Grants, Loans, and Governance: When Does Climate Finance Actually Reduce Vulnerability in South Asia

This study examines whether the effectiveness of climate finance in reducing climate vulnerability depends on both the type of finance received and the quality of domestic institutions. Specifically, it investigates whether grants are more effective than concessional or non-concessional loans in lowering climate vulnerability, and whether stronger institutional quality enables countries to utilize climate-related loans more effectively. Using a balanced panel of five South Asian countries—Bangladesh, India, Nepal, Pakistan, and Sri Lanka—over the period 2010–2024, the analysis employs panel econometric techniques to assess the direct effects of climate finance and the moderating role of governance. The study is motivated by the region's growing climate risks alongside increasing debt pressures, including Sri Lanka's sovereign default, Pakistan's debt distress, and Bangladesh's IMF-supported stabilization program. By distinguishing between grants and loans, the research contributes to the climate finance literature by identifying the conditions under which different financing instruments can effectively reduce climate vulnerability, with implications for climate finance allocation and institutional reform in developing economies.