The International Monetary Fund (IMF) has advised Pakistan to allocate one percent of its GDP annually to bolster its defenses against climate shocks, such as extreme weather events. This recommendation is part of a special document addressing selected issues in the country, emphasizing the need for increased investment in climate adaptation infrastructure.

The IMF suggests that this additional investment should be made while maintaining conventional public investment at its current levels. Approximately 40 percent of the proposed investment would be financed through concessional debt, with the remainder covered by domestic debt, reflecting Pakistan’s existing debt structure.

The IMF’s analysis indicates that such investments could significantly mitigate the economic impact of natural disasters. By investing in adaptation infrastructure, the negative effects on GDP, private consumption, and private investment could be reduced by one-third to one-half compared to a baseline scenario. Moreover, Pakistan’s GDP could return to its steady state within five years following a climate shock.

The report highlights that improving public investment efficiency, in line with the C-PIMA Action Plan, would enhance Pakistan’s resilience, particularly in the immediate aftermath of a disaster. However, the additional investment required for resilience would result in moderately higher debt levels.

The IMF also notes that using fiscal instruments, such as consumption and income taxes, to respond to such shocks could help reduce public debt following recovery. However, this approach may not be feasible or desirable in the event of a major natural disaster. Therefore, the IMF underscores the importance of fiscal consolidation and structural reforms to maintain the fiscal space necessary to manage such shocks effectively.