akistan is currently traversing a challenging path, balancing the demands of fiscal stability with the need to address the escalating impacts of climate change. The ongoing discussions with the International Monetary Fund are a critical part of the country’s efforts to stabilise its economy and reinforce its resilience to environmental risks.

An IMF delegation was in Pakistan From November 11 to 15 to review the country’s adherence to the $7 billion 37-month extended fund facility (EFF) programme, which aims to provide the necessary financial support for economic recovery. A significant aspect of these talks was climate resilience, which has become increasingly important as Pakistan faces mounting environmental challenges.

The discussions are centred on Pakistan’s commitment to allocate 1 percent of its GDP annually toward addressing climate change. This is part of a broad strategy to mitigate the environmental impacts of global warming, including more frequent floods, droughts and the accelerated melting of glaciers.

The government is seeking additional concessional loans to support climate adaptation projects, ensuring that Pakistan can enhance its capacity to deal with these challenges while continuing its development efforts. A key point of focus during these talks was allocation of provincial budgets to support these climate-related goals, reinforcing the national commitment to environmental sustainability.

Alongside the climate discussions, the IMF reviewed Pakistan’s economic performance under the EFF. This programme aims at stabilising the country’s economy by addressing immediate fiscal challenges. Currently, Pakistan faces a revenue shortfall of $685 million, which has contributed to a rising fiscal deficit. The IMF highlighted how Pakistan could bridge these gaps and stabilise its finances. An additional concern was the external financing needs of $2.5 billion for the current fiscal year.

One of the central topics is the pathetic situation of state-owned enterprises (SOEs), particularly the failed privatisation of the national airline and the ongoing losses in the power and gas sectors. These challenges continue to strain the economy.

The discussions also provided an opportunity to highlight the fiscal reforms undertaken by the government. These reforms, which include measures to reduce inflation, are meant to ensure a market-determined exchange rate and increase revenue generation and designed to stabilise the economy in the medium and long term.

The IMF in the report, Measuring the Gains from Structural Reforms and Climate Adaptation Investment in Pakistan has highlighted that Pakistan’s economic history has been marked by stagnation, despite having started from a similar economic position as its regional peers in the early 1980s.

While neighbouring countries have seen growth in income levels, Pakistan’s progress has been slow. Poverty rates therefore remain high. A lack of significant improvements in key social development indicators emphasises the challenges the country faces. Weak productivity growth, declining capital investment and inefficient resource allocation, particularly between the agricultural and non-agricultural sectors, are major contributors to this stagnation.

Additionally, the country’s fiscal capacity remains low. Human capital investment has been inadequate, primarily due to the fragile fiscal position and low tax revenue outcomes. The impact of these structural weaknesses has been compounded by the intensifying effects of climate change. Pakistan is warming at a rate that exceeds the global average. This has led to reduced water availability, prolonged droughts, accelerated glacial melt and rising sea levels threatening coastal areas.

Pakistan faces a revenue shortfall of $685 million, which has contributed to a rising fiscal deficit. The IMF highlighted how Pakistan could bridge these gaps and stabilise its finances, an additional concern being the external financing needs. 

Over the recent decades, climate-related disasters have caused economic losses of $29.3 billion and urban planning and infrastructure systems have struggled to keep pace with these growing environmental pressures. As climate change continues to exacerbate these challenges, the urgency of addressing both fiscal weaknesses and climate resilience has grown.

To evaluate the potential impacts of reforms and climate adaptation investments, the IMF has used its DIGNAR and DIGNAD models. These models suggest that a combination of fiscal reforms, labour market improvements, trade liberalisation and SOE restructuring could increase Pakistan’s growth by approximately 2 percent annually over the next five years.

Additionally, investments in climate-adaptive infrastructures such as flood defences, water management systems and disaster-preparedness strategies — could mitigate the negative impact of natural disasters by up to a third, improving the recovery process and minimising economic losses.

The DIGNAR model evaluates the economic impacts of these reforms, which include improving public investment efficiency, enhancing tax collection, reducing labour market friction and reforming SOEs.

The cumulative impact of these reforms could increase Pakistan’s growth potential by around 2 percent annually. The model highlights that improved public investment efficiency would create a more conducive environment for private sector growth, thus stimulating the economy. Reforming the tax system is also critical, as it would broaden the tax base and help reduce the country’s debt-to-GDP ratio.

In addition to fiscal reforms, labour market and product market reforms are key to spurring growth. Simulations show that implementing these reforms could result in a 7 percent increase in output over five years, accompanied by a 6 percent reduction in the debt-to-GDP ratio. This will foster a more competitive business environment, reduce inequality and promote long-term economic stability. Labour market reforms are expected to contribute the most to output growth, with significant gains also anticipated from tax reforms and public investment efficiency improvements.

Climate resilience investments are equally important. According to the DIGNAD model, investment in climate-adaptive infrastructure is crucial for reducing the impact of natural disasters on Pakistan’s economy. The model suggests that by allocating just 1 percent of GDP per year toward climate resilience, Pakistan could significantly reduce the negative effects of natural disasters and return to steady growth more quickly after a disaster.

While these investments may initially increase public debt, the long-term benefits of building resilience to climate-related shocks outweigh the short-term costs.

The combination of structural reforms and climate resilience investments represents a clear path toward sustainable and inclusive growth for Pakistan. By addressing both fiscal challenges and the need for climate adaptation, Pakistan can create an environment that supports long-term economic growth while also ensuring the well-being of its citizens in the face of increasingly frequent and severe climate impacts. These reforms will not only foster economic stability but also help reduce poverty, inequality and vulnerability to environmental shocks.

As Pakistan works toward stabilising its economy and enhancing its climate resilience, it is essential for policymakers to adopt a holistic approach that integrates fiscal reforms with climate adaptation strategies. The IMF’s engagement provides a valuable opportunity for Pakistan to secure the necessary support to overcome its immediate fiscal challenges while also building a more resilient and sustainable future. In the long run, the success of these efforts will depend on careful planning, consistent implementation and long-term commitment from all stakeholders.

For Pakistan to navigate its current challenges successfully, the focus must be on creating a robust fiscal system that supports sustainable growth and investing in climate resilience to safeguard the country’s future prosperity.

By strengthening both economic and environmental foundations, Pakistan can move towards a more stable and prosperous future. This integrated approach will ensure that the country can withstand future shocks, both economic and climatic and provide a foundation for sustainable development that benefits all citizens.

Dr Ikramul Haq, an advocate of the Supreme Court and writer, is an adjunct teacher at Lahore University of Management Sciences.

Abdul Rauf Shakoori is a corporate lawyer based in the USA.