## sipea2025030

## Source details

**Canonical URL:** [sipea2025030](https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025030.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/selected-issues-papers/2025/english/sipea2025030.pdf.md)
- [Structured JSON version](/-/media/files/publications/selected-issues-papers/2025/english/sipea2025030.pdf.json)

---

### A. Exposure to Sea Level Rise and Hurricanes
- Geography and exposure
  - The Bahamas is an archipelago of over 700 islands with 80 percent of its land area less than 1.5 meters above sea level.
  - The country has been hit by six major hurricanes and several tropical storms in the last decade, including a category 5 hurricane Dorian in 2019.
  - Tourism contributes about 50 percent to GDP, increasing vulnerability to climate impacts.
- Recent and projected impacts
  - Hurricane Dorian (2019) caused $3.4 billion in damage to physical assets, amounting to 25 percent of The Bahamas' GDP.
  - Natural disasters have averaged 3.2 percent of GDP in annual damages over the past decade.
  - Acevedo (2016) projects hurricane-related damages will increase by 31 percent under 3°C warming and by 42 percent under 4.3°C.
  - Sea levels are projected to rise by nearly 0.5 meters by the end of the century, which could place about 41 percent of the land and 22 percent of the population below sea level.
  - Without adaptation, a 0.5 m sea level rise could cause the complete loss of up to half of sandy beaches located near hotel infrastructure (Spencer et al., 2022).
- Distributional aspects and adaptation priorities
  - Smaller, less developed islands (Exuma, Andros, Cat Island, and other smaller family islands) contribute 5.1 percent of national income and 7 percent of the population but are expected to experience disproportionately higher income losses and have lower adaptation capacity compared to New Providence and Grand Bahama.
  - Adaptation policy should combine protection of physical assets, planned retreat, and targeted preservation of natural capital (coral reefs, mangroves, beaches) to support tourism and livelihoods.

### B. Quantifying Climate Risks in The Bahamas
- Methodological approach
  - Dual-pronged analysis: (i) output losses from intensifying hurricanes (recurring disaster shocks) and (ii) output losses from permanent land inundation (slow onset sea level rise).
  - Land inundation losses estimated with a two-sector output accounting framework that explicitly incorporates natural capital; traded sector output is complementary to natural capital.
  - Hurricane impacts evaluated with a Markov-switching DSGE model that switches between disaster and nondisaster states; distinguishes standard public capital (vulnerable) and resilient public capital (intact in disasters).
- Key calibration assumptions and parameters
  - Hurricanes inflict damages amounting to 7.3 percent of GDP per event, reflecting the average losses from past major disasters.
  - Hurricane damages are assumed to increase in line with projections in Acevedo (2016); probability of occurrence matches historical patterns and is held constant.
  - Resilient investments are estimated to cost the government 25 percent more than standard investments.
  - Conservative assumptions for natural capital losses: half of projected sandy beach losses from Spencer et al. (2022) are used; exposed physical assets are proportionate to exposed population; 50 percent of exposed assets destroyed in less developed islands and 20 percent in more developed ones.
- Adaptation scenarios analyzed
  - Scenario 1: No adaptation.
  - Scenario 2: Protection of physical assets (public sector invests to safeguard people, private assets, and government infrastructure; government infrastructure made resilient).
  - Scenario 3: Protection of physical assets and natural capital (adds measures such as breakwater construction, coral reef and mangrove protection, and beach nourishment).

### C. Potential Output Losses from Climate Change and Benefits from Adaptation
- Baseline and projected losses without adaptation (Scenario 1)
  - Current prevailing natural disaster profile reduces current potential output level by about 8 percent relative to a counterfactual without tropical storms.
  - By 2100, combined losses from disasters and permanent inundation could be between 8.3 percent of GDP under SSP2-4.5 and 11.1 percent of GDP under SSP5-8.5.
  - The traded (export-oriented) sector is particularly vulnerable due to heavy reliance on natural capital (sandy beaches, coral reefs, arable land, fish stocks).
- Gains from protecting physical assets (Scenario 2)
  - Public investment in adaptation that secures physical assets yields a long-term increase in the level of GDP of around 5.5-6.8 percent.
  - Traded output losses remain sizeable because natural capital remains vulnerable; complementarities between physical and natural capital limit growth dividends when natural capital is not preserved.
- Additional gains from protecting natural capital (Scenario 3)
  - Adding targeted measures to preserve natural capital (beach nourishment, artificial reefs, breakwaters, coral and mangrove protection) further reduces long-run traded output losses and eases pressure on future export and fiscal revenues.
  - Potential output losses fall from 2.8-4.3 percent of GDP under Scenario 2 to 1.2-2.3 percent of GDP under Scenario 3.
  - Analysis assumes protective measures ensure 80 percent of exposed private physical assets are safeguarded against permanent inundation and a similar share of government infrastructure is made resilient; protection of natural capital similarly assumes 80 percent preservation.
- Policy implications
  - Closing economy-wide adaptation needs through investments in structural resilience can unlock large potential output gains and stabilize fiscal and foreign exchange income streams.
  - For tourism-dependent economies, a comprehensive strategy must prioritize protection of natural capital alongside resilient physical infrastructure and consider distributional differences across islands when designing public adaptation interventions.

