## 1. Djibouti Investment Projects and Sea Elevation

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### Major vulnerabilities and economic structure
- Djibouti is arid, with arable land at 0.1 percent by area and almost no agriculture; the country cannot sustainably cover about 95 percent of its needs in fresh water from its own sources and imports water from Ethiopia.
- Economic concentration in coastal areas: service activities account for 76 percent of GDP and 53 percent of total employment, dominated by port and transport-related services.
- Large-scale, debt-financed coastal investments under way include new ports, railroad and water pipeline, and free-trade zones.
- Djibouti is ranked seventh on vulnerability to climate change among small developing states (MapleCroft, 2018).
- Key institutional and planning weaknesses: deficiencies in water resources management, land use planning, building codes, social-environmental and financial protection schemes, risk management public policies, and environmental degradation and contamination.

### Recent events and observed impacts
- Tropical Cyclone Sagar (May 19–20, 2018):
  - About 50 percent of Djibouti City was severely affected by flash floods and heavy rainfall based on satellite imagery.
  - Impacted up to 30,000 people, dropped 110 mm (a year’s worth of rainfall), damaged about 2,000 homes in Djibouti City, destroyed infrastructure and businesses, and caused fatalities.

### Projected climate trends and physical risks
- Temperature:
  - Current average temperature in Djibouti: 28°C.
  - Absolute maximum monthly temperatures have already increased by 1.3°C across the country (past three decades), particularly in June and July.
  - Air temperature may increase by 1°C every two decades.
  - By 2100 average temperature would rise to 32°C (based on different climate models).
- Rainfall:
  - Monthly rainfall projected to increase from 16 to 23 mm, with higher seasonal variability (wetter wet months, drier dry months).
  - El Niño/La Niña effects expected to make wet months wetter and dry months drier.
- Droughts:
  - Probability of severe droughts will increase by 20 percent by 2050.
- Sea level rise and coastal exposure:
  - Sea level may rise by to about 1 meter or even more by 2100.
  - About 88 percent of Djibouti’s population live in coastal areas concentrated in Djibouti-ville, Arta, and Tajourah.
  - Sea-level rise scenarios: an increase of the sea level by one meter to 2.8 meters would almost double the number of people affected; about half of economic activities and almost a third of capital stock would be affected under these scenarios.
  - Notable geographic datum: Djiboutian lake Assal is located 155 meters below sea level.
- Ecological and structural impacts:
  - Climate warming may lead to the loss of about a half of the coral shelf by 2050.
  - Rising sea level may increase coastal erosion, affect marine ecosystems, and lead to saline intrusion affecting rivers and groundwater.
  - Heat stress effects: impacts on livestock feed intake, growth, production; increased water consumption with decreased availability; flood-induced infrastructure damage can render water delivery infrastructure unusable.

### Frequency and severity of climate-related disasters
- Since 1970, climate-related disasters in Djibouti occurred on average as often as in sub-Saharan Africa (SSA) and 2.3 times more often than other emerging markets and developing economies (EMDEs).
- Average material damage caused by natural disasters in Djibouti was about 0.1 percent of the damage caused by natural disasters in SSA and 0.05 percent in EMDEs.
- Average number of people per square kilometer affected by natural disasters in Djibouti was 1.4 times higher than in SSA and 3 times higher than in EMDEs.
- Mean fatalities in Djibouti were 0.1 of SSA and 0.5 of EMDEs.
- GFDRR (2018) hazard ratings for Djibouti:
  - Coastal floods: high.
  - Extreme heat and wildfires: high.
  - Water scarcity hazard: medium (up to a 20 percent chance that droughts will occur in the coming 10 years).
  - Cyclone hazard: very low (less than a 1 percent chance of potentially-damaging cyclone-strength winds in the next 10 years), noting Cyclone Sagar was a low-probability event that nonetheless occurred.

### Macroeconomic and fiscal implications
- Temperature–growth link: Fund research suggests an increase in average temperature by 1°C can reduce per capita GDP by nearly 1.5 percent in sub-Saharan African countries such as Djibouti.
- Structural and socio-economic effects expected: negative impacts on agricultural output, industrial output, labor productivity, energy demand, health, conflict risk, and economic growth; increased urban migration and dependence on international food assistance and government transfers.
- Refugee inflows from regional environmental crises (e.g., 2017 droughts and famine in Yemen and Somalia) compound pressures on infrastructure and services.

