Current Affairs

There is a question whether COP 27, will move on from the question of mitigation because it is so important to the question of climate change. The bond markets are determined by adaptation and mitigation, because the question of resilience is so important. A report by the IMF (International Monetary Fund) believes that mitigation and adaptation are key elements towards lowering a governments exposure to high yields in the bond market through investment in adaptation and mitigation. According to IMF research for the period 1995-2017, “the coefficient to climate change ranges -0.164 and 0.405”, though negative statistically, it proves that countries that are more resilient to climate change have bond yields that are lower, which pushes the countries that emit 9 percent of green house gasses into a bracket of not being able to issue inexpensive bonds because they cannot demonstrate the ability to raise the finance to mitigate and adapt.

This is a catch twenty two scenario, climate change is affecting the poorest and least able to adapt to the impact of environmental arguments, they do not have the resources to mitigate the impact of primary sources that are causal in the global warming argument. Nations in this position do not have the  finances or resources to manage a catastrophe or the ability to raise the finances or issue green bonds to adapt to environmental pressures affecting their national resources.

According to the IMF report, a “1 percent improvement in climate change resilience is associated with a decrease of 0.15 percent in long-term government bond [exposure]”. So what does resilience mean. It is actually a number of factors that enable and empower a country to adapt to climate change outcomes that could damage an economy.  So the main argument is whether a country has the ability to sustain GDP (gross domestic production), balance its budget, has the international reserves to fall back on, has the effectiveness of an infrastructure and a governments ability to sustain and manage outcomes determined by climate change.

The IMF outline in their report that “both climate change vulnerability and resilience have no pronounced impact on government bond yields (exposure) in advanced economies”. At the same time the IMF report argues that the coefficient determining the outcome of a bond, does affect poorer countries that are neither able to adapt or mitigate to climate outcomes. So the question is what exactly can a country do when a 1 percent increase in climate change vulnerability will lead to a costing in emerging economies of 3.11 percent yield (exposure) to a variable bond in an emerging economy, while 1 percent improvement in resilience means a lower exposure by 0.75%. What this means is that a countries ability to release bonds is determined by a coefficient of 500 base points, which does not sound so bad until this factor is quantified by Sovereign Risk premium “by 15.55 basis point […] but the difference between countries […] amounts to 233 basis points for climate change vulnerability and 56 basis points for climate change resilience.

The simplest explanation is that countries most exposed to climate change are unable to adapt, they have the highest interest rate on bonds to enable their country to afford the necessary tools and ability to build the infrastructure required to adapt to environmental climate impacts, such as droughts, hurricanes, typhoons, flooding or any event that affects a nations ability to withstand global warming.     

Pakistan has been hit by an unusually early monsoon, flooding has led to a third of the country being underwater with 33 million homes destroyed. A BBC interview with the environment minister Senator Sherry Rahman, argued that successive governments had channelled rain water from the north of Pakistan, where there is more rain, to the southern provinces most affected. Senator Sherry Rahman, argued that “this is climate change, the rains have come early and were much worse than expected”.

Official GDP (gross domestic production) figures for Pakistan have been given a B rating, meaning that the figures provided should be used with caution. A 2020 report believed that Pakistan GDP to debt ratio was 74% of its resources. World Economics argues that government debt ratio is actually 84% of GDP, with Pakistan’s reserves standing at US$18.52 billion. Of course there are other debt factors to take into account, such as the investment coming from China, which five years ago, according to Reuters, China had pledged to invest US$57 billion in Pakistan’s rail, road and energy infrastructure. There are other elements lagging on Pakistan’s economy, such as the renewal of military equipment, renewal of port facilities, such as Gwadar Sea Port, which is part of the China-Pakistan corridor (CPEC), which is very much of President Xi’s flagship “Belt and Road” initiative.

In the Reuters report five years ago, investors were worried about the current account deficit, which “widened by 160 percent […] in the nine months to March.” But what does this mean, it is extra debt above that that has already been secured through other institutions. Therefore elements that make up the Pakistani economy are not necessarily as they seem, there is an element of debt transference that will challenge the ability of Pakistan to repair the infrastructure, because the Chinese investment in the economy in Pakistan, will realise US$5 billion debt repayment to China by the Pakistani central bank in 2022.

It is so hard to quantify debt to enable the bond markets to release funding for mitigation and adaptation when a number of quantifiable factors cannot be determined. Pakistan, was forced to restructure debt in 2013, when it approached the IMF for relief for a slump and the governments inability to service debt. What does this mean for the Pakistani government, a bond market that is expensive to service, it could be worse, for instance Zambia is restructuring its debt with the IMF and there is a premium of 25% on bonds, or Lebanon, which is in negotiation with the IMF and does not have a banking system with any liquidity and is vulnerable to any events that could impact the economy, as happened two years ago, which lead to a bail out by Europe and the United States to provide the support to tackle the man made disaster.

Pakistan and the United Nations have set up an appeal for funding to manage the outcome of the floods, Ahsan Iqbal Pakistan’s Planning Minister, believes the floods are worse than 2010, interviewed by Reuters he said, “I think it is going to be huge. So far, (a) very early preliminary estimate is that it is big, it is higher than US$10 billion”. But it is the concept of reconstruction that bites, Pakistan has had to cut spending in order that funds can be released according to the stipulations set by the IMF. Ahsan Iqbal in an interview with Sky News, argued that “The international community has a responsibility to help us, upgrade our infrastructure to make our infrastructure more climate resilient.” But Dr Liz Stephens associate professor of Climate Risks and Resilience said “questions need to be asked” about why these floods are similarly damaging to those in 2010”.

 The United States National Academy of Sciences defines resilience as “the ability to prepare and plan for, absorb, recover and […] adapt to adverse events. It is a key aspect of adaptation to climate events. The United States government argues that resilience is to withstand and recover from natural disasters to an economy. So the main elements that make resilience so key is that it empowers communities to recover from climate risks, threats and vulnerability. There is another aspect that will challenge Pakistan and that is an inability to do anything to mitigate climate change, and in this sense the question has to be whether adapting to climate fluctuations is going to be cost effective, if extreme weather patterns continue to affect the ability of the vulnerable to live where they do. It becomes a question of a strategy to manage the risk, because one of the questions has to be whether it is cost effective to place the resources on short term solutions, rather than a way to find an answer that enables a community to adapt.

If you are a hard headed economist then the question has to be whether resilience itself is about the value that the vulnerable hold as an asset. The question has to be whether climate change makes a community more vulnerable and as Ahsan Iqbal believes, that the displacement of the millions in the Pakistani floods will happen more often as insecure communities become more vulnerable to adverse weather patterns. Based on the argument that the climate unpredictability will be a recurring event, then would there be benefit in moving a population from an area that is going to be vulnerable.

The question of investment itself argues that investment in resilience is determined by cost analyst, where every Dollar spent on mitigation before an event takes place, has a return over the time that the investment has been made. The question has to be whether the calculation is determined on a theoretical argument, if this occurs, then the outcome will be this. But investment itself does not take into consideration the human factor other than cost or fluctuations caused by assets being damaged, then the question has to be how the long term economic will be impacted by the impact of climate related disasters.

 Joe Biden’s argument of build back better was also an argument of adapting industry to the impact of climate related events. Resilience investment is determined by mitigation and adaptation and the investment in the rich north into building the tools to mitigate global warming by 2050, has been determined by a clear argument that action on climate mitigation and adaptation is the best way to build resilient economies, which if COP 27 can release funding from the polluters to build more resilient economies by those most affected by climate change.