### Calibrated Parameters and Initial Values
- Macroeconomic ratios and shares
  - Potential GDP growth rate: 1.5
  - Private investment to GDP: 23
  - Private consumption to GDP: 59
  - Public investment to GDP: 2
  - Public consumption to GDP: 20
  - Net exports to GDP: -4
  - Share of traded goods in total output: 40
  - Share of domestic demand for traded output: 10
  - Share of imported capital goods in total investment: 50
  - Share of imported goods in domestic consumption: 27
  - Share of hotel rooms in New Providence and Grand Bahama: 70
  - Share of physical capital located in New Providence and Grand Bahama: 69.4
- Interest rates and depreciation
  - Annualized (implicit) interest rate on domestic debt: 4
  - Depreciation rate of private capital: 5
  - Depreciation rate of non-resilient public capital: 7.5
  - Depreciation rate of resilient public capital: 3
- Climate resilience and exposure shares
  - Share of natural capital resistant to climate change on New Providence and Grand Bahama: 70
  - Share of natural capital resistant to climate change on other islands: 50
  - Share of exposed physical assets resilient to climate change on New Providence and Grand Bahama: 70
  - Share of exposed physical assets resilient to climate change on other islands: 60
  - Share of exposed public capital resilient to SLR on New Providence and Grand Bahama: 75
  - Share of public capital resilient to SLR on other islands.: 30
- Public investment and sectoral production parameters
  - Public investment efficiency: 50
  - Traded sector: Labor share in production: 42.7
  - Traded sector: Capital share in production: 18.3
  - Traded sector: Elasticity of output to public capital: 0.15
  - Traded sector: Natural capital share in the production function: 39
  - Non-traded sector: Labor share in production: 60
  - Non-traded sector: Capital share in production: 40
  - Non-traded sector: Elasticity of output to public capital: 0.15

*Source: IMF staff calculations.*

### Section 1

### Assessing Climate Change Risks—Potential Output Losses and Gains from Strengthening Resilience

### A. Exposure to Sea Level Rise and Hurricanes
- Geography and exposure
  - The Bahamas is an archipelago of over 700 islands with 80 percent of its land area less than 1.5 meters above sea level.
  - The country has been hit by six major hurricanes and several tropical storms in the last decade, including a category 5 hurricane Dorian in 2019.
  - Tourism contributes about 50 percent to GDP, increasing vulnerability to climate impacts.
- Recent and projected impacts
  - Hurricane Dorian (2019) caused $3.4 billion in damage to physical assets, amounting to 25 percent of The Bahamas' GDP.
  - Natural disasters have averaged 3.2 percent of GDP in annual damages over the past decade.
  - Acevedo (2016) projects hurricane-related damages will increase by 31 percent under 3°C warming and by 42 percent under 4.3°C.
  - Sea levels are projected to rise by nearly 0.5 meters by the end of the century, which could place about 41 percent of the land and 22 percent of the population below sea level.
  - Without adaptation, a 0.5 m sea level rise could cause the complete loss of up to half of sandy beaches located near hotel infrastructure (Spencer et al., 2022).
- Distributional aspects and adaptation priorities
  - Smaller, less developed islands (Exuma, Andros, Cat Island, and other smaller family islands) contribute 5.1 percent of national income and 7 percent of the population but are expected to experience disproportionately higher income losses and have lower adaptation capacity compared to New Providence and Grand Bahama.
  - Adaptation policy should combine protection of physical assets, planned retreat, and targeted preservation of natural capital (coral reefs, mangroves, beaches) to support tourism and livelihoods.

