Paper short abstract:

This paper explores central banks' contribution to social protection and climate resilience through subsidized financing, risk-sharing and financial inclusion policies. It highlights innovative strategies from Central Bank of Pakistan to reduce vulnerabilities and foster sustainability.

Paper long abstract:

Social protection traditionally falls under fiscal policy, but this paper argues that central banks can also play a critical role by addressing poverty and vulnerability through their proxies, such as inflation and exchange rate stability, targeted financing schemes and financial inclusion initiatives. Drawing on evidence from the State Bank of Pakistan (SBP), we demonstrate how subsidized financing programs for SMEs and agriculture sector empower vulnerable groups to adopt renewable energy, energy-efficient technologies and climate-resilient agricultural practices. Specialized lending for youth and women entrepreneurs further promotes sustainability and economic inclusivity.

As being the regulatory authority, the central bank’s role of distributional fairness through social protection mechanisms in climate mitigation policies cannot be underestimated. The State Bank of Pakistan fosters access to finance via digital platforms, providing critical support to smallholder farmers and low-income individuals to mitigate the negative impacts of climate-related disasters. Nonetheless, there exist barriers in the form of weaker institutions which in the presence of power politics and elite capture, hampers progress towards fairness in climate mitigation policies. Therefore, utilizing a first-hand data set from SBP, this study critically examines the potential for central banks to facilitate the development of parametric and area-yield insurance products to protect agriculture and SMEs against climate-induced income losses. Additionally, we discuss the issuance and adoption of green bonds as a tool to finance climate-resilient projects that safeguard vulnerable communities.