The International Monetary Fund (IMF) has advised Pakistan to spend one percent of its GDP to protect itself against climate shocks like extreme weather events.
In a special document on selected issues in the country, the lender said this scenario assumes that conventional public investment remains at its steady state level while an additional 1 percent of GDP per year is invested in adaptation infrastructure (against climate hazard).
About 40 percent of this additional investment is financed via concessional debt, with most of the balance financed by domestic debt, in line with Pakistan’s current debt structure.
IMF detailed that considering the larger levels of investment in this scenario, and the higher return on adaptation investment (relative to conventional investment, in line with Marto and others 2018), the negative deviations of GDP, private consumption, and private investment from the steady state following the shock are between about one third one half of that in the baseline scenario, although Pakistan’s GDP returns to its steady state 5 years after the shock.
The lender said such 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 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.
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