## 1. Simulation Results under One-off Natural Disaster

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### Overview and purpose
- Uses the Debt-Investment-Growth and Natural Disasters (DIGNAD) model to evaluate macroeconomic impacts of climate adaptation pathways for the Republic of the Marshall Islands (RMI).
- Focus: how resilient infrastructure investments and public investment management reduce GDP contraction from rapid onset and slow-moving natural disaster shocks, and how financing strategies (including VAT-based tax reform and external climate finance) affect reconstruction and long-term growth.

### Vulnerability, damages, and adaptation costs
- Key vulnerabilities and impacts:
  - Average elevation: approximately 2 meters above sea level; nearly the entire population resides within 100 meters of the shoreline.
  - A 1-in-10-year event combined with a 0.5-meter rise in sea levels could affect over 50 percent of urban areas in Majuro and more than 80 percent in Ebeye, resulting in annual damages equivalent to nearly 30 percent of GDP.
  - One-third of the population has relocated to the United States since 2011 (MISSA registration for the Universal Basic Income “Enra” program).
- Adaptation cost estimates:
  - Indicative discounted (present value) costs to physically adapt fully against a 0.5 meters SLR: approximately US$ 5.0 billion, equivalent to about 19 years of 2023 GDP, or nearly US$ 90,000 per capita.
- NAP multi-phase contingent approach (2024-2150+):
  - 2024-2040: Immediate, low-risk actions and institutional frameworks.
  - 2040-2070: Re-evaluate protective measures; decisions on protection vs planned relocations.
  - 2070-2100: With 0.5 meters SLR, review strategies for further protection or relocations.
  - Beyond 2150: Possible SLR of 2 meters will necessitate critical migration/alternative land decisions.

### External climate finance landscape (selected figures)
- The United States (Climate Fund): Grant 20 (USD mil) in FY 2024 under Compact to create a Climate Fund.
- The United States (Sector Grant): Grant 50 per year, adjusted by 2 percent per year as inflation indexation; minimum 30 percent and maximum 50 percent of the Sector Grant must be allocated to Public Infrastructure.
- World Bank (Cat DDO): Grant 21 (USD mil) including a US$9 million development policy grant and a US$12 million Cat DDO.
- ADB (Disaster Resilience Program): Grant 6 (USD mil) for quick disbursing budget support post-disaster.
- Access to multilateral climate funds (GCF, Adaptation Fund, GEF) exists but actual financing limited due to accreditation requirements.

### Model calibration and steady state parameters (exact values)
- Trend growth rate in absence of natural disasters: 2.3%
- Value added in NT-sector: 70.0%
- Cost share of NT-inputs in production of private capital: 40.0%
- Cost share of NT-inputs in production of public capital: 40.0%
- Remittances to GDP ratio: 12.2%
- Imports to GDP ratio: 73.1%
- Consumption tax rate (VAT): 12.0%
- Labor income tax rate: 12.9%
- Domestic public debt to GDP: 0.0%
- Concessional public debt to GDP: 17.3%
- Commercial public debt to GDP: 0.0%
- Private external debt to GDP: 0.0%
- Grants to GDP: 37.6%
- Contingency Fund or Natural Disaster Fund: 4.7%
- Public infrastructure investment to GDP ratio: 7.6%
- Public adaptation infrastructure investment to GDP ratio: 0.0%
- Return to standard infrastructure: 25.0%
- Return to adaptation infrastructure: 30.0%
- Depreciation rate of standard public infrastructure: 7.5%
- Depreciation rate of resilient public infrastructure: 3.0%
- Efficiency of public infrastructure investment: 50.0%
- Scaling parameter determining ability of adaptation capital to withstand natural disaster: 15.00
- Cost ratio adaptation vs standard investment [adaptation is % expensive than standard]: 35.0%

