IMF studies macro-economic impact of natural disasters on countries

WASHINGTON, Oct 31, CMC – The International Monetary Fund (IMF) says in addition to permanent damages to public and private capital, natural disasters cause temporary losses of productivity, inefficiencies during the reconstruction process, and damages to the country’s creditworthiness.
In a study that explored the macroeconomic impact of natural disasters, the authors of the IMF Working Paper titled “Building Resilience to Natural Disasters: An Application to Small Developing States* note that small developing states like those in the Caribbean are frequently hit by natural disasters that tend to leave long-lasting scars in the economy.
So far this year, several Caribbean islands, namely Dominica, Antigua and Barbuda, the British Virgin Islands, the Turks and Caicos Islands, Anguilla and St. Martin, have been devastated by Hurricanes Irma, and Maria.
In addition several other countries like the Bahamas, Haiti and St. Kitts-Nevis have suffered extensive damage as a result of the Category 5 storms.
In the Working Paper, the authors, Ricardo Marto, Chris Papageorgiou, and Vladimir Klyuev, argue that in addition to deaths of a non-negligible fraction of the population, natural disasters destroy public and private infrastructure needed for the economy to function, disrupting economic and social activities with long-lasting effects.
“They also put considerable strains on government finances, frequently demanding a swift reconstruction of major infrastructures—yet with limited room to raise additional revenues or curtail transfers and other expenditures.”
The paper assesses two main policy issues, namely if the government were to fully rebuild the public infrastructure destroyed by the cyclone in less than a decade, what additional resources would the donor community have to pitch in to ensure fiscal and debt sustainability over the medium term?; and secondly if the government were to invest in resilient infrastructure and save financial resources in a contingency fund, how fiscal and debt sustainability would be improved after the disaster?
Using the Pacific island of Vanuatu, severely hit by Cyclone Pam in March 2015, the authors noted that the country could not face damages alone and that grant-fathering is key for debt sustainability.
“In spite of the moral hazard issues linked with such a strategy, bi and multilateral partners would have to significantly scale up their financial contributions following the cyclone if the donor community wants to ensure a smooth recovery.
“Second, the government can, and should, invest in resilient infrastructure and build fiscal buffers that would attenuate the impact of the disaster. However, these initiatives imply some policy choices head-on: the government would need to create fiscal space – raising taxes or reducing other expenditure-  or resort to borrowing.
“Finally, and more importantly, donors can help make these investments. This would help reduce the need for their financial contributions post-disaster”
But they said recovering from a highly damaging natural disaster will still demand significant financial contributions from donors, even with a reasonable level of adaptation infrastructure—hence grant-fathering is essential.
In using a dynamic small open model to examine the macro economic impact of the disasters, the Working Paper notes that the results of the survey show the important role the donor community may play in sustaining a swift recovery in countries severely hit by natural disasters.
“Possible extensions of this model could study the optimal balance between ex ante and ex post policies for both policymakers and donors, or alternatively consider different damage functions, which could include temperature or wind speeds and assess the impact of climate change on growth and debt sustainability.
“On the other hand, the policy dialogue could revolve around the following issues: incorporating disaster costs into budget planning, for example, average impact on growth, increased infrastructures’ depreciation rates and maintenance costs”.