Vanuatu has a comparatively favorable economy and cautious macroeconomic policies that have helped maintain stability and confidence. Financial sector policies also have been appropriately cautious. The economy must maintain low debt in the longer term, but as funding is needed for infrastructure, maintenance, and social services, new revenue measures have to be identified. This revenue could help strengthen the state while maintaining growth potential, especially in the tourism and agricultural sectors. The financing options for new large infrastructure projects have to be assessed.
Mr. Alessandro Cantelmo, Mr. Leo Bonato, Mr. Giovanni Melina, and Mr. Gonzalo Salinas
Resilience to climate change and natural disasters hinges on two fundamental elements: financial protection —insurance and self-insurance— and structural protection —investment in adaptation. Using a dynamic general equilibrium model calibrated to the St. Lucia’s economy, this paper shows that both strategies considerably reduce the output loss from natural disasters and studies the conditions under which each of the two strategies provides the best protection. While structural protection normally delivers a larger payoff because of its direct dampening effect on the cost of disasters, financial protection is superior when liquidity constraints limit the ability of the government to rebuild public capital promptly. The estimated trade-off is very sensitive to the efficiency of public investment.
Ricardo Marto, Mr. Chris Papageorgiou, and Mr. Vladimir Klyuev
We present a dynamic small open economy model to explore the macroeconomic impact of
natural disasters. In addition to permanent damages to public and private capital, the disaster
causes temporary losses of productivity, inefficiencies during the reconstruction process, and
damages to the sovereign's creditworthiness. We use the model to study the debt sustainability
concerns that arise from the need to rebuild public infrastructure over the medium term and
analyze the feasibility of ex ante policies, such as building adaptation infrastructure and fiscal
buffers, and contrast these policies with the post-disaster support provided by donors. Investing
in resilient infrastructure may prove useful, in particular if it is viewed as complementary to
standard infrastructure, because it raises the marginal product of private capital, crowding in
private investment, while helping withstand the impact of the natural disaster. In an application
to Vanuatu, we find that donors should provide an additional 50% of pre-cyclone GDP in grants
to be spent over the following 15 years to ensure public debt remains sustainable following
Cyclone Pam. Helping the government build resilience on the other hand, reduces the risk of
debt distress and at lower cost for donors.