Chapter 8 Moving from Aspiration to Action on Climate Adaptation

Gareth Anderson

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Gareth Anderson

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https://isni.org/isni/0000000404811396 International Monetary Fund

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Language:: English

Keywords:: MENAP region; MENAP country; policy challenge; climate stress; country abbreviation; Climate finance; Natural disasters; Middle East; North Africa

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Abstract

The Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region is highly vulnerable to climate change.1 The region’s main climate stresses have increased in recent decades and are set to further intensify in the decades ahead: temperatures are projected to rise even higher; precipitation is expected to become even more volatile; and climate-related disasters are likely to hit more frequently and severely. The intensification of the region’s climate conditions is challenging people’s lives and livelihoods with greater land degradation (especially desertification and salinization), water stress, and rising sea levels. The human, physical, and economic impact of continued climate change threatens to deepen poverty and inequality in the region and could endanger social stability and peace.

Introduction

The Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region is highly vulnerable to climate change.¹ The region’s main climate stresses have increased in recent decades and are set to further intensify in the decades ahead: temperatures are projected to rise even higher; precipitation is expected to become even more volatile; and climate-related disasters are likely to hit more frequently and severely. The intensification of the region’s climate conditions is challenging people’s lives and livelihoods with greater land degradation (especially desertification and salinization), water stress, and rising sea levels. The human, physical, and economic impact of continued climate change threatens to deepen poverty and inequality in the region and could endanger social stability and peace.

This chapter, based on the IMF Departmental Paper “Feeling the Heat: Adapting to Climate Change in the Middle East and Central Asia” (Duenwald and others 2022), argues that strengthening capacity to proactively boost resilience to climate stresses is an urgent and critical priority for MENAP economies. Success in doing so will require adaptation policies to be integrated within broader climate strategies and supported by both domestic and external financing sources. Timely adaptation can help contain damage from climate change, maintain macroeconomic and financial stability, and support socioeconomic development and inclusive growth.

Climate Trends

MENAP countries are already suffering from climate change, with many having already experienced higher temperatures, declining and more erratic precipitation, and more frequent and severe disasters in recent decades:

Higher temperatures. Annual temperatures have increased by about 1.3°C on average in the MENAP region relative to the first half of the 20th century (Figure 8.1), outstripping increases in the rest of the world. The average temperature across countries in the region was 23°C in 2020, compared with an average of 19°C across countries in the rest of the world.
Declining precipitation. Annual precipitation has, in general, been on a declining trend in the MENAP region for much of the past two decades, with precipitation in the most recent decade on average about 5 percent lower than in the first half of the 20th century (Figure 8.1). In addition, rainfall has generally become more erratic across the region.
Higher frequency and intensity of climate disasters:
- Frequency. The occurrence of climate disasters—discrete, impactful events caused by a climate hazard—has also risen over the past two decades.² Episodes of extreme temperatures have become more numerous and changing rain patterns have resulted in more frequent excessive rain events. Recent decades have seen flash foods in the MENAP region’s arid/semiarid zones (for example, Egypt, Iraq, Morocco, and Tunisia).
- Intensity. Climate hazards have also become more intense in MENAP countries over the past two decades. Warm spells have increased by almost 19 days relative to the previous two decades. In addition, drought severity has increased in the region, and to a much larger extent than in other emerging markets and developing economies (Figure 8.2). Iran, Iraq, and Syria all suffered severe droughts in 2021.

Climate trends have had challenging consequences. They have exacerbated water stress—with 11 countries in the MENAP region judged to face “extremely high” levels of baseline water stress (Hofste, Reig, and Schleifer 2019)—and accelerated environmental degradation and desertification. As a result, arable land size and fertility have eroded, as have surface and underground waters, which sustain farming, fishing, and hydropower. The rise of the global sea level has also been accelerating since the 1960s (Dangendorf and others 2019), threatening the region’s highly populated coastal regions—in both rural areas (particularly in Egypt, Djibouti, and the United Arab Emirates [UAE]) and cities (for example, Manama, Doha, Kuwait City, and Alexandria).