### Financing of public infrastructure at steady state and deviations (exact figures)
- Steady-state financing (Average FY2026-30, percent of GDP):
  - Public Infrastructure Investment: 7.6%
  - Grants from Foreign Governments: 6.4%
    - Sector Grant (30%): 4.6%
    - Climate Fund: 0.3%
    - Others: 1.4%
  - Grants from MDBs: 1.2%
  - Other (operating balance; VAT 10%): 0.1%
- Deviations from steady state (Average FY2026-30, percent of GDP) — Baseline, Tax Reform, Adaptation 1, Adaptation 2 & PIE:
  - Public Infrastructure Investment: +3.2% (Baseline); +3.7% (Tax Reform); +3.7% (Adaptation 1); +3.7% (Adaptation 2 & PIE)
  - Grants from Foreign Government: +1.6% (all scenarios)
    - Sector Grant (40%): +1.6% (all scenarios)
    - Climate Fund: 0 (all scenarios)
    - Others: 0 (all scenarios)
  - Grants from MDBs: 0 (all scenarios)
  - Other (operating balance; VAT rate=12% in the baseline and 15% other scenarios): +1.6% (Baseline); +2.4% (Tax Reform); +2.4% (Adaptation 1); +2.4% (Adaptation 2 & PIE)

### Disaster scenarios modeled (exact descriptions)
- Disaster Scenario 1: A one-off natural disaster (e.g., a devastating typhoon) hits in 2031, resulting in a reduction of 20 percent of GDP.
- Disaster Scenario 2: A recurring shock (i.e., SLR and the associated coastal flooding), with a reduction of 2 percent of GDP per annum.

### Model assumptions about reconstruction and capital
- Government aims to fully restore damaged infrastructure within five years, commencing in the same year as the disaster event occurs.
- Natural disasters modeled to affect: (i) permanent damage to public infrastructure, (ii) permanent damage to private capital, and (iii) temporary reductions in productivity.
- Natural disasters do not affect reconstruction efficiency or the external public debt risk premium (in the model).

### Public infrastructure investment parameterization and assumptions
- Steady state of public standard infrastructure investment: 7.6 percent of GDP (covers trend growth net investment and operations and maintenance).
- Steady state of adaptation infrastructure investment: 0.0 percent of GDP.
- Average returns: standard infrastructure 25.0%; adaptation infrastructure 30.0%.
- Depreciation: standard infrastructure 7.5%; adaptation infrastructure 3.0%.
- Efficiency of standard public investment: 50.0% (LIC average per Aligishiev et al., 2023).
- Adaptation investment cost premia and effectiveness:
  - Adaptation investment is assumed 35.0% more expensive than standard investment.
  - Adaptation capital’s ability to withstand natural disaster is scaled by parameter 15.00 and is assumed to be lower than that in literature due to local constraints.

### Investment and financing scenarios analyzed (narrative bullets)
- Baseline Scenario:
  - Boost standard public infrastructure investment during FY26-30 by reallocating Sector Grants (40 percent allocation to infrastructure vs 30 percent steady state) and leveraging additional Compact grants.
  - Yields a 3.2 percent of GDP annual increase in infrastructure investment for five years before the anticipated 2031 disaster.
  - Contingency credit lines from ADB and WBG amount to cumulative 4.7 percent of GDP for the 5-year reconstruction period (approximately 0.9 percent of GDP per annum) in the event of a one-off disaster.
- Tax Reform Scenario:
  - Builds on Baseline; VAT rate increases from 12 percent in baseline to 15 percent starting in FY27, generating an additional tax revenue of 0.5 percent of GDP earmarked for infrastructure.
- Adaptation 1 Scenario:
  - Same financing as Baseline but diverts the additional 4.0 percent of GDP per annum (deviation from steady state) toward adaptive public infrastructure in the five years preceding the one-off disaster.
- Adaptation 2 & PIE Scenario:
  - Same as Adaptation 1 plus reforms that raise public investment efficiency by 20 percentage points to 70.0%.

