Pakistan has been in the news all too frequently in recent years, thanks to earthquakes, floods, political upheavals, and economic woes. Plus ça change: All told, the IMF has had to come to the rescue 23 times since 1958, with none of the bailouts doing much more than allowing the government to avoid default on its hard-currency debts. And while the IMF’s ultimate objective is to nudge Pakistan onto a sustainable growth path, the impact of the bailouts has mostly been to lock Pakistan into a cycle of borrowing to pay interest on past borrowing.

Pakistan’s external debt reached 73 percent of GDP in the past fiscal year, with the government just averting default in July 2023 thanks to IMF rescue number 23, a $3 billion loan. The economic prognosis remains grim, with the IMF forecasting no growth in per capita GDP in 2024.

Actually, rescue number 24 was needed in early 2024. At that time, Pakistan’s foreign exchange reserves had dwindled to $3.5 billion, barely enough to cover one month of imports. And the situation is even worse than that figure suggests: Pakistan must repay some $77 billion to lenders between April 2023 and June 2026.

What’s more, the long term looks bleaker than the short. Pakistan is barely saving enough to cover the depreciation on the physical capital stock. Consumption (the flip side of savings) rose from an average of 85 percent of GDP in the 1990s to 93 percent for 2010 to 2023. The country’s gross investment from all sources is only around 15 percent of GDP, roughly half what it should be to sustain long-term growth (and less than a third of China’s investment rate during its decades of rapid development). By no coincidence, Pakistan’s tax-to-GDP ratio is less than 10 percent, insufficient to finance critical investment in civil infrastructure.

Turning the Page (I Hope)

So what’s really new in what the Fund for Peace think tank diplomatically calls a “fragile state”? (Pakistan is bunched on the fund’s list with Venezuela and Iraq.) Mostly, a sense of time running out. The country’s present plight is more sharply defined than in the past because climate change is now significantly contributing to the country’s economic and social distress. The severe floods of 2022 alone displaced 8 million, and cost more than $30 billion in crop and infrastructure damage. The World Bank estimates that failure to adapt to climate change in coming years could reduce Pakistan’s GDP by 18 to 20 percent by 2050.

But Pakistan’s past reliance on IMF bailouts severely limits the country’s ability to adapt to climate change, even if it could summon the will to deny scarce fiscal resources to competing priorities. The IMF bailouts have typically focused on austerity measures to reduce public spending and budgetary deficits, thus limiting the government’s capacity to invest in resilient infrastructure, weather early warning systems and the post-disaster social safety net.

Could Pakistan break out of the vicious cycle? Ironically, the IMF may be able to play a critical role. Pakistan’s 2024 Extended Fund Facility (EFF) program, which will provide $7 billion over 37 months, differs significantly from bailouts-as-usual. The EFF explicitly incorporates climate change into the program’s design, reflecting a recognition by the giant multilateral lender that climate adaptation is a necessary if insufficient step toward a sustainable future for Pakistan. (The country’s previous injection of IMF cash, a Stand-by Arrangement in 2023, was the first to mention climate change but did explicitly include it as a core component of the program.)

The IMF’s priority under the EFF is still balance of payments support, not direct funding for hardening the economy against the coming metaphoric and literal storms. But the EFF program is conditional on attention to climate adaptation, with progress monitored as part of the overall program evaluation.

One big dream here is to convince other potential sources of foreign capital, public and private, that Pakistan is finally getting serious about development in general and climate adaptation in particular. If the IMF is successful in this regard, the EFF may catalyze the delivery of resources from dedicated global climate funds, such as the Green Climate Fund.

Skeptics are right to compare the modest funds in the EFF with the enormous amounts of money needed to meet Pakistan’s climate change goals. According to a 2021 World Bank assessment on climate risk, Pakistan will need to invest $348 billion cumulatively by 2030 to meet its Nationally Determined Contributionunder the 2016 Paris Agreement on climate change. Moreover, the cost of adaptation in agriculture, water, infrastructure and other vital sectors equates to a bit less than 6 percent of Pakistan’s GDP through 2030.

Actually, those numbers are conservative, in part because warming seem to be accelerating at a pace not anticipated, in part because delay in tackling the problems is raising the total cost of the weather disasters on the horizon. The good news (if you want to look at it that way) is that, while adaptation costs are daunting, the costs of the failure to adapt would be far higher. The World Bank predicts that every dollar invested in climate-resilient infrastructure in relatively poor countries such as Pakistan can yield $4 in benefits.

• • •

Ultimately, the success of the IMF initiative will be determined by Pakistan’s will to break the cycle of economic and political instability that has diverted focus and resources away from development. This is asking a lot of a government perpetually preoccupied by juggling the claims of powerful military, religious, geopolitical and economic interests to stay in power. Indeed, Imram Kahn, prime minister elected in 2018, has been in jail since 2022 after he dropped the ball.

Changing Pakistan’s priorities — and surviving to lead — will be a daunting task.