### Cost estimates and model-based projections (Africa-level and model summaries)
- Africa-level estimate:
  - Central net economic costs of climate change could be equivalent to 1.5–3% of GDP each year by 2030 in Africa.
- Integrated assessment model results:
  - FUND model: under business-as-usual, net economic costs could be equivalent to 2.7% of GDP each year in Africa by 2025.
  - PAGE 2002 model: economic costs could be equivalent to around 2% of GDP each year in Africa by 2040 (central value, market and non-market sectors, A2 scenario), with a 5–95% confidence interval of 0.4–4%; by 2100 costs could be equivalent to 10% of GDP each year.
  - RICE model: explicitly includes adaptation (autonomous adaptation, anticipatory adaptation, sea-level rise adaptation) and calibrates costs and benefits across forms of adaptation.
- General finding: investing today in mitigation and adaptation can reduce future costs over time.

### Conclusions and policy implications (summary)
- Climate change may have severe macro-fiscal implications for Djibouti; related costs are potentially large and exceed current available internal and external resources.
- Fiscal planning implications:
  - Authorities need to factor in expenditure related to mitigation and adaptation to climate change in medium- and long-term fiscal projections.
  - Investing now in adaptation has large potential benefits in reducing future costs, while inaction may lead to structural and human resource losses.
- Policy options include promoting strong growth and building fiscal space to finance climate-related investments.

---

### 21. The cost of climate change for Djibouti

### Modeled economic costs and scenarios
- PAGE model estimates:
  - Baseline scenario (temperature increase by 2°C): total costs for Djibouti could be linearly increasing from 1 to 3 percent of GDP in 2020–60.
  - Adverse scenario (+4°C temperature change): potential cost may reach 6 percent of its GDP.
- RICE-type model (CPDN, 2015; AAGr2, 2015) adapted to Djibouti — baseline (2°C) cumulative 2010–60:
  - If government invests about US$ 1.8 billion in adaptation over the next 50 years (90 percent of the 2017 GDP), residual damage still about US$ 800 million (40 percent of 2017 GDP).
  - Without adaptation, overall cumulative damage may exceed US$ 5 billion (250 percent of 2017 GDP).
- Adverse (4°C) cumulative 2010–60:
  - If government invests US$ 1.3 billion in adaptation (65 percent of 2017 GDP), residual damage about US$ 2.7 billion (135 percent of 2017 GDP).
  - Without adaptation, overall cumulative damage may exceed US$ 9 billion (450 percent of 2017 GDP).
- Scenario insight: even with adaptation, residual damages may be large, up to twice as large as adaptation costs.
- Limitations:
  - Estimates are indicative and do not fully capture extreme events, cross-sectoral links, socially contingent effects, or cumulative effects on adaptive capacity.

### Past experience and observed fiscal impacts
- Post-factum annual cost from recent climate-related natural disasters amounted to about 1 percent of GDP annually.
- During the 2008–11 drought:
  - Real GDP per capita growth dropped and inflation accelerated.
  - Revenue and grants remained broadly stable; current expenditure remained broadly stable; capital expenditure increased financed mainly by external loans.
  - Fiscal deficit expanded sharply in 2009; current account increased mainly because of surge in international food and fuel prices.
  - External public debt and debt service remained relatively stable as most aid was financed by grants.
- Box 2 (Drought impacts):
  - Population: out of 818,000 total, about 120,000 citizens and about 20,000 refugees suffered food insecurity.
  - Activity estimated to increase from 3½ percent in 2010 to almost 4½ percent in 2011.
  - Inflation estimated to rise from 4 percent in 2010 to 5 percent in 2011.
  - Government unprogrammed drought-related spending about 0.2 percent of GDP.
  - Pledges received: US$47 million from bilateral and multilateral donors.