### Simulation Results — One-off Natural Disaster
- Context and fiscal constraint:
  - RMI government will address the residual fiscal gap by adjusting fiscal instruments, such as taxes and transfers.
  - Given limited debt-carrying capacity, the RMI government will refrain from issuing public domestic and external commercial debt to close this gap.
- Baseline Scenario:
  - Government enhances standard public infrastructure spending over a five-year period, financed by additional grants.
  - Natural disaster strikes in 2031.
  - Investment mitigates the GDP loss by approximately 5 percentage points, resulting in a contraction of about 15 percent of GDP.
  - Private investment and consumption experience a sharp decline.
  - Total public debt-to -GDP ratio escalates during disaster and falls as reconstruction (2031-2035) proceeds, with gradual recovery in private investment, consumption, and GDP.
- Tax Reform Scenario:
  - VAT rate increases from 12 percent to 15 percent.
  - Results in an additional 0.5 percent GDP per annum in standard infrastructure investment compared to the baseline.
  - Impact on GDP and total public debt-to -GDP ratio is marginal.
  - Permanent VAT elevation discourages private consumption following completion of post-disaster construction in 2035.
  - Conclusion: permanent tax increase is not a viable mitigation strategy for a country primarily susceptible to one-off natural disasters where public investment relies on tax revenue mobilization and grants rather than debt-creating mechanisms.
- Adaptation 1 Scenario:
  - Government scales up climate-resilient infrastructure investment over a five-year period, financed through additional grants and tax reform.
  - Allocating the same financial resources to adaptation capital significantly curbs GDP losses from natural disasters and stabilizes the public debt-to -GDP ratio.
  - Climate-resilient investments stimulate private investment during post-disaster reconstruction and beyond.
- Adaptation 2 & PIE Scenario:
  - Emphasizes enhancing Public Investment Efficiency (PIE) via PFM reforms.
  - Improved investment efficiency diminishes GDP losses and facilitates more expedited recovery.
  - Resilient investments are conducive to sustainable long-term GDP growth, supported by private investment and consumption growth.

### Simulation Results — Recurring Shocks Due to Sea Level Rise
- Context:
  - Recurring climate shocks produce persistent annual GDP losses; government invests in standard or adaptation infrastructure to restore damaged capital and potentially create new infrastructure.
  - Annual GDP loss attributable to sea level rise (SLR) is 2 percent of GDP, though cumulative impact over time can exceed a large one-off disaster.
- Baseline Scenario:
  - Under parameters calibrated to RMI fundamentals, persistent and exacerbating GDP loss will exceed 4.5 percent per annum in the long run, compared to a steady state without recurring shocks.
  - Consistent decline in private investment and private consumption growth relative to steady state.
  - Recurrent replenishment spending crowds out government transfers to households.
- Tax Reform Scenario:
  - Permanent VAT increase (12 percent to 15 percent) to finance infrastructure replenishment.
  - Mobilized revenues allocated to restoring and constructing standard infrastructure reduce average annual GDP losses by 1.3 percentage points over the 20-year horizon.
  - Facilitates an increase in private investment by approximately 0.9 percentage points per annum.
  - Adverse impact of higher VAT may suppress private consumption until sufficient public infrastructure is progressively developed by FY2038.
- Adaptation 1 Scenario:
  - Mobilized resources from additional grants and tax reform used to replenish and develop climate adaptation infrastructure.
  - After initial decline, GDP gradually ascends toward steady state as climate-resilient infrastructure is established.
  - Private investment and consumption expected to recover more swiftly in the long run.
- Adaptation 2 & PIE Scenario:
  - With a 20 percent improvement in PIE, GDP is projected to recover from previous losses and return to steady state levels in the long run.
  - Combination of adaptation investment and PIE improvement is expected to mitigate cumulative GDP losses over the next 20 years by approximately 25 percent in terms of steady state GDP.