### B. Quantifying Climate Risks in The Bahamas
- Methodological approach
  - Dual-pronged analysis: (i) output losses from intensifying hurricanes (recurring disaster shocks) and (ii) output losses from permanent land inundation (slow onset sea level rise).
  - Land inundation losses estimated with a two-sector output accounting framework that explicitly incorporates natural capital; traded sector output is complementary to natural capital.
  - Hurricane impacts evaluated with a Markov-switching DSGE model that switches between disaster and nondisaster states; distinguishes standard public capital (vulnerable) and resilient public capital (intact in disasters).
- Key calibration assumptions and parameters
  - Hurricanes inflict damages amounting to 7.3 percent of GDP per event, reflecting the average losses from past major disasters.
  - Hurricane damages are assumed to increase in line with projections in Acevedo (2016); probability of occurrence matches historical patterns and is held constant.
  - Resilient investments are estimated to cost the government 25 percent more than standard investments.
  - Conservative assumptions for natural capital losses: half of projected sandy beach losses from Spencer et al. (2022) are used; exposed physical assets are proportionate to exposed population; 50 percent of exposed assets destroyed in less developed islands and 20 percent in more developed ones.
- Adaptation scenarios analyzed
  - Scenario 1: No adaptation.
  - Scenario 2: Protection of physical assets (public sector invests to safeguard people, private assets, and government infrastructure; government infrastructure made resilient).
  - Scenario 3: Protection of physical assets and natural capital (adds measures such as breakwater construction, coral reef and mangrove protection, and beach nourishment).

### C. Potential Output Losses from Climate Change and Benefits from Adaptation
- Baseline and projected losses without adaptation (Scenario 1)
  - Current prevailing natural disaster profile reduces current potential output level by about 8 percent relative to a counterfactual without tropical storms.
  - By 2100, combined losses from disasters and permanent inundation could be between 8.3 percent of GDP under SSP2-4.5 and 11.1 percent of GDP under SSP5-8.5.
  - The traded (export-oriented) sector is particularly vulnerable due to heavy reliance on natural capital (sandy beaches, coral reefs, arable land, fish stocks).
- Gains from protecting physical assets (Scenario 2)
  - Public investment in adaptation that secures physical assets yields a long-term increase in the level of GDP of around 5.5-6.8 percent.
  - Traded output losses remain sizeable because natural capital remains vulnerable; complementarities between physical and natural capital limit growth dividends when natural capital is not preserved.
- Additional gains from protecting natural capital (Scenario 3)
  - Adding targeted measures to preserve natural capital (beach nourishment, artificial reefs, breakwaters, coral and mangrove protection) further reduces long-run traded output losses and eases pressure on future export and fiscal revenues.
  - Potential output losses fall from 2.8-4.3 percent of GDP under Scenario 2 to 1.2-2.3 percent of GDP under Scenario 3.
  - Analysis assumes protective measures ensure 80 percent of exposed private physical assets are safeguarded against permanent inundation and a similar share of government infrastructure is made resilient; protection of natural capital similarly assumes 80 percent preservation.
- Policy implications
  - Closing economy-wide adaptation needs through investments in structural resilience can unlock large potential output gains and stabilize fiscal and foreign exchange income streams.
  - For tourism-dependent economies, a comprehensive strategy must prioritize protection of natural capital alongside resilient physical infrastructure and consider distributional differences across islands when designing public adaptation interventions.

*Source: IMF staff calculations.*

### Section 2

### The Bahamas: Calibrated Parameters and Initial Values

### Macroeconomic ratios and shares
- Potential GDP growth rate: 1.5
- Private investment to GDP: 23
- Private consumption to GDP: 59
- Public investment to GDP: 2
- Public consumption to GDP: 20
- Net exports to GDP: -4
- Share of traded goods in total output: 40
- Share of domestic demand for traded output: 10
- Share of imported capital goods in total investment: 50
- Share of imported goods in domestic consumption: 27
- Share of hotel rooms in New Providence and Grand Bahama: 70
- Share of physical capital located in New Providence and Grand Bahama: 69.4

### Interest rates and depreciation
- Annualized (implicit) interest rate on domestic debt: 4
- Depreciation rate of private capital: 5
- Depreciation rate of non-resilient public capital: 7.5
- Depreciation rate of resilient public capital: 3

### Climate resilience and exposure shares
- Share of natural capital resistant to climate change on New Providence and Grand Bahama: 70
- Share of natural capital resistant to climate change on other islands: 50
- Share of exposed physical assets resilient to climate change on New Providence and Grand Bahama: 70
- Share of exposed physical assets resilient to climate change on other islands: 60
- Share of exposed public capital resilient to SLR on New Providence and Grand Bahama: 75
- Share of public capital resilient to SLR on other islands.: 30

### Public investment and sectoral production parameters
- Public investment efficiency: 50
- Traded sector: Labor share in production: 42.7
- Traded sector: Capital share in production: 18.3
- Traded sector: Elasticity of output to public capital: 0.15
- Traded sector: Natural capital share in the production function: 39
- Non-traded sector: Labor share in production: 60
- Non-traded sector: Capital share in production: 40
- Non-traded sector: Elasticity of output to public capital: 0.15

*Sources: National authorities and IMF staff calculations.*

---


_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025030.pdf_