Continued climate change is set to further intensify the MENAP region’s climate stresses in the coming decade. Even with significant cuts in global emissions, temperatures are projected to rise further, with particularly high temperatures in summertime. Average summertime temperatures could exceed 30°C in about 60 percent of MENAP countries by 2050 (Figure 8.3). In a higher emissions scenario, parts of the region could become uninhabitable by the end of the century (Lelieveld and others 2016). Drier seasons would intensify the region’s water stress, impacting many sectors of the economy, in particular agriculture and tourism, and could increase macroeconomic volatility and sociopolitical tensions.

Climate disasters are also expected to become more frequent and powerful. The median MENAP country is predicted to experience almost 50 more warm-spell days per year over 2020–39 in a moderate-emission scenario, relative to eight days on average over the period 1986–2005, and at much higher temperatures. Droughts are also foreseen to become much more severe, and more so than for other emerging market and developing economies.

Implications for the Macroeconomy

Climate-related policy challenges are macrocritical in MENAP countries. The experience of recent decades illustrates the profound effect that climate change can have on growth and prosperity. This section highlights an empirical analysis that shows changing climate patterns have had long-lasting effects on economies in the region.

The empirical approach used considers how past temperature and precipitation shocks and climate disasters have affected macroeconomic outcomes in the MENAP region over the past two decades. To assess the impact of temperature and precipitation shocks on macroeconomic variables, the local projection approach of Jordà (2005) is used, closely following the methodology of IMF (2017). To examine the impact of climate disasters, a panel vector autoregressive model with exogenous shocks is used.³

The analysis shows that higher temperatures had an adverse impact on growth and employment, particularly in countries where temperatures were already high. Temperature shocks increased unemployment over many years (Figure 8.4, panel 1), and this pattern was common across male, female, and youth unemployment. For five of the hottest MENAP countries (Bahrain, Djibouti, Mauritania, Qatar, and the UAE), a temperature increase had a negative and significant impact on real GDP per capita both in the year of the shock and the following year (Figure 8.4, panel 2). Precipitation shocks, defined as a 100-millimeter increase in annual precipitation levels relative to the 20-year moving historical average, also increased unemployment, although the effect was more muted compared to temperature shocks.

Temperature shocks also had differing impacts across sectors (Figure 8.5). While tourism employment initially remained unaffected, it declined in the medium term. There is also tentative evidence to suggest that agricultural employment declined in response to temperature shocks—though the effect was not statistically significant, perhaps reflecting the lack of coverage of the informal sector. In contrast, services employment increased over the medium term. Together, this analysis suggests that further temperature increases in the MENAP region could lead to sizable sectoral shifts in employment—for example, away from tourism and agriculture and into other service sector activities.

Climate disasters also had statistically significant and long-lasting effects on economic activity in MENAP countries. GDP per capita growth, on average, declined sharply in disaster years before subsequently bouncing back. Disasters can also affect current account dynamics (Figure 8.6). Estimates suggest that imports rose following climate disasters, supported by increased aid flows, while foreign direct investment declined sharply, further emphasizing how climate shocks had enduring effects.

Looking more closely at past climate disasters shows that natural hazards have caused larger human damages in MENAP countries with lower climate resilience. Resilience to a given shock is influenced both by a country’s exposure and its vulnerability to climate events. High-exposure countries are those where many livelihoods; species or ecosystems; environmental functions; services; resources; infrastructure; or economic, social, or cultural assets are in places and settings that could be adversely affected. High-vulnerability countries are those with a high propensity or predisposition to be adversely affected by climate hazards (UNFCCC 2021).

Relative to others in the region, Gulf Cooperation Council countries have generally experienced lower human damages, due to both lower exposure and vulnerabilities. This reflects higher institutional capacity and fewer climate-dependent economic sectors (including smaller agricultural sectors), better climate-adapted infrastructure, and higher levels of socioeconomic and human development.

Fragile and conflict-affected, low-income countries (such as Somalia, Sudan, and Afghanistan) have low resilience and have experienced higher losses. They are mostly located in degraded drylands, where their people live of rain-dependent subsistence farming and are highly vulnerable to climate shocks.