### Concluding Remarks — Findings and Policy Implications
- Key findings:
  - Adaptation investment mitigates economic impacts of climate challenges for RMI in both one-off and recurring shock scenarios.
  - One-off scenario: enhanced public infrastructure investment reduced GDP contraction; tax reforms proved ineffective for long-term growth.
  - Recurring shocks: induce permanent annual GDP loss; VAT increase can facilitate infrastructure restoration and boost private investment despite dampened consumption.
  - Improvements in PIE amplify the benefits of adaptation investments, substantially reducing cumulative GDP losses over time.
- Financing and institutional priorities:
  - Maximizing climate funding is crucial to meet significant financing needs for climate-resilient infrastructure.
  - Domestic action: enhancing revenue collection can create fiscal space for adaptation investments; simulation results show mobilizing resources through tax reform can mitigate recurring shocks.
  - External action: better utilization of the renewed Compact, including sector grants, is important.
  - Secure substantial concessional climate adaptation financing and collaborate with international organizations, development partners, and NGOs to access and utilize climate finance.
  - Accessing climate funds (e.g., Green Climate Fund) requires demonstrating capacity in PIM and PFM; RMI should focus on building institutional capacity to access climate finance.
  - Learning from peer countries’ approaches through development partners could be beneficial.
- Prioritization and sequencing:
  - Given limited financing envelope, prioritize and sequence key adaptation actions while balancing adaptation pathways and fiscal sustainability in the medium- and long-term.
  - Government should consider trade-offs across islands and locations, and between investing in human capital (education and health) and enhancing physical infrastructure, all supported by efficient and transparent governance and robust institutional frameworks.

*Source: IMF staff calculations and chapter content.*

### 1. Simulation Results under One-off Natural Disaster __________________________________ 12

### 1. Simulation Results under One-off Natural Disaster

### Overview and purpose
- The paper uses the Debt-Investment-Growth and Natural Disasters (DIGNAD) model to evaluate macroeconomic impacts of climate adaptation pathways for the Republic of the Marshall Islands (RMI).
- Focus: how resilient infrastructure investments and public investment management reduce GDP contraction from rapid onset and slow-moving natural disaster shocks, and how financing strategies (including VAT-based tax reform and external climate finance) affect reconstruction and long-term growth.

### Vulnerability, damages, and adaptation costs
- Key vulnerabilities and impacts:
  - Average elevation: approximately 2 meters above sea level; nearly the entire population resides within 100 meters of the shoreline.
  - A 1-in-10-year event combined with a 0.5-meter rise in sea levels could affect over 50 percent of urban areas in Majuro and more than 80 percent in Ebeye, resulting in annual damages equivalent to nearly 30 percent of GDP.
  - One-third of the population has relocated to the United States since 2011 (MISSA registration for the Universal Basic Income “Enra” program).
- Adaptation cost estimates:
  - Indicative discounted (present value) costs to physically adapt fully against a 0.5 meters SLR: approximately US$ 5.0 billion, equivalent to about 19 years of 2023 GDP, or nearly US$ 90,000 per capita.
- NAP multi-phase contingent approach (2024-2150+):
  - 2024-2040: Immediate, low-risk actions and institutional frameworks.
  - 2040-2070: Re-evaluate protective measures; decisions on protection vs planned relocations.
  - 2070-2100: With 0.5 meters SLR, review strategies for further protection or relocations.
  - Beyond 2150: Possible SLR of 2 meters will necessitate critical migration/alternative land decisions.

### External climate finance landscape (selected figures)
- The United States (Climate Fund): Grant 20 (USD mil) in FY 2024 under Compact to create a Climate Fund.
- The United States (Sector Grant): Grant 50 per year, adjusted by 2 percent per year as inflation indexation; minimum 30 percent and maximum 50 percent of the Sector Grant must be allocated to Public Infrastructure.
- World Bank (Cat DDO): Grant 21 (USD mil) including a US$9 million development policy grant and a US$12 million Cat DDO.
- ADB (Disaster Resilience Program): Grant 6 (USD mil) for quick disbursing budget support post-disaster.
- Access to multilateral climate funds (GCF, Adaptation Fund, GEF) exists but actual financing limited due to accreditation requirements.

