Climate Risk Analysis - How the catastrophic floods of 2022 exacerbated Pakistan’s fiscal vulnerabilities to climate induced disasters
With COP27 in the books, Pakistan has witnessed a ray of light, a chance to turn adversity into opportunity. This can be a 210 million euros opportunity that the flood-stricken South Asian nation can leverage to ‘shield’ itself from extreme climate events.
The ‘Global Shield against Climate Risks’ initiative launched by the G7 and the Vulnerable 20 (V20) countries has identified Pakistan as one of the ‘Pathfinder Countries’, providing it an opportunity to access pre-arranged disaster financing for climate-induced disasters.
The sheer scale of destruction is best reflected in the recently published Post Disaster Needs Assessment, carried out by the government of Pakistan and international development agencies. As per the official figures, Pakistan’s cash-strapped economy is currently facing a $14.9 billion reconstruction & rehabilitation challenge, equating to more than 1.5 times the country’s overall development expenditure of $10 billion. It is pertinent to mention that this figure only exhibits the costs associated with reconstructing the damaged infrastructure in the ‘vulnerable pre-flooding state’.
An effective climate/disaster risk financing mechanism generally comprises a three-layered approach that involves: ‘risk retention’ where “less severe economic losses” are financed through ad-hoc budgetary reallocations and contingency funds. Then there’s ‘risk transfer’ where “moderately severe economic losses” are financed through risk transfer solutions such as risk insurance or the issuance of catastrophe bonds. Third is ‘residual risk mitigation’ where “highly severe economic losses” that are beyond the financial capacity of a country are financed through international humanitarian assistance.