a wake-up call for urgent action to prevent further devastation to the people of Pakistan and its economy due to climate change,” said Martin Raiser, World Bank Vice President for South Asia. “Accelerated climate actions can protect the economy from shocks and secure more sustainable and inclusive growth in Pakistan.”

The report recommends five priority transitions to adapt to climate change: transform the agri-food system; build resilient and livable cities; accelerate a just transition to sustainable energy and low-carbon transport; strengthen human capital to achieve sustained and equitable development and climate resilience; and align financing policies, incentives, and institutions to support the scale-up of climate actions.

To implement a climate-resilient and low-carbon development pathway, estimates of total investment needs up to 2030 amount to over 10 percent of the cumulative GDP for the period. The report recommends accelerating the reforms to expand domestic revenue mobilization, including by raising new municipal and property taxes to finance urban investments. It highlights the importance of improving efficiency and targeting of subsidies for agriculture and energy while protecting the most vulnerable. Yet, even ambitious increases in fiscal resources over the coming years will not be enough for Pakistan to finance all the needed investments, so significant international support and private investment will be essential.

“If we want to tackle climate change, we need to prioritize investing in adaptation to help prepare Pakistan for future climate-related calamities, which are growing in frequency and intensity,” said Hela Cheikhrouhou, IFC Regional Vice President for Middle East, Central Asia, Türkiye, Afghanistan and Pakistan. “With the right policy frameworks, Pakistan has the opportunity to attract private investment to build its resilience, particularly in sectors such as water management, agriculture, urban infrastructure, municipal services, and housing.”

Pakistan is not a significant contributor to global warming, but it is on a high-growth trajectory of carbon emissions linked to fossil fuel use. This is also a source of the country’s chronic fiscal stress and worsening air pollution. Therefore, climate actions that bring co-benefits to both adaptation and mitigation and contribute to improving development outcomes should have the highest priority.

“Foreign private capital can play an important role in addressing the climate change challenges in Pakistan,” said EthiopisTafara, MIGA Vice President and Chief Risk, Legal and Administrative Officer. “Sustaining flows of foreign direct investment that support climate mitigation and adaptation will contribute toward financing Pakistan’s low-carbon transition.”

The five sets of recommended policy transitions are:

(1) Transforming the Agri-Food System: The agri-food system is the largest employer in Pakistan, particularly for poor and vulnerable households. But the sector’s productivity has been plummeting due to the degradation of land, the overuse of chemical inputs and water, and the lack of research. Productivity is expected to decline further, with yields projected to drop another 50% by 2050, threatening food security. Repurposing environmentally damaging subsidies, promoting climate-smart and regenerative agriculture and livestock systems, and prioritizing ecosystem restoration will be key to bolster rural incomes and strengthen food and water security.

(2) Building Resilient and Livable Cities: By 2050, 60 per cent of Pakistan’s population will live in urban areas, already highly exposed to pollution and climate change. Making cities more livable and inclusive would bring large economic benefits. Urgent reforms are needed for more integrated land use planning, investments in municipal services, the use of nature-based solutions, and investment in energy efficiency and clean transportation. Strong municipal governments and the expansion of city finances via property taxation are critical.

(3) Accelerating a Just Transition to Sustainable Energy and Low-carbon Transport: Pakistan’s energy sector is a critical enabler of economic development and poverty reduction. However, it is a huge drain on public finances and foreign exchange and is one of the biggest contributors to the country’s GHG emissions. Pakistan must prioritize reducing the cost of generation including through energy efficiency, ensuring cost-reflective tariffs, and improved targeting of subsidies, while addressing technical and collection losses in transmission and distribution. Scaled-up investment in mass transit can avoid locking in highly polluting modes of transport.

(4) Strengthening Human Capital to Achieve Sustained and Equitable Development and Climate Resilience: Pakistan needs to address its human capital crisis. This can be achieved by addressing poor management of water, sanitation and hygiene, a principal driver of child stunting; and by reducing the country’s high fertility rate. Pakistan should also ensure universal access to quality schooling and expand its social-protection system by improving benefits, particularly for those at the highest risk.

(5) Aligning Financing Policies, Incentives, and Institutions to Support Scale-up of Climate Actions: Implementing these policies and investments will require a comprehensive financing strategy, greater private sector involvement, domestic revenue mobilization, and robust institutions that are accountable for improved public spending. International climate financing will be essential to complement Pakistan’s own commitment to resilient and inclusive development.

Copyright Business Recorder, 2022