### Model calibration and steady state parameters (exact values)
- Trend growth rate in absence of natural disasters: 2.3%
- Value added in NT-sector: 70.0%
- Cost share of NT-inputs in production of private capital: 40.0%
- Cost share of NT-inputs in production of public capital: 40.0%
- Remittances to GDP ratio: 12.2%
- Imports to GDP ratio: 73.1%
- Consumption tax rate (VAT): 12.0%
- Labor income tax rate: 12.9%
- Domestic public debt to GDP: 0.0%
- Concessional public debt to GDP: 17.3%
- Commercial public debt to GDP: 0.0%
- Private external debt to GDP: 0.0%
- Grants to GDP: 37.6%
- Contingency Fund or Natural Disaster Fund: 4.7%
- Public infrastructure investment to GDP ratio: 7.6%
- Public adaptation infrastructure investment to GDP ratio: 0.0%
- Return to standard infrastructure: 25.0%
- Return to adaptation infrastructure: 30.0%
- Depreciation rate of standard public infrastructure: 7.5%
- Depreciation rate of resilient public infrastructure: 3.0%
- Efficiency of public infrastructure investment: 50.0%
- Scaling parameter determining ability of adaptation capital to withstand natural disaster: 15.00
- Cost ratio adaptation vs standard investment [adaptation is % expensive than standard]: 35.0%

### Financing of public infrastructure at steady state and deviations (exact figures)
- Steady-state financing (Average FY2026-30, percent of GDP):
  - Public Infrastructure Investment: 7.6%
  - Grants from Foreign Governments: 6.4%
    - Sector Grant (30%): 4.6%
    - Climate Fund: 0.3%
    - Others: 1.4%
  - Grants from MDBs: 1.2%
  - Other (operating balance; VAT 10%): 0.1%
- Deviations from steady state (Average FY2026-30, percent of GDP) — Baseline, Tax Reform, Adaptation 1, Adaptation 2 & PIE:
  - Public Infrastructure Investment: +3.2% (Baseline); +3.7% (Tax Reform); +3.7% (Adaptation 1); +3.7% (Adaptation 2 & PIE)
  - Grants from Foreign Government: +1.6% (all scenarios)
    - Sector Grant (40%): +1.6% (all scenarios)
    - Climate Fund: 0 (all scenarios)
    - Others: 0 (all scenarios)
  - Grants from MDBs: 0 (all scenarios)
  - Other (operating balance; VAT rate=12% in the baseline and 15% other scenarios): +1.6% (Baseline); +2.4% (Tax Reform); +2.4% (Adaptation 1); +2.4% (Adaptation 2 & PIE)

### Disaster scenarios modeled (exact descriptions)
- Disaster Scenario 1: A one-off natural disaster (e.g., a devastating typhoon) hits in 2031, resulting in a reduction of 20 percent of GDP.
- Disaster Scenario 2: A recurring shock (i.e., SLR and the associated coastal flooding), with a reduction of 2 percent of GDP per annum.

Model assumptions about reconstruction and capital
- Government aims to fully restore damaged infrastructure within five years, commencing in the same year as the disaster event occurs.
- Natural disasters modeled to affect: (i) permanent damage to public infrastructure, (ii) permanent damage to private capital, and (iii) temporary reductions in productivity.
- Natural disasters do not affect reconstruction efficiency or the external public debt risk premium (in the model).

### Public infrastructure investment parameterization and assumptions
- Steady state of public standard infrastructure investment: 7.6 percent of GDP (covers trend growth net investment and operations and maintenance).
- Steady state of adaptation infrastructure investment: 0.0 percent of GDP.
- Average returns: standard infrastructure 25.0%; adaptation infrastructure 30.0%.
- Depreciation: standard infrastructure 7.5%; adaptation infrastructure 3.0%.
- Efficiency of standard public investment: 50.0% (LIC average per Aligishiev et al., 2023).
- Adaptation investment cost premia and effectiveness:
  - Adaptation investment is assumed 35.0% more expensive than standard investment.
  - Adaptation capital’s ability to withstand natural disaster is scaled by parameter 15.00 and is assumed to be lower than that in literature due to local constraints.

