It is, indeed, important that Pakistan should continue to deal with its macroeconomic and growth challenges of the traditional nature, reducing twin deficits, avoiding stagflation, reforming state-owned enterprises, and fixing the energy sectors, among others. Having said that, one additional dimension to managing the economy at both the macro-, and micro levels is internalizing the impact of climate change; in particular, the consequence of fast-rising heat temperatures.
Economic policy, therefore, needs to appropriately adapt accordingly. Although efforts are being made for some time now by the ministries/departments of planning, and climate change to provide policy input on matters related to climate change, it is important that a wholesome ‘heat economic policy’ that directly gauges and prepares the economic sectors of the economy against the impact of rising heat and its impact in terms of heat waves, glacier-melting, and floods, for instance, is formulated more directly and in a leadership for the whole economy, by ministry/departments of finance, tax-, and statistical authorities and the State Bank of Pakistan (SBP), and in collaboration planning-, and climate change ministries/departments with sectoral ministries/departments like agriculture, industries, and with bilateral, and multilateral development partners. Such a policy is indeed important for a highly climate change vulnerable country like Pakistan, which has seen extreme heat waves on a more regular basis annually, along with more frequent, and high-intensity floods.
Economic policy can no longer take climate disasters as exogenous happenings in view of the fast-unfolding climate change crisis, especially in the last few years. An article ‘Heat will likely soar to record levels in next 5 years, new analysis says’ published in New York Times (NYT) on May 17, 2023 highlighted: ‘Global temperatures are likely to soar to record highs over the next five years, driven by human-caused warming and a climate pattern known as El Niño, forecasters at the World Meteorological Organization said on Wednesday. The record for Earth’s hottest year was set in 2016. There is a 98 percent chance that at least one of the next five years will exceed that, the forecasters said, while the average from 2023 to ’27 will almost certainly be the warmest for a five-year period ever recorded.’
Having said that, heat temperatures have been very aggressive this summer as well, as a July 6, 2023 NYT published article ‘Heat records are broken across the globe’ pointed out: ‘The past three days were quite likely the hottest in Earth’s modern history, scientists said on Thursday, as an astonishing surge of heat across the globe continued to shatter temperature records from North America to Antarctica. The spike comes as forecasters warn that the Earth could be entering a multiyear period of exceptional warmth driven by two main factors: continued emissions of heat-trapping gases, mainly caused by humans burning oil, gas and coal; and the return of El Niño, a cyclical weather pattern.’
Hence, there is more urgent need for individual countries to make expenditure and revenue decisions, which are in line with a broader ‘heat economic policy’ that understands the importance of making appropriate climate budgets and where both domestic banks and multilateral institutions, not to mention rich, advanced countries, also need to provide a much more responsible hand in support in terms of climate finance than unfortunately has happened up till now.
Proposed ‘heat economic policy’ should address both the demand side of needed climate budgets, and the supply side in terms of climate resource mobilization, both domestically and multilaterally. An important bottleneck on both the demand and supply side is adoption of austerity policies; where such policies make domestic cost of capital all the more higher in the case of developing countries while it somewhat also negatively affects lending capacity from rich countries, making international capital markets all the more expensive for developing countries.
Here, in the case of developing countries, which have both low climate resilience, and also are highly – both domestic, and external – debt distressed, need to take on board International Monetary Fund (IMF) to bring a more balanced approach between macroeconomic stabilisation – like the one being pursued currently under the standby arrangement (SBA) – and meeting greater spending needs for a more climate resilient economy.
Hence, while from the government side it means coming up with much more progressive taxation and tax-base broadening measure, but given the fast unfolding nature of climate change, and given Pakistan is among the top ten countries most vulnerable to climate change, it is important that IMF should support climate vulnerable countries like Pakistan with greater climate-related special drawing rights (SDRs) support on an annual basis – on the lines suggested in the ‘Bridgetown Initiative’ – along with doing away with its ‘surcharge policy’ for such countries.
In addition, it would make sense to take a much more softer approach to the monetary- and fiscal austerity policies by IMF for highly climate vulnerable developing countries like Pakistan, which have significant climate spending needs – for instance, a devastating flood last year that inundated a one-third of the country – and where anyways inflation traditionally is at least equally a governance-related, supply-side, fiscal phenomenon; not to mention the highly supply-side determined inflation in the wake of the pandemic.
A dedicated ‘heat economic policy’ should therefore not only bring greater clarity on the impact of heat waves, floods, other disasters on the economy in terms of revenue lost, and additional expenditure needs on a medium-term basis, but also identify corresponding non-monetary and fiscal austerity plan. For instance, on the external front, it should indicate steps that allow greater mission-oriented approach on the economic diplomacy front to unlock greater climate finance for the country. This would mean greater government leadership in bringing forth climate related projects that can create greater attraction and motivation for such climate related investments. Moreover, multilateral institutions, and rich, advanced countries are approached in a more purpose-oriented way to make greater push for release of greater climate finance.
On the domestic front, Pakistan should reduce the domestic debt burden, and make available greater fiscal space by rolling back on both the monetary austerity approach – significantly rolling back on over-board monetary tightening – and by doing away with such objectives as primary surplus, and on both these accounts should have a specific ‘heat economic policy’ as an umbrella policy for negotiations with the IMF in an overall effort to reflect this thought process in a formalized way through possible amendments to the currently negotiated SBA.
The proposed ‘economic heat policy’ should also come up with policy measures at the sectoral level so that the impact of climate change and global warming is better reflected, for instance, in labour, tax, insurance, manufacturing and industrial policies. Hence, for example, working hours and pay incentives for more heat demanding and vulnerable sectors are reflected in the proposed policy with more subsidized capital and input costs for sectors that are highly vulnerable to heat impacts and climate disasters. A recent Financial Times (FT) published article ‘How an era of extreme heat is reshaping economies’ pointed out in this regard: ‘Industries ranging from construction, to manufacturing, agriculture, transport and insurance are all bracing forchanges to the way they do business as high-temperature days become more routine because of climate change.’Dr Omer Javed, "‘Heat economic policy’," Business recorder. 2023-07-28.
Keywords: Economics , Economic policy , Growth challenges , Climate change , Climate budget , Climate disasters , State Bank , Pakistan , IMF