Climate risk analysis

With COP27 over, Pakistan has seen an opportunity to transform adversity into opportunity. The flood-ravaged South Asian nation may be able to capitalize on this opportunity worth 210 million euros to "shield" itself from extreme climate events.

Pakistan has been selected as one of the "Pathfinder Countries" for the "Global Shield against Climate Risks" initiative, which was launched by the G7 and the Vulnerable 20 (V20) countries. This gives Pakistan access to pre-arranged disaster financing for disasters caused by climate change.

A country like Pakistan, which is currently experiencing an extreme liquidity crunch as a result of the recent catastrophic floods, may find that such an opportunity to be a lifeline. An inadequate response to the worst disaster in the nation's history has resulted from the country's inability to obtain the necessary funding for its rehabilitation and reconstruction efforts.

The Post Disaster Needs Assessment, which was conducted by the Pakistani government and international development organizations and was recently published, best reflects the sheer magnitude of the damage. According to official figures, Pakistan's cash-strapped economy is currently facing a $14.9 billion reconstruction and rehabilitation challenge. This amount is more than 1.5 times the $10 billion that the country spends on overall development. It is important to note that the costs of repairing the damaged infrastructure in the "vulnerable pre-flooding state" are all that are included in this figure.

The science of post-disaster reconstruction and rehabilitation, on the other hand, places an emphasis on incorporating "Building Back Better" principles, which demand that the rebuilt infrastructure be significantly more resilient than the one it replaces. The "Flood-resilient Rehabilitation and Reconstruction Process" would cost an additional $1.3 billion, bringing the total cost of rehabilitation and reconstruction to $16.2 billion, given Pakistan's climate vulnerability.

Pakistan's policymakers have been left wondering how other nations, particularly the developed nations of the Global North, will respond to the financial effects of extreme climate events. In the modern world, no nation is immune to the negative effects of climate change. Having effective "Country-level Climate/Disaster Risk Financing Mechanisms" that enable these nations to access substantial financial reserves in the event of a catastrophic climate-induced disaster is the answer to this question.

An effective climate/disaster risk financing mechanism typically consists of the following three steps: risk retention, in which ad hoc budgetary reallocations and emergency funds are used to pay for "less severe economic losses." The second type is known as "risk transfer," and it involves financing "moderately severe economic losses" through risk transfer options like risk insurance or the issuance of catastrophe bonds. Third is "residual risk mitigation," in which international humanitarian assistance is used to pay for "highly severe economic losses" that are beyond a nation's financial capabilities.

The problem with Pakistan's traditional risk financing strategy is that it only uses "risk retention" and "residual risk mitigation" measures, leaving out "risk transfer," which is the most important step.

As a result, the nation is left with essentially two unworkable options for dealing with the economic effects of natural disasters: 1) shoulder the financial burden using the government's existing resources, which, given Pakistan's current economic outlook, do not exist; or, in the event that the financial impact is beyond the government's capacity, rely on international humanitarian assistance through flash appeals (Pakistan has received $174.8 million out of an $816 million international flash appeal, compared to the initially secured $132.7 million). This situation requires policymakers to pay immediate attention to climate risk transfer solutions that are most effective in Pakistan's economic, geographical, and meteorological context. Pakistan's lack of a national Climate Risk Financing Strategy and National Adaptation Plan has left the government clueless about how to cover the costs of this climate emergency's reconstruction and rehabilitation.

By assisting Pakistan in developing its first-ever Climate Risk Financing Strategy and National Adaptation Plan, the "Global Shield" initiative seeks to address these fundamental policy issues. Pakistan will be able to access effective risk transfer solutions based on these strategies and plans to lessen its financial vulnerability to extreme climate events in the future. In addition, the initiative aims to expand Pakistan's social security systems and improve Pakistan's climate risk analysis so that those affected can better deal with climate shocks.

Although Pakistan's path to achieving fiscal resilience to climate-induced disasters via the much-applauded "Global Shield" appears to be quite straightforward on paper, the actual process may take a different turn. Pakistan's ability to quickly and effectively develop a long-term Climate Risk Financing Strategy and National Adaptation Plan is critical to its success. It would continue to be a "climate vulnerable economy" that continually asks for international assistance whenever a disaster strikes if it does not comply.