### Mitigation: commitments, costs, and projects
- Policy context:
  - Djibouti submitted an Intended Nationally Determined Contribution (INDC) in advance of the Paris 2015 conference.
  - Paris agreement scheduled to come into effect in 2020.
- Commitments:
  - Goal: keep long-term GHG emissions roughly at the level of 2010.
  - Djibouti committed to reduce emissions by 40 percent relative to the baseline scenario, unconditionally financed from its own resources.
- Cost estimates and financing needs:
  - To reduce emissions by a further 20 percent by 2030 (beyond the unconditional 40 percent target), Djibouti will need to invest more than US$3.8 billion (almost 200 percent of the 2018 GDP).
  - An additional US$1.6 billion (77 percent of GDP) financed by international donors may reduce emissions by a further 10 percent by 2010 relative to the baseline scenario (INDC, 2015).
  - Mitigating costs could amount to 1–4 percent of a median country’s consumption and may be comparable in Djibouti.
  - Delayed mitigation to 2030 can raise costs up to 44 percent of a country’s consumption.
- Projects:
  - Unconditional/already financed: recently opened railway and electricity line with Ethiopia, planned geothermal and solar power plants, energy efficiency projects in public buildings.
  - Conditional/awaiting financing: additional electricity pipeline to Ethiopia, improved energy efficiency of existing buildings, distribution of low voltage bulbs, reforestation, reduction of wood fuel consumption, accelerated replacement of air conditioners and refrigerators, construction of an additional power plant and wind turbines, import restrictions on old cars, improving energy efficiency of mosques, installation of agroforestry systems.
- Relative contribution:
  - Djibouti’s emissions represent only 0.005 percent of global emissions.
  - Overall cost of mitigation alone is twice Djibouti’s current GDP and cannot be financed only from domestic resources.

### Adaptation: needs, current spending, and gaps
- Rationale:
  - Adaptation is essential given scarce water resources, minuscule arable land shrinking due to deforestation, and likely loss of half the coral cover.
  - Social priorities: reduce vulnerability to drought, protect against rising sea levels, improve water access, protect biodiversity, reinforce rural resilience.
- Current adaptation projects and finance:
  - Projects currently implemented amount to about US$100 million (5 percent of GDP) — about 12 percent of total investment needed for adaptation under the 2°C scenario.
  - Funded projects include rehabilitation of rural coastal communities, a desalination plant fueled by renewable energies, building of water tanks, experimental dams, water pumping, sanitation, and a solar electricity plant.
  - Additional projects under consideration: a second desalination plant, repairs of water sources, construction of new dykes and dams.
  - Financing: government resources and development partners (World Bank, European Union, UNDP, UNEP, UNICEF, ADB, IFAD).

### Fiscal costs and policy scenarios
- Fiscal space constraints:
  - Public debt increased from 60 to over 90 percent of GDP in recent years due to a debt-financed investment boom.
  - Fiscal space to finance additional climate-related expenses is extremely limited.
- Growth and reform scenarios:
  - No-reform scenario: latent growth about 3 percent (historical pre-investment boom).
  - Reform scenario: implementation of Visions Djibouti 2035 reforms, major tax reforms, two-fold improvement in business climate (Doing Business rating from 154 to the 70–80 range), prudent debt management; growth could accelerate to 7 percent in the medium term and remain 5–6 percent in the long term.
- Fiscal implications — No-reform scenario (based on 2017 IMF Article IV baseline and Figure 7 climate costs):
  - Cost of inaction increases from about 1 percent of GDP currently to 3 percent of GDP by 2060.
  - This amounts to subtracting about US$ 20 million from Djibouti’s current GDP.
  - Direct fiscal cost with adaptation: about 0.7 percent of GDP in 2020 and not more than 1.4 percent of GDP in 2060.
    - Components: additional public investment of about 0.2 percent of GDP in the short run and 0.5 percent of GDP in the long run; residual damage 0.5 percent and 0.9 percent of GDP, respectively.
  - Most affected sectors: transport and trade (rising sea level may incapacitate older port and free trade zone facilities).
- Fiscal implications — Reform scenario:
  - Without adaptation, potential long-run loss about 0.5 percent of GDP.
  - With adaptation, cost would amount to 0.3 percent of GDP: 0.1 percent for investment and 0.2 percent as residual damage.
  - Transport, warehousing and communication remain most affected sectors but on a much lower scale than in the no-reform scenario.
- Policy implication: higher GDP growth does not obviate the need for adaptation actions but makes financing needs more manageable.

