December 12, 2016/IMF
EXECUTIVE SUMMARY
Small developing states are disproportionately vulnerable to natural disasters. On average, the annual cost of disasters for small states is nearly 2 percent of GDP—more than four times that for larger countries. This reflects a higher frequency of disasters, adjusted for land area, as well as greater vulnerability to severe disasters. About 9 percent of disasters in small states involve damage of more than 30 percent of GDP, compared to less than 1 percent for larger states. Greater exposure to disasters has important macroeconomic effects on small states, resulting in lower investment, lower GDP per capita, higher poverty, and a more volatile revenue base.
One-third of small developing states are also highly or extremely vulnerable to climate change in the lifetime of the current generation. Climate change is projected to affect small states disproportionately, partly by exacerbating natural disasters and partly through more gradual effects such as rising sea level. Small states will thus face much larger economic costs from climate change than larger peers. The impact on important economic sectors (agriculture, tourism, fishing) and pressures on ecosystems could exacerbate poverty and emigration.
Well-designed domestic policies can reduce the direct human and economic costs of climate change and natural disasters. A range of macroeconomic policy approaches will be needed—including not only better disaster response but much more focus on risk reduction and preparedness. These policies should be developed on a proactive basis (not only after disasters have hit), and integrated into core PFM, investment, and debt management frameworks. Risks to the financial sector should similarly be assessed and crisis management frameworks adopted. Risk reduction efforts will improve the business climate, encourage new investments, and help sustain stronger medium-term growth. Capacity building support from the Fund and other development partners will remain critical.
Financing is needed for risk reduction and response to natural disasters and climate change. Advance planning should provide for a combination of fiscal buffers, contingent financing plans, and risk transfer arrangements. Too often, however, disaster financing is largely identified “after the event”. Partly as a result, larger disasters appear to be under-financed for small states, despite their relatively small cost by global standards.
On climate change, financing has been oriented toward mitigating greenhouse gas emissions rather than helping small states adapt to global warming. While small states have begun to access global climate funds, their adjustment needs are under-funded by as much as $1 billion annually. Complex and administratively cumbersome procedures for establishing eligibility for climate change financing are hampering access by small states with weak capacity.
The Fund plays a niche-but-important role in meeting member’s post-disaster financing needs. Small developing states are active users of the Fund’s emergency financing facilities and instruments (RCF and RFI) which have been important sources of rapid liquid support. That said, small states benefitted much less than larger countries from the 2015-16 reforms to access under PRGT facilities and the RFI, and they find current access limits constraining in relation to their large balance of payments needs for the most severe disasters. To address this gap in the financial safety net, an increase in RCF and RFI access limits is proposed for members facing severe disasters. Small states should also be encouraged to consider more active use of Fund arrangements, including on a precautionary basis, as a vehicle for resilience-building policy reforms and associated capacity building support. Given the role for the Fund in helping countries to develop macro-critical policies for climate change mitigation and adaptation (carbon pricing and energy subsidies; fiscal, investment and debt management frameworks for climate-related spending, etc.), consideration could be given to tailored assessments of policies in these areas to help countries develop strong climate change policy frameworks and qualify for access to global climate funding.