‘Environmentally sustainable’ bonds

Pakistan faces a significant challenge to finance its large trade deficits and external debt repayments. This is reflected in the sharp drawdown of the SBP (State Bank of Pakistan) foreign currency reserves in the last one year, from a peak of $ 20 billion in August 2021 the reserves have declined to $ 8.6 billion in September 2022.

The market pricing of Pakistan’s sovereign plain vanilla Eurobonds is at a record high, effectively pricing us out of the market. In the short run, the green ‘environmentally sustainable’ bonds offer a better alternative for Pakistan to tap the global credit markets, especially in the wake of the super floods caused by global warming. In the medium term, our blue assets including the development of the coastal belt for tourism and marine fisheries can become key resources for attracting FDI (foreign direct investment) and enhancing export revenues.

Our joint research publication with the Sustainable Development Policy Institute (SDPI) titled ‘Pathways to a Sustainable Blue Economy: Role of Financial Institutions’ highlights the fast-growing market for environmentally sustainable assets and how Pakistan can tap into this market for raising investments for critical infrastructure and balance of payment (BoP) support.

Global sustainable bond market has grown significantly since 2015 and is estimated to be around $1 trillion by 2021, making up 10% of the total global bond assets. While Pakistan tasted success in its first green bond issuance of $ 500 million in 2021, there is a need to develop a larger pipeline by identifying green assets and scaling up capacity to meet the international standards.

China and India have taken the lead in terms of issuance of global sustainable bond with estimated US$ 12 billion raised till 2020. The sovereign issuance has been slow at US$ 2 billion, while the remaining amount has been issued by the corporate entities. In India, the corporate sector raised nearly US$ 7 billion through ESG and Green bonds in 2021, compared to $1.4 billion in 2020. The issuance of green bonds has attracted stronger bids, larger order books, increased pricing leverage and a higher quality investors base. All of this has led to lower average cost of debt as compared to conventional bonds.

The enormous potential of the Blue Economy to contribute towards economic growth and improvements in livelihoods has not been fully realised by the policy makers of Pakistan and across the world.

Climate change and over-exploitation of our blue natural resources are extracting significant costs in terms of loss to marine life and bio diversity. The livelihoods of communities dependent on the blue resources are also being impacted, leading to rising unemployment and poverty.

In Pakistan, capacity remains weak and the fragmentation of roles and responsibilities between the federal, provincial, and local governments has led to a weak policy framework.

This has also resulted in years of underinvestment in critical infrastructure including ports, hotels & tourism facilities, water storage, and drainage infrastructure. In many ways, the 2022 super floods are a result of lack of water drainage infrastructure. While Pakistan experienced significantly higher rainfall than average, the damage to crops, roads and housing infrastructure could have been averted if proper drainage facilities had been put in place.

The importance of the blue economy was reinforced in 2015, when the UN incorporated it in Sustainable Development Goals (SDGs) as UN SDG Goal 14, which focuses on the life below water. The ocean is not only crucial from economic perspective, but is also a source of food, water, weather variations, and oxygen for human and other species.

The components of the blue economy and their forward and backward linkages are on large scale. It consists on the sectors named: living resources, minerals, energy, coastal and maritime activities, ocean support services, maritime safety and security, and raw materials for marine biotechnology.

Pakistan, with a coastal area of 1050 km is blessed with significant blue natural resources. Its blue economy contributes an estimated US$ 1 billion or around 0.4% of the national GDP. Bulk of this contribution is in the form of fisheries, coastal tourism, and maritime revenue. The more technologically advanced sectors including energy, pharmaceuticals and minerals industries are currently non-existent in the blue landscape.

Maritime tourism contributes around US$300 million and is largely underdeveloped. There is significant potential to enhance FDI inflows through developing our coastal belt for the tourism industry, as witnessed in India’s Kerala state and in the Maldives.

Pakistan has a potential of breeding fish worth US $2 billion annually, however seafood exports stand at only $450 million (0.2% of GDP). Fisheries sector accounts for less than 0.4% of GDP. Marine fisheries are depleted and overfished as per UN FAO.

High costs are impacting sector’s profitability. Pakistan lags behind its neighbors in aquaculture production. Post-harvest processing is underdeveloped. Fish processing industry is under-capitalized and deploys outdated technology.

Maritime revenue contributes $ US 183 million to economy, while India earns US$6 billion and Bangladesh US$5.6 billion. As per World Bank, it has potential to increase to over US$2 billion. Gwadar port has a huge potential for growth. It is the third operational port developed under CPEC after the Karachi port and Port Qasim. Pakistan has an underdeveloped tourism industry. Pakistan earns 0.3% of GDP, while Thailand earns 18% and Malaysia earns 6%.

The government needs significant financing, domestic and external, over the medium term to modernize existing infrastructure, enhance sustainability of economic activities by reducing pollution of blue resources, and create new clusters of economic activity for uplifting livelihoods of the local communities.

The communities living along the coastline are mostly poor. The economy and livelihoods of these rural communities are directly tied to their immediate environment, which consists of mangrove swamps and creeks fisheries, subsistence agriculture & livestock and fish farming.

ADB reports that 79% of the population is characterized as poor, while 54% of these communities are in the poorest of the poor category. The development of coastal tourism facilities, supportive financing from banks, and sustainable fishing practices can go a long way in subsiding the poverty of these communities.

In order to take advantage of the abundant blue resources available to Pakistan, the government should mobilize investment in the sector. It should work with SBP for provision of easy credit and interest-free loans. Ministry of Maritime Affairs (MoMA) needs to take effective initiatives to enhance the efficiency and value-addition by fishing sector.

The government should work with think tanks, and civil society to raise awareness regarding preserving mangroves forest. Special maritime industrial zones are needed to be developed with the installation of latest digital technologies.


Business Recorder

Published: October 3, 2022
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