### Investment and financing scenarios analyzed (narrative bullets)
- Baseline Scenario: Boost standard public infrastructure investment during FY26-30 by reallocating Sector Grants (40 percent allocation to infrastructure vs 30 percent steady state) and leveraging additional Compact grants; yields a 3.2 percent of GDP annual increase in infrastructure investment for five years before the anticipated 2031 disaster; contingency credit lines from ADB and WBG amount to cumulative 4.7 percent of GDP for the 5-year reconstruction period (approximately 0.9 percent of GDP per annum) in the event of a one-off disaster.
- Tax Reform Scenario: Builds on Baseline; VAT rate increases from 12 percent in baseline to 15 percent starting in FY27, generating an additional tax revenue of 0.5 percent of GDP earmarked for infrastructure.
- Adaptation 1 Scenario: Same financing as Baseline but diverts the additional 4.0 percent of GDP per annum (deviation from steady state) toward adaptive public infrastructure in the five years preceding the one-off disaster.
- Adaptation 2 & PIE Scenario: Same as Adaptation 1 plus reforms that raise public investment efficiency by 20 percentage points to 70.0%.

### Policy implications and recommended priorities (extracted from analysis)
- Resilient infrastructure investments and effective public investment management can significantly reduce GDP contraction following rapid onset and slow-moving natural disaster shocks.
- Tax reform (permanent increase in the VAT rate) helps facilitate infrastructure restoration against persistent sea-level rise and boost private investment and long-term growth despite dampened consumption.
- To meet substantial financing needs for climate-resilient infrastructure, maximizing climate funding is essential, including:
  - Improving domestic revenue collection.
  - Mobilizing external resources from the renewed Compact and development partners.
  - Strengthening institutional capacity to access climate finance effectively.
- Given limited financial envelopes, prioritize adaptation actions while maintaining fiscal sustainability.
- Enhance public investment efficiency (PIE) through advanced technologies, minimizing waste, and strengthening procurement procedures to increase outputs from given investment rates.

*Source: IMF staff calculations and chapter content.*

### 13. Post-disaster Financing Scenarios: Based on the above specified fiscal parameters for

### 13. Post-disaster Financing Scenarios: Based on the above specified fiscal parameters for

### Simulation Results — One-off Natural Disaster
- Context and fiscal constraint:
  - RMI government will address the residual fiscal gap by adjusting fiscal instruments, such as taxes and transfers.
  - Given limited debt-carrying capacity, the RMI government will refrain from issuing public domestic and external commercial debt to close this gap.

- Baseline Scenario:
  - Government enhances standard public infrastructure spending over a five-year period, financed by additional grants.
  - Natural disaster strikes in 2031.
  - Investment mitigates the GDP loss by approximately 5 percentage points, resulting in a contraction of about 15 percent of GDP.
  - Private investment and consumption experience a sharp decline.
  - Total public debt-to -GDP ratio escalates during disaster and falls as reconstruction (2031-2035) proceeds, with gradual recovery in private investment, consumption, and GDP.

- Tax Reform Scenario:
  - VAT rate increases from 12 percent to 15 percent.
  - Results in an additional 0.5 percent GDP per annum in standard infrastructure investment compared to the baseline.
  - Impact on GDP and total public debt-to -GDP ratio is marginal.
  - Permanent VAT elevation discourages private consumption following completion of post-disaster construction in 2035.
  - Conclusion: permanent tax increase is not a viable mitigation strategy for a country primarily susceptible to one-off natural disasters where public investment relies on tax revenue mobilization and grants rather than debt-creating mechanisms.

- Adaptation 1 Scenario:
  - Government scales up climate-resilient infrastructure investment over a five-year period, financed through additional grants and tax reform.
  - Allocating the same financial resources to adaptation capital significantly curbs GDP losses from natural disasters and stabilizes the public debt-to -GDP ratio.
  - Climate-resilient investments stimulate private investment during post-disaster reconstruction and beyond.