Given that past climate events have resulted in sizable human damage with broader macroeconomic consequences, coupled with the likelihood that future events could have a more severe impact on the region as climate stresses intensify, a lack of adequate adaptation to climate change could threaten:

Inclusive growth and per capita incomes. Economic growth may be lower and more volatile because of damage to human capital and physical infrastructure. Increased temperatures would likely have an uneven impact across sectors, first affecting the rain-dependent agricultural sector with potential further effects on manufacturing, trade, and tourism via demand and supply shocks.
Socioeconomic development, inequality, and political stability. Preexisting social disparities could be aggravated, for example, by intensifying water stress or land fertility in areas that are already in crisis or have heightened social-political tensions. This could amplify conflicts and affect migration patterns across the region.
Macroeconomic stability. Debt sustainability may be undermined, both directly through fiscal accounts and indirectly through lower growth. Current account dynamics could also be affected, through the impact on import demand and export potential, weighing on external sustainability.
Financial stability. The soundness of insurance and financial institutions could be threatened by a deterioration of balance sheets, deposit withdrawals, nonperforming loans, and a reevaluation of assets used as collateral (IMF 2020a).

Policy Implications

The humanitarian, social, and macroeconomic costs of climate change necessitate urgent and decisive adaptation action. While it is well-documented that the potential returns to investing in adaptation are significant—ranging as high as 100–1,000 percent—realizing the full benefits requires time, capacity building, and funding (IMF 2022; Hallegatte, Rentschler, and Rozenberg 2019). Although actual policies will need to reflect individual country circumstances and challenges, this section highlights some common principles and priorities that could guide adaptation efforts in the MENAP region.

Frameworks for Developing Policies

As an overarching priority, climate change impacts and adaptation policies need to be mainstreamed and fully integrated into national economic strategies. Effective policymaking requires understanding the risks and costs associated with climate change and the potential benefits from adaptation policies. Policymakers should therefore develop macroeconomic frameworks that fully reflect climate risks; use cost-benefit analysis to design interventions that mitigate those risks and have a positive net present value; and, to implement the interventions, secure financing that is adequate and robust. Near-term macroeconomic forecasting and budget planning should consider climate shock scenarios, post-disaster financing needs, and risk-reduction strategies. At longer horizons, adaptation planning should also utilize robust scenario analyses grounded in climate science that take account of global mitigation efforts.

Developing a National Adaptation Plan (NAP) under the United Nations Framework Convention on Climate Change (UNFCCC) is one way of providing a structure for countries to identify information and administrative gaps, incorporate policies into a plan, and guide policy implementation and regular review. The NAP process involves four elements.⁴ To date, most MENAP countries have made progress on at least one element, and three full NAP documents have been produced (Kuwait, Sudan, and West Bank and Gaza). Some countries have instead formulated climate strategies outside of the NAP process. Saudi Arabia, for example, launched its “Green Initiative” in 2021 and refers to its specific adaptation strategy within its Nationally Determined Contribution submitted to the UNFCCC.

A prerequisite for developing frameworks that reflect climate risks is the availability of high-quality data. Without detailed and reliable data on the climate risks faced by households, firms, and financial institutions, it is difficult to make in-depth assessments of the potential payoffs of adaptation policies. Large data gaps are common in MENAP countries (Ferreira and others 2021), mainly reflecting a lack of forward-looking, granular, and verifiable data and disclosure standards. Closing these gaps would help to inform public interventions and facilitate greater private investment. Supported by regional and global partners, such as the Network for Greening the Financial System, policymakers should make the disclosure of climate risks mandatory. This would require harmonizing existing assessment methodologies and standardizing disclosure regimes as well as supervisory frameworks.

