Ezequiel Cabezon, Ms. Leni Hunter, Ms. Patrizia Tumbarello, Kazuaki Washimi, and Mr. Yiqun Wu
Natural disasters and climate change are interrelated macro-critical issues affecting all
Pacific small states to varying degrees. In addition to their devastating human costs, these
events damage growth prospects and worsen countries’ fiscal positions. This is the first
cross-country IMF study assessing the impact of natural disasters on growth in the Pacific
islands as a group. A panel VAR analysis suggests that, for damage and losses equivalent to
1 percent of GDP, growth drops by 0.7 percentage point in the year of the disaster. We also
find that, during 1980-2014, trend growth was 0.7 percentage point lower than it would have
been without natural disasters. The paper also discusses a multi-pillar framework to enhance
resilience to natural disasters at the national, regional, and multilateral levels and the
importance of enhancing countries’ risk-management capacities. It highlights how this
approach can provide a more strategic and less ad hoc framework for strengthening both ex
ante and ex post resilience and what role the IMF can play.
The Rapid Credit Facility (RCF) and Rapid Financing Instrument (RFI) are valuable components of the disaster risk financing tool kit for Fund members, especially developing countries. They help to meet urgent balance of payments needs, and are designed to play a catalytic role in mobilizing other external financing.
This paper develops proposals for a higher annual access limit under the RCF and RFI, building on a November 2016 staff paper on small states’ resilience to natural disasters and climate change (IMF, 2016c). Directors generally supported the proposal in that paper to establish higher annual access limits of 60 percent of quota under the RCF and RFI for countries experiencing severe natural disaster-related damages.
The focus of this paper is to specify the threshold of damage from a natural disaster that would allow members experiencing urgent balance of payments needs arising from such disasters to access emergency financing at the higher annual limit. In the November 2016 paper, staff proposed, among other things, the possibility of establishing a higher access limit under the RCF and RFI where the amount of damage reached the threshold of 30 percent of GDP. Most Directors regarded the proposed threshold of disaster damage as overly restrictive, and suggested lowering the threshold to 20 percent of GDP or lower, provided that this did not jeopardize the self-sustainability of the PRGT. For a range of future disaster outcomes, a damage threshold of 20 percent of GDP could increase projected annual average PRGT loan demand in the 1-5 percent range over the next decade, which should not pose significant risks to the robustness of PRGT self-sustainability. Cautious stewardship of PRGT resources argues against a lower disaster damage threshold, pending further experience with disaster trends and associated PRGT loan demand.
This paper does not propose changes to the current cumulative access limits for the RCF and RFI. The cumulative access limits play an important role in the Fund’s financing architecture, constraining the extent to which countries can access Fund resources without implementing a Fund-supported program with upper credit tranche (UCT) conditionality and associated policies in circumstances where such a program would be more appropriate. The Board will have the opportunity to review the cumulative access limits in the context
This Climate Change Policy Assessment (CCPA) takes stock of the Federated States of Micronesia (FSM)’s climate response plans, from the perspective of their macroeconomic and fiscal implications. CCPA explores the possible impact of climate change and natural disasters and the cost of FSM’s planned response. It suggests macroeconomically relevant reforms that could strengthen the national strategy and identifies policy gaps and resource needs. FSM has made progress toward its Nationally Determined Contribution mitigation pledge by beginning to expand renewable power generation and improve its efficiency. The authorities plan to continue this and encourage the take-up of energy efficient building design and appliances. Accelerating adaptation investments is paramount, which requires addressing critical capacity constraints and increasing grant financing. It is recommended that FSM needs to increase its capacity to address natural disaster risks following the expiry of Compact-related assistance in 2023. It is advised to improve climate data collection and use, including on the costs of high and low intensity disasters and disaster response expenditure.
International Monetary Fund. Strategy, Policy, &, Review Department, International Monetary Fund. Western Hemisphere Dept., and International Monetary Fund. Asia and Pacific Dept
This paper discusses how countries vulnerable to natural disasters can reduce the associated human and economic cost. Building on earlier work by IMF staff, the paper views disaster risk management through the lens of a three-pillar strategy for building structural, financial, and post-disaster (including social) resilience. A coherent disaster resilience strategy, based on a diagnostic of risks and cost-effective responses, can provide a road map for how to tackle disaster related vulnerabilities. It can also help mobilize much-needed support from the international community.
This paper reviews the literature on the macroeconomic impact of natural disasters and presents the IMF’s role in assisting countries coping with natural catastrophes. Focusing on seven country cases, the paper describes the emergency financing, policy support, and technical assistance provided by the Fund to help governments put together a policy response or build a macro framework to lay the foundation for recovery and/or unlock other external financing. The literature and experience suggests there are ways to strengthen policy frameworks to increase resilience to natural disaster shocks, including identifying the risks and probability of natural disasters and integrating them more explicitly into macro frame-works, increasing flexibility within fiscal frameworks, and improving coordination amongst international partners ex post and ex ante.