### Factors driving fiscal differences between reform and no-reform scenarios
- Structural reforms reduce the relative fiscal burden of adaptation and mitigation by increasing GDP and tax revenues while adaptation costs remain similar in nominal terms.
- Higher underlying GDP growth in the reform scenario helps generate higher tax resources to finance an unchanged level of adaptation costs.
- Under the reform scenario, embedding climate-related expenditure into the budget and higher growth reduces the need for ad-hoc cuts in other expenditure items when climate shocks occur.

### Illustrative macro-fiscal outcomes and key statistics
- Current fiscal practice: climate adaptation expenditures are not built into Djibouti’s long-term fiscal and debt projections (with the exception of a few current investment projects contributing to climate mitigation).
- Reform scenario assumptions: growth will remain steady at 5-6 percent in the long run and all climate adaptation investment will be financed by new public borrowing.
  - Overall fiscal deficit may worsen by about 0.5 percent of GDP relative to the current baseline.
  - After several large-scale repayments on large public investment contracted in 2013-16, the fiscal deficit is expected to stabilize at about 3 percent of GDP or 3.5 percent of GDP if climate adaptation investments are included.
  - The trajectory of public debt in this case would not be decreasing, but would rather hover at about 60 percent of GDP.
- No-reform scenario assumptions: projected high and sustained growth does not materialize and Djibouti falls back to latent growth at about 3 percent.
  - The fiscal deficit would almost double relative to the reform scenario to about 7 percent of GDP.
  - As a result, the debt level would exceed 100 percent of GDP and would stay on an explosive path in the long run.

### Policy recommendations and fiscal management actions
- Strong growth is the single most important precondition to generate resources needed to adapt to climate change.
- Fiscal policy must balance supporting growth and preserving debt sustainability; the authorities’ debt-financed reform program, if successfully accomplished, can deliver the required growth rate.
- Implement growth-friendly tax reforms that:
  - increase revenue,
  - reduce the burden on the poor,
  - level the playing field across businesses,
  - rebalance expenditure toward items with high growth multipliers, such as capital expenditure.
- Generate fiscal space sufficient to start financing adaptation to climate change:
  - Build a substantial fiscal space into the budget on an annual basis as part of a broader envelope that includes financing for climate change mitigation and disaster response programs.
  - Invest in adaptation now to address climate-related macroeconomic vulnerabilities and promote disaster-resilient infrastructure, transport and energy generation, public health capacity, risk-informed spatial planning, building standards, and payment systems.
- Investing in mitigation and adaptation now would save resources later; model estimates suggest ad-hoc reactions to climate effects and induced natural disasters may be substantially more expensive than a predetermined investment path.
- Prioritize scarce resources on adaptation measures to use generated fiscal space more efficiently and with long-lasting effect in Djibouti.

### Contingency planning, fiscal risk management, and regional coordination
- Integrate climate change mitigation and adaptation into broader fiscal reform and regular fiscal management procedures, complemented with disaster risk management.
- Explicitly identify and adequately integrate climate-related risks into the medium-term fiscal framework and debt sustainability analysis.
- Maintain substantial fiscal buffers to mitigate unforeseen implications of climate change and associated natural disasters.
- Clarify the role of the National Natural Disaster Management Fund (NNDMF), especially regarding its mandate, governance structure, budget linkages, and relations.
- Improve coordination of climate change response with neighboring countries in the Horn of Africa to create regional synergies and help mobilize financing; mitigation strategies include short-term approaches (e.g., distributing food) and long-term approaches (e.g., planting drought-tolerant crop varieties).

*Source: IMF Working Paper (wp18233), section text provided.*

### 1. Djibouti Investment Projects and Sea Elevation ....................................................................4

### 1. Djibouti Investment Projects and Sea Elevation

### Major vulnerabilities and economic structure
- Djibouti is arid, with arable land at 0.1 percent by area and almost no agriculture; the country cannot sustainably cover about 95 percent of its needs in fresh water from its own sources and imports water from Ethiopia.
- Economic concentration in coastal areas: service activities account for 76 percent of GDP and 53 percent of total employment, dominated by port and transport-related services.
- Large-scale, debt-financed coastal investments under way include new ports, railroad and water pipeline, and free-trade zones.
- Djibouti is ranked seventh on vulnerability to climate change among small developing states (MapleCroft, 2018).
- Key institutional and planning weaknesses enhancing vulnerability: deficiencies in water resources management, land use planning, building codes, social-environmental and financial protection schemes, risk management public policies, and environmental degradation and contamination.

