The World Bank has warned that Pakistan is highly vulnerable to the impacts of climate change, with extreme events frequently resulting in fiscal shocks for the economy.
“An estimated population of 49 million is residing in areas at risk of 4-5 percent decline in quality of life by 2030. Climatic shocks have caused significant loss of life, economic damage, and reversal of development gains over the last 15 years”, the Bank stated in the “Second Resilient Institutions for Sustainable Economy: Climate Change Technical Note”.
The Bank further stated that the increased intensity and frequency of floods alone has caused substantial physical damage, affecting more than 30 million people since 2010, with damages and losses exceeding US$14 billion. The country is also increasingly exposed and vulnerable to various other climatic hazards, particularly droughts, heatwaves, and cyclones.
These climatic shocks impact household welfare, undermine human capital formation, and are particularly challenging for the fiscal sustainability of the country, it added.
The Bank stated that two prior actions in this operation are expected to yield climate co-benefits.
The first prior action is to better target and reduce the fiscal cost of power subsidies, (a) the Cabinet has approved a second phase of subsidy reforms for domestic consumers that:
- reduces subsidies for users above 200kWh/month for six consecutive months; and
- eliminates the incremental block tariff benefit; and (b) the Ministry of Energy has notified DISCOs to increase electricity tariffs for users above 200 kWh/month for six consecutive months in fiscal year 2023.
The Bank stated that Pakistan’s Country Climate and Development Report (CCDR) identifies that significant inefficiencies across the energy sector are the result of large distortive energy subsidies. These inefficiencies are detrimental to the reliability of electricity and gas supplies and also generate large fiscal deficits that accumulate into high levels of power sector debt, commonly referred to as the “circular debt”. To improve the efficiency of the power sector, the CCDR recommends that Pakistan implement politically difficult reforms, including tariff reforms in the electricity sector.
This prior action will have positive environmental impacts by reducing subsidies for most residential consumers and thereby mitigating incentives for excessive energy use and the associated adverse effects on the environment. Further, the salient feature of this reform is the improvement of the equity of electricity subsidies through protecting disadvantaged consumers, those consuming less than 200KW per month for six consecutive months, who are likely to be the poorest.
The second prior action is to support the wider usage of digital payments, the State Bank of Pakistan has:
- launched the Pakistan instant payment system;
- increased the acceptance infrastructure for digital payments; and
- issued a revised Foreign Exchange Manual to facilitate investments; and (b) to allow the use of digital payments to vendors, the Finance Division has amended the Treasury Rules.
The Bank stated that Pakistan had already successfully deployed digital payments during the 2010 floods to provide swift and transparent compensation to the affected population. However, the payments were conducted then through ad-hoc arrangements and mainly through state-owned banks.
With this new system, the entire banking sector can be utilized to rapidly deploy digital disaster aid payments and reach areas that may become physically inaccessible in the event of climatic shocks or natural disasters.
Therefore, digital payments supported through this PA can be used as part of the disaster response infrastructure. The use of digital technology also ensures that the benefit transfer system itself is resilient and operational in the wake of potential disruption from climate-related natural disasters, the note added.