Specific Areas of Focus

Equipped with frameworks to assess climate risks and design interventions, policymakers in the region should consider:

Boosting public investment in resilient infrastructure. In MENAP countries, the public sector is typically the main investor in infrastructure but has historically used ex-post measures for disaster relief, recovery, and reconstruction following climate shocks, rather than making proactive investments. Policymakers should reverse this focus and prioritize investments in adaptation that help contain significant human and material damages and limit the detrimental impact of climate change on the macroeconomy. Investing preemptively in resilient infrastructure can reduce the adverse impact of climate change on growth and employment, limit the need for stimulative fiscal policy, and improve debt dynamics. A model simulation for Morocco shows that adaptation investment can limit drought-related GDP losses and lead to a more favorable debt-to-GDP ratio in the medium-term relative to a standard investment mix.⁵ Adaptation investment for Morocco could also deliver higher returns prior to drought events, due to the higher economic dividends from investing in resilient irrigation projects (World Bank 2005). Efficient prioritization of public investments is critical to exploit complementarities and handle trade-offs. So-called “no-regret” measures—measures that are justified under all plausible future scenarios, including the absence of man-made climate change—could be prioritized. Examples from the region include the upgrade of the national water management system in Jordan and the promotion of drip irrigation schemes in Maghreb countries. Scaling up public investment also requires fiscal risks to be properly managed. This means ensuring the robustness of public investment management practices, public procurement, public-private-partnership frameworks, and central oversight in the Ministry of Finance (IMF 2022; Gerling 2017).
Increasing the role of the private sector. Given the scale of adaptation needs and the urgency and potential payoffs of investments in resilient infrastructure, policymakers should encourage increased participation in adaptation investment by the private sector. Doing so requires removing market imperfections and policies that make private adaptation both insufficient and inefficient. Policymakers can help improve the environment for private investment through reviewing regulations; encouraging climate risk disclosures; disseminating business-relevant information on climate risks; and devising appropriate fiscal policies, such as tax breaks and subsidies, financing incentives, or public-private partnerships.
Adjusting inclusive growth and development agendas. Labor market, sectoral, and regional policies should be devised to support those most vulnerable to climate change, for instance, by reducing the climate impact on jobs and livelihoods in coastal regions and supporting sectors like agriculture and tourism that could suffer because of changing climate conditions and rising sea levels.
Designing efficient and fair macroeconomic policies. Public policies should aim at minimizing climate risks efficiently. In some cases, it may be too costly to eliminate all risks and adaptation investments may not have a positive net present value. In such cases, fiscal and financial sector policies should support those most vulnerable to the impacts of climate change. Social systems could be adjusted to include climate-dependent social transfers that activate when climate conditions exceed predefined thresholds, indexed cash transfers (for example, which neutralize the effects of food price spikes after adverse climate events), or subsidized insurance against natural hazards (either through government or donors).

Financing

Scaling up public and private investment in adaptation implies significant financing needs. At the global level, developing countries’ annual investment needs for adaptation is projected to be up to $300 billion in 2030 and up to $500 billion in 2050 (UNEP 2016). Relative to GDP, adaptation needs are likely to be larger in poor, small, and vulnerable countries. The IMF (2020) estimates that annual costs of improving resilience to foods, storms, and rising sea levels alone could be close to 2 percent of GDP for some MENAP countries (for example, Mauritania). Considering the additional need for investment to protect against droughts and heat waves, which are particularly severe in the region, total costs could be significantly higher than this. Pakistan’s overall adaptation needs, for example, were estimated in 2016 to be between $7–$14 billion per year out to 2050 (Government of Pakistan 2021), while Mauritania estimates its total financing needs for adaptation actions between 2021–2030 to be $10.6 billion (Islamic Republic of Mauritania 2021).

Boosting spending on adaptation will be challenging for many countries in the region, particularly given tight fiscal space in the aftermath of the COVID-19 pandemic. These countries need to create fiscal space through a mix of domestic policy reforms and more international support, leveraging various external financing options.

Domestic Sources

Adjusting fiscal policy to create space for greater adaptation spending is one possible source of domestic finance—for example, through reorientating spending away from less productive uses, widening tax bases and making them more equitable, tackling waste and corruption, and reforming loss-making, state-owned enterprises (IMF 2021). Two broad areas to focus on are:

Redirecting resources from energy (and other) subsidies. Fuel subsidies in the MENAP region are rather generous (Figure 8.7), accounting for 4.6 percent of GDP in 2020, even after some initial energy price reform steps (for example, in Saudi Arabia).⁶ ^, ⁷ ^, ⁸ Removing such subsidies should be part of a broader energy sector reform that entails having well-targeted social transfer systems put in place first. Also, general—and thus mostly regressive—electricity and water subsidies could be scaled back in some countries (such as in Pakistan and Tunisia), accompanied by well-targeted cash transfers for the most vulnerable.
Mobilizing domestic revenue. Mobilizing domestic (non-oil) revenues, particularly in areas where the region still lags comparators, is a key way of increasing fiscal space to increase adaptative investment for greater resilience. Boosting the efficiency of tax collection systems, streamlining exemptions, raising income tax rates, and introducing new taxes (for example, property taxes) would support this objective. Depending on country circumstances, carbon taxation could be considered to generate additional revenue. If pursued, taxing the production and uses of fossil fuels could raise significant revenue in many countries (Figure 8.8), depending on the tax rate applied, the volume of domestic carbon emissions, and the capacity of the tax administration. For instance, a tax of $25 per ton of carbon could collect over 4 percent of GDP in fiscal revenues in Iraq. This additional revenue would open fiscal space for a range of purposes (Marron and Morris 2016), including for compensating those vulnerable to the consequences of both the use of fossil fuels and policy measures to encourage a reduction in the use of fossil fuels.

Policies can also be designed to encourage greater private sector investment in adaptation. Households and companies face substantial adaptation pressures, particularly where public action is constrained by tight fiscal space and weak administrative capacity. Private adaptation efforts, however, are also constrained by limited financing opportunities. Tree factors help explain why this is the case (Tall and others 2021): (1) a lack of data on country-level climate risks and vulnerabilities to guide investment decision-making, (2) limited clarity on government investment gaps to achieve adaptation goals, and (3) low perceived or actual returns on investment.

Countries can help to alleviate some of the constraints holding back private sector investment by improving planning and coordination between different stakeholders. This could facilitate better data and information sharing, specifically on the costs and benefits of various adaptation measures. Financial policies could also be designed to help reduce costs and improve the risk-return profile for private investment. Potential measures include blended finance, guarantees, subsidization, and credit enhancement.

External Sources

External financing for adaptation is available through multilateral and bilateral sources, as well as the private sector. However, the supply of finance from these sources to date has been relatively modest and uneven across countries.

Between 2009–19, MENAP countries received a total of $53 billion in climate financing from bilateral and multilateral sources, of which about 53 percent was from bilateral sources. However, only about $15 billion of this was solely for adaptation initiatives, while about $34 billion was for mitigation and $5 billion was for both adaptation and mitigation initiatives. Of the external finance for solely adaptation initiatives, almost half went to Pakistan, Morocco, and Tunisia (Figure 8.9).

Multilateral and bilateral financing have some specific characteristics in the MENAP region. Terms on multilateral financing have been predominantly nonconcessional, in contrast to bilateral financing, which has been fully concessional. Just under 60 percent of the multilateral finance provided for adaptation between 2009–19 (including joint mitigation initiatives) was nonconcessional. Complex project selection criteria for both bilateral and multilateral assistance can mean that in some cases financing is only available for countries with sufficiently high institutional capacity. This reflects a global pattern whereby the allocation of bilateral financing is not always related to a country’s climate vulnerability, but instead can reflect other factors like institutional capacity to apply, implement, and manage projects (Doshi and Garschagen 2020). This underscores the importance of capacity development initiatives in this area, as well as efforts by country authorities to create an enabling environment for attracting adaptation finance.

Green bonds offer an additional source of external private finance to help support climate change goals. Unlike traditional corporate and municipal bonds, green bonds are earmarked for specific climate and environmental projects. Before the COVID-19 pandemic, the green bond market had grown to over $257 billion worldwide since the first issuance in 2007. By the end of 2020, five MENAP countries had issued green bonds (Egypt, Lebanon, Morocco, Saudi Arabia, UAE; see IFC 2019, 2020, 2021), with Egypt in 2020 issuing the first sovereign green bond in the region.