### Recent events and observed impacts
- Tropical Cyclone Sagar (May 19–20, 2018) caused widespread flooding: about 50 percent of Djibouti City was severely affected by flash floods and heavy rainfall based on satellite imagery.
- Sagar impacted up to 30,000 people, dropped 110 mm (a year’s worth of rainfall), damaged about 2,000 homes in Djibouti City, destroyed infrastructure and businesses, and caused fatalities.

### Projected climate trends and physical risks
- Temperature:
  - Current average temperature in Djibouti: 28°C.
  - Absolute maximum monthly temperatures have already increased by 1.3°C across the country (past three decades), particularly in June and July.
  - Air temperature may increase by 1°C every two decades.
  - By 2100 average temperature would rise to 32°C (based on different climate models).
- Rainfall:
  - Monthly rainfall projected to increase from 16 to 23 mm, with higher seasonal variability (wetter wet months, drier dry months).
  - El Niño/La Niña effects expected to make wet months wetter and dry months drier.
- Droughts:
  - Probability of severe droughts will increase by 20 percent by 2050.
- Sea level rise and coastal exposure:
  - Sea level may rise by to about 1 meter or even more by 2100.
  - About 88 percent of Djibouti’s population live in coastal areas concentrated in Djibouti-ville, Arta, and Tajourah.
  - Sea-level rise scenarios: an increase of the sea level by one meter to 2.8 meters would almost double the number of people affected; about half of economic activities and almost a third of capital stock would be affected under these scenarios.
  - Notable geographic datum: Djiboutian lake Assal is located 155 meters below sea level.
- Ecological and structural impacts:
  - Climate warming may lead to the loss of about a half of the coral shelf by 2050.
  - Rising sea level may increase coastal erosion, affect marine ecosystems, and lead to saline intrusion affecting rivers and groundwater.
  - Heat stress effects: impacts on livestock feed intake, growth, production; increased water consumption with decreased availability; flood-induced infrastructure damage can render water delivery infrastructure unusable.

### Frequency and severity of climate-related disasters
- Since 1970, climate-related disasters in Djibouti occurred on average as often as in sub-Saharan Africa (SSA) and 2.3 times more often than other emerging markets and developing economies (EMDEs).
- Average material damage caused by natural disasters in Djibouti was about 0.1 percent of the damage caused by natural disasters in SSA and 0.05 percent in EMDEs (likely reflecting data collection deficiencies).
- Average number of people per square kilometer affected by natural disasters in Djibouti was 1.4 times higher than in SSA and 3 times higher than in EMDEs.
- Mean fatalities in Djibouti were 0.1 of SSA and 0.5 of EMDEs, suggesting stronger early warning and disaster preparedness on average.
- GFDRR (2018) hazard ratings for Djibouti:
  - Coastal floods: high (potentially-damaging waves expected to flood the coast at least once in the next 10 years).
  - Extreme heat and wildfires: high.
  - Water scarcity hazard: medium (up to a 20 percent chance that droughts will occur in the coming 10 years).
  - Cyclone hazard: very low (less than a 1 percent chance of potentially-damaging cyclone-strength winds in the next 10 years), noting Cyclone Sagar was a low-probability event that nonetheless occurred.

### Macroeconomic and fiscal implications
- Temperature–growth link: Fund research suggests an increase in average temperature by 1°C can reduce per capita GDP by nearly 1.5 percent in sub-Saharan African countries such as Djibouti.
- Structural and socio-economic effects expected: negative impacts on agricultural output, industrial output, labor productivity, energy demand, health, conflict risk, and economic growth; increased urban migration and dependence on international food assistance and government transfers.
- Refugee inflows from regional environmental crises (e.g., 2017 droughts and famine in Yemen and Somalia) compound pressures on infrastructure and services.