- Adaptation 2 & PIE Scenario:
  - Emphasizes enhancing Public Investment Efficiency (PIE) via PFM reforms.
  - Improved investment efficiency diminishes GDP losses and facilitates more expedited recovery.
  - Resilient investments are conducive to sustainable long-term GDP growth, supported by private investment and consumption growth.

### Simulation Results — Recurring Shocks Due to Sea Level Rise
- Context:
  - Recurring climate shocks produce persistent annual GDP losses; government invests in standard or adaptation infrastructure to restore damaged capital and potentially create new infrastructure.
  - Annual GDP loss attributable to sea level rise (SLR) is 2 percent of GDP, though cumulative impact over time can exceed a large one-off disaster.

- Baseline Scenario:
  - Under parameters calibrated to RMI fundamentals, persistent and exacerbating GDP loss will exceed 4.5 percent per annum in the long run, compared to a steady state without recurring shocks.
  - Consistent decline in private investment and private consumption growth relative to steady state.
  - Recurrent replenishment spending crowds out government transfers to households.

- Tax Reform Scenario:
  - Permanent VAT increase (12 percent to 15 percent) to finance infrastructure replenishment.
  - Mobilized revenues allocated to restoring and constructing standard infrastructure reduce average annual GDP losses by 1.3 percentage points over the 20-year horizon.
  - Facilitates an increase in private investment by approximately 0.9 percentage points per annum.
  - Adverse impact of higher VAT may suppress private consumption until sufficient public infrastructure is progressively developed by FY2038.

- Adaptation 1 Scenario:
  - Mobilized resources from additional grants and tax reform used to replenish and develop climate adaptation infrastructure.
  - After initial decline, GDP gradually ascends toward steady state as climate-resilient infrastructure is established.
  - Private investment and consumption expected to recover more swiftly in the long run.

- Adaptation 2 & PIE Scenario:
  - With a 20 percent improvement in PIE, GDP is projected to recover from previous losses and return to steady state levels in the long run.
  - Combination of adaptation investment and PIE improvement is expected to mitigate cumulative GDP losses over the next 20 years by approximately 25 percent in terms of steady state GDP.

### Concluding Remarks — Findings and Policy Implications
- Key findings:
  - Adaptation investment mitigates economic impacts of climate challenges for RMI in both one-off and recurring shock scenarios.
  - One-off scenario: enhanced public infrastructure investment reduced GDP contraction; tax reforms proved ineffective for long-term growth.
  - Recurring shocks: induce permanent annual GDP loss; VAT increase can facilitate infrastructure restoration and boost private investment despite dampened consumption.
  - Improvements in PIE amplify the benefits of adaptation investments, substantially reducing cumulative GDP losses over time.

- Financing and institutional priorities:
  - Maximizing climate funding is crucial to meet significant financing needs for climate-resilient infrastructure.
  - Domestic action: enhancing revenue collection can create fiscal space for adaptation investments; simulation results show mobilizing resources through tax reform can mitigate recurring shocks.
  - External action: better utilization of the renewed Compact, including sector grants, is important.
  - Secure substantial concessional climate adaptation financing and collaborate with international organizations, development partners, and NGOs to access and utilize climate finance.
  - Accessing climate funds (e.g., Green Climate Fund) requires demonstrating capacity in PIM and PFM; RMI should focus on building institutional capacity to access climate finance.
  - Learning from peer countries’ approaches through development partners could be beneficial.

- Prioritization and sequencing:
  - Given limited financing envelope, prioritize and sequence key adaptation actions while balancing adaptation pathways and fiscal sustainability in the medium- and long-term.
  - Government should consider trade-offs across islands and locations, and between investing in human capital (education and health) and enhancing physical infrastructure, all supported by efficient and transparent governance and robust institutional frameworks.

*Source: IMF Staff Calculations.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1mhlea2025002-source-pdf.pdf_