However, like bilateral and multilateral financing sources, adaptation remains largely underrepresented among active green bonds. The Climate Bonds Initiative reported in 2018 that globally, only 3–5 percent of the green bond proceeds could be traced to funding climate change adaptation and resilience (Climate Bonds Initiative 2018). The challenge of defining adaptation and resilience projects and evaluating them has contributed to the underrepresentation. On the one hand, investors want to know that projects align with certain adaptation goals. On the other hand, adaptation is regarded as notoriously difficult to measure, track, and evaluate, compounding the challenges involved in adequately pricing climate risks.

Conclusions

This chapter has highlighted the enormous climate change challenges that MENAP countries are already facing, as well as the likelihood these will intensify in the decades ahead. Given the threat from climate change to socioeconomic development and stability, the region needs to move from aspiration to action on adaptation efforts.

Across the region, common priorities include mainstreaming adaptation into policy frameworks; considering efficient public interventions, such as no-regret measures, that could boost climate resilience; and encouraging greater participation of the private sector. Aside from these common goals, there are also some specific priorities for country groups with similar levels of climate resilience and available fiscal space:

Higher and middle-income countries, particularly hydrocarbon-rich Gulf Cooperation Council countries, are relatively less exposed and vulnerable to climate shocks. The quality of their adaptation strategy would benefit from strengthening administrative capacity to ensure a holistic and well-prioritized approach. Bolstering international cooperation would also allow their adaptation strategies to exploit the latest technologies.
Middle-income countries with medium resilience but without fiscal space should develop policies that make space for adaptation spending while preserving debt sustainability, focusing on enhancing domestic revenue mobilization and expenditure efficiency, as well as accessing more international assistance. They should also improve the quality of public services and targeting of social safety nets and, where administrative capacity allows, consider introducing state-dependent social transfers and indexed cash transfers. In addition, these countries should strengthen financial inclusion and insurance against natural hazards, particularly for farmers, and leverage public-private-partnerships for infrastructure development.
Lower-income, fragile and conflict-affected countries lack their peers’ fiscal space and additionally have particularly low climate resilience and administrative capacity. They should strengthen disaster preparedness and coping capacities, while trying to build broader institutional capacity and social resilience. To gradually upgrade social spending and infrastructure, these countries need international support for financing and capacity development. Spending needs could also be supported through greater domestic revenue mobilization.

Limited adaptation progress so far underscores the need for greater domestic consultation and international cooperation. Given the redistributional impact of climate policies within and across countries, policymakers need to acknowledge political economy sensitivities. This means consulting stakeholders and designing compensation mechanisms to galvanize broad societal support for climate policies. Furthermore, while cross-country cooperation can support the effectiveness of a country’s adaptation policy, international cooperation and support is crucial to address frequently binding capacity and funding bottlenecks.

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World Bank. 2005. Shaping the Future of Water for Agriculture: A Sourcebook for Investment in Agricultural Water Management. Washington, DC: World Bank.
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The MENAP region includes Afghanistan, Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Jordan, Kuwait, Lebanon, Libya, Mauritania, Morocco, Oman, Qatar, Pakistan, Saudi Arabia, Sudan, Syria, Tunisia, the United Arab Emirates, and Yemen.

A hazard is the potential occurrence of a natural or human-induced physical event or trend that may cause loss of life, injury, or other health impacts, as well as damage and loss to property, infrastructure, livelihoods, service provision, ecosystems, and environmental resources (IPCC 2021). Examples of climate disasters include cyclones, droughts, foods, and severe winters.

For full details of the empirical approaches, see Duenwald and others (2022).

The four elements are as follows: lay the groundwork and address gaps; preparatory elements; implementation strategies; and reporting, monitoring, and review.

The results of the model simulation are reported in Duenwald and others (2022) and are prepared by Giovanni Melina, Zamid Aligishiev, and Kubi Johnson.

These subsidies are not necessarily annual budget allocations only, but also recapitalizations of loss-making SOEs.

The estimation of explicit subsidies includes subsidies for petroleum, natural gas, coal, and electricity.

The estimation of explicit subsidies reflects the difference between the price consumers pay for the use of energy including of fuel or electricity (retail price) and the cost of supplying it (supply cost). The supply cost is assumed to be equal to the export parity price, which is expected to be higher than the production cost.

Abstract

Introduction

Climate Trends

Implications for the Macroeconomy