### Cost estimates and model-based projections
- Africa-level estimates:
  - Central net economic costs of climate change could be equivalent to 1.5–3% of GDP each year by 2030 in Africa.
- Integrated assessment model results:
  - FUND model: under business-as-usual, net economic costs could be equivalent to 2.7% of GDP each year in Africa by 2025.
  - PAGE 2002 model: economic costs could be equivalent to around 2% of GDP each year in Africa by 2040 (central value, market and non-market sectors, A2 scenario), with a 5–95% confidence interval of 0.4–4%; by 2100 costs could be equivalent to 10% of GDP each year.
  - RICE model: explicitly includes adaptation (autonomous adaptation, anticipatory adaptation, sea-level rise adaptation) and calibrates costs and benefits across forms of adaptation.
- General finding from models: investing today in mitigation and adaptation can reduce future costs over time.

### Conclusions and policy implications (from the paper)
- Climate change may have severe macro-fiscal implications for Djibouti; related costs are potentially large and exceed current available internal and external resources.
- Fiscal planning implications:
  - Authorities need to factor in expenditure related to mitigation and adaptation to climate change in medium- and long-term fiscal projections.
  - Investing now in adaptation has large potential benefits in reducing future costs, while inaction may lead to structural and human resource losses.
- Policy options include promoting strong growth and building fiscal space to finance climate-related investments.

*Source: IMF staff paper "Djibouti Investment Projects and Sea Elevation" (chapter content as provided).*

### 21.      The cost of climate change for Djibouti can be relatively high. Estimates based on

### 21. The cost of climate change for Djibouti

### Modeled economic costs and scenarios
- PAGE model estimates:
  - Baseline scenario (temperature increase by 2°C): total costs for Djibouti could be linearly increasing from 1 to 3 percent of GDP in 2020–60.
  - Adverse scenario (+4°C temperature change): potential cost may reach 6 percent of its GDP.
- RICE-type model (CPDN, 2015; AAGr2, 2015) adapted to Djibouti — baseline (2°C) cumulative 2010–60:
  - If government invests about US$ 1.8 billion in adaptation over the next 50 years (90 percent of the 2017 GDP), residual damage still about US$ 800 million (40 percent of 2017 GDP).
  - Without adaptation, overall cumulative damage may exceed US$ 5 billion (250 percent of 2017 GDP).
- Adverse (4°C) cumulative 2010–60:
  - If government invests US$ 1.3 billion in adaptation (65 percent of 2017 GDP), residual damage about US$ 2.7 billion (135 percent of 2017 GDP).
  - Without adaptation, overall cumulative damage may exceed US$ 9 billion (450 percent of 2017 GDP).
- Scenario insight: even with adaptation, residual damages may be large, up to twice as large as adaptation costs.

### Limitations of model estimates
- Estimates are indicative, useful for signals, size, patterns, and adaptation financing requirements.
- Models only partially cover effects: do not capture extreme events (including flooding and droughts), cross-sectoral links, socially contingent effects, or cumulative effects on adaptive capacity.

### Past experience and observed impacts
- Post-factum annual cost from recent climate-related natural disasters amounted to about 1 percent of GDP annually.
- During the 2008–11 drought:
  - Real GDP per capita growth dropped and inflation accelerated.
  - Revenue and grants remained broadly stable; current expenditure remained broadly stable; capital expenditure increased financed mainly by external loans.
  - Fiscal deficit expanded sharply in 2009; current account increased mainly because of surge in international food and fuel prices.
  - External public debt and debt service remained relatively stable as most aid was financed by grants.
- Box 2 (Drought impacts):
  - Population: out of 818,000 total, about 120,000 citizens and about 20,000 refugees suffered food insecurity.
  - Activity estimated to increase from 3½ percent in 2010 to almost 4½ percent in 2011.
  - Inflation estimated to rise from 4 percent in 2010 to 5 percent in 2011.
  - Government unprogrammed drought-related spending about 0.2 percent of GDP.
  - Pledges received: US$47 million from bilateral and multilateral donors.

### Mitigation: commitments, costs, and projects
- Policy context:
  - Djibouti submitted an Intended Nationally Determined Contribution (INDC) in advance of the Paris 2015 conference.
  - Paris agreement scheduled to come into effect in 2020.
- Commitments:
  - Goal: keep long-term GHG emissions roughly at the level of 2010.
  - Djibouti committed to reduce emissions by 40 percent relative to the baseline scenario, unconditionally financed from its own resources.
- Cost estimates and financing needs:
  - To reduce emissions by a further 20 percent by 2030 (beyond the unconditional 40 percent target), Djibouti will need to invest more than US$3.8 billion (almost 200 percent of the 2018 GDP).
  - An additional US$1.6 billion (77 percent of GDP) financed by international donors may reduce emissions by a further 10 percent by 2010 relative to the baseline scenario (INDC, 2015).
- Mitigation cost modeling:
  - Mitigating costs could amount to 1–4 percent of a median country’s consumption and may be comparable in Djibouti (Edenhofer et al., 2014 and IPPC, 2015).
  - Delayed mitigation to 2030 can raise costs up to 44 percent of a country’s consumption.
- Projects:
  - Unconditional/already financed: recently opened railway and electricity line with Ethiopia, planned geothermal and solar power plants, energy efficiency projects in public buildings.
  - Conditional/awaiting financing: additional electricity pipeline to Ethiopia, improved energy efficiency of existing buildings, distribution of low voltage bulbs, reforestation, reduction of wood fuel consumption, accelerated replacement of air conditioners and refrigerators, construction of an additional power plant and wind turbines, import restrictions on old cars, improving energy efficiency of mosques, installation of agroforestry systems.
- Relative contribution:
  - Djibouti’s emissions represent only 0.005 percent of global emissions.
  - Overall cost of mitigation alone is twice Djibouti’s current GDP and cannot be financed only from domestic resources.

### Adaptation: needs, current spending, and gaps
- Rationale:
  - Adaptation is essential given scarce water resources, minuscule arable land shrinking due to deforestation, and likely loss of half the coral cover.
  - Social priorities: reduce vulnerability to drought, protect against rising sea levels, improve water access, protect biodiversity, reinforce rural resilience.
- Current adaptation projects and finance:
  - Projects currently implemented amount to about US$100 million (5 percent of GDP) — about 12 percent of total investment needed for adaptation under the 2°C scenario.
  - Funded projects include rehabilitation of rural coastal communities, a desalination plant fueled by renewable energies, building of water tanks, experimental dams, water pumping, sanitation, and a solar electricity plant.
  - Additional projects under consideration: a second desalination plant, repairs of water sources, construction of new dykes and dams.
  - Financing: government resources and development partners (World Bank, European Union, UNDP, UNEP, UNICEF, ADB, IFAD).

### Fiscal costs and policy scenarios
- Fiscal space constraints:
  - Public debt increased from 60 to over 90 percent of GDP in recent years due to a debt-financed investment boom.
  - Fiscal space to finance additional climate-related expenses is extremely limited.
- Growth and reform scenarios:
  - No-reform scenario: latent growth about 3 percent (historical pre-investment boom).
  - Reform scenario: implementation of Visions Djibouti 2035 reforms, major tax reforms, two-fold improvement in business climate (Doing Business rating from 154 to the 70–80 range), prudent debt management; growth could accelerate to 7 percent in the medium term and remain 5–6 percent in the long term.
- Fiscal implications — No-reform scenario (based on 2017 IMF Article IV baseline and Figure 7 climate costs):
  - Cost of inaction increases from about 1 percent of GDP currently to 3 percent of GDP by 2060.
  - This amounts to subtracting about US$ 20 million from Djibouti’s current GDP.
  - Direct fiscal cost with adaptation: about 0.7 percent of GDP in 2020 and not more than 1.4 percent of GDP in 2060.
    - Components: additional public investment of about 0.2 percent of GDP in the short run and 0.5 percent of GDP in the long run; residual damage 0.5 percent and 0.9 percent of GDP, respectively.
  - Most affected sectors: transport and trade (rising sea level may incapacitate older port and free trade zone facilities).
- Fiscal implications — Reform scenario:
  - Without adaptation, potential long-run loss about 0.5 percent of GDP.
  - With adaptation, cost would amount to 0.3 percent of GDP: 0.1 percent for investment and 0.2 percent as residual damage.
  - Transport, warehousing and communication remain most affected sectors but on a much lower scale than in the no-reform scenario.
- Policy implication: higher GDP growth does not obviate the need for adaptation actions but makes financing needs more manageable.

*Source: CPDN, 2015; AAGr2, 2015; INDC (2015); Edenhofer et al. (2014); IPPC (2015); IMF staff projections.*

### 43.      Several factors explain different fiscal implications under the two scenarios.

### 43.      Several factors explain different fiscal implications under the two scenarios.

### Factors driving fiscal differences between reform and no-reform scenarios
- Higher investment needs in the no-reform scenario relative to the reform scenario imply that structural reforms make climate mitigation and adaptation more affordable.
- If Djibouti succeeds in reforming the business climate (see Kireyev, 2017), growth will accelerate while the cost of adaptation and mitigation would remain the same, reducing those costs in terms of GDP.
- Higher underlying GDP growth in the reform scenario helps generate higher tax resources to finance an unchanged level of adaptation costs.
- Under the reform scenario, the budget structure would embed additional climate change-related expenditure, including on investment; with substantially higher growth, the cost of mitigation and adaptation would be substantially lower in percent of GDP relative to the no-reform scenario.
- Consequently, the budget would require less ad-hoc cuts in other expenditure items under the reform scenario once financing climate-related shocks becomes unavoidable.

### Illustrative macro-fiscal outcomes and key statistics
- Current fiscal practice: climate adaptation expenditures are not built into Djibouti’s long-term fiscal and debt projections (with the exception of a few current investment projects contributing to climate mitigation).
- Reform scenario assumptions: growth will remain steady at 5-6 percent in the long run and all climate adaptation investment will be financed by new public borrowing.
  - Overall fiscal deficit may worsen by about 0.5 percent of GDP relative to the current baseline.
  - After several large-scale repayments on large public investment contracted in 2013-16, the fiscal deficit is expected to stabilize at about 3 percent of GDP or 3.5 percent of GDP if climate adaptation investments are included.
  - The trajectory of public debt in this case would not be decreasing, but would rather hover at about 60 percent of GDP.
- No-reform scenario assumptions: projected high and sustained growth does not materialize and Djibouti falls back to latent growth at about 3 percent.
  - The fiscal deficit would almost double relative to the reform scenario to about 7 percent of GDP.
  - As a result, the debt level would exceed 100 percent of GDP and would stay on an explosive path in the long run.

### Policy recommendations and fiscal management actions
- Strong growth is the single most important precondition to generate resources needed to adapt to climate change.
- Fiscal policy must balance supporting growth and preserving debt sustainability; the authorities’ debt-financed reform program, if successfully accomplished, can deliver the required growth rate.
- Implement growth-friendly tax reforms that:
  - increase revenue,
  - reduce the burden on the poor,
  - level the playing field across businesses,
  - rebalance expenditure toward items with high growth multipliers, such as capital expenditure.
- Generate fiscal space sufficient to start financing adaptation to climate change:
  - Build a substantial fiscal space into the budget on an annual basis as part of a broader envelope that includes financing for climate change mitigation and disaster response programs.
  - Invest in adaptation now to address climate-related macroeconomic vulnerabilities and promote disaster-resilient infrastructure, transport and energy generation, public health capacity, risk-informed spatial planning, building standards, and payment systems.
- Investing in mitigation and adaptation now would save resources later; model estimates suggest ad-hoc reactions to climate effects and induced natural disasters may be substantially more expensive than a predetermined investment path.
- Prioritize scarce resources on adaptation measures to use generated fiscal space more efficiently and with long-lasting effect in Djibouti.

### Contingency planning, fiscal risk management, and regional coordination
- Climate change mitigation and adaptation should be integrated into broader fiscal reform and regular fiscal management procedures, complemented with disaster risk management.
- The government needs to explicitly identify and adequately integrate climate-related risks into the medium-term fiscal framework and debt sustainability analysis.
- Substantial fiscal buffers are needed to mitigate unforeseen implications of climate change and associated natural disasters.
- Clarify the role of the National Natural Disaster Management Fund (NNDMF), especially regarding its mandate, governance structure, budget linkages, and relations.
- Djibouti’s adaptation success depends on other countries’ actions; if other countries do not follow good adaptation policies, Djibouti faces a strong disincentive to invest alone and may bear large costs of inaction by others.
- Improve coordination of climate change response with neighboring countries in the Horn of Africa to create regional synergies and help mobilize financing; mitigation strategies include short-term approaches (e.g., distributing food) and long-term approaches (e.g., planting drought-tolerant crop varieties).

*Source: IMF Working Paper (wp18233), section text provided.*

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_Source: https://www.imf.org/-/media/files/publications/wp/2018/wp18233.pdf_