## Macro-Criticality of Water Resources — wpiea2025251-source-pdf ## Source details **Canonical URL:** [Macro-Criticality of Water Resources — wpiea2025251-source-pdf](https://www.imf.org/-/media/files/publications/wp/2025/english/wpiea2025251-source-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2025/english/wpiea2025251-source-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2025/english/wpiea2025251-source-pdf.pdf.json) --- ### Introduction and water importance - Water is described as a vital source of life and a foundational input to economic activity, underpinning long-term development and supporting nearly every sector of the economy. - Water is one of the most critical factors of production, central to agriculture, industry, energy, and transport, and essential for the production of goods and services and the movement of people and commodities. - Access to safe water and sanitation is essential for poverty reduction, human health, and inclusive growth; ensuring availability and sustainable management for all would yield broad-based benefits. - Key headline statistics preserved verbatim: - The annual economic value of water and freshwater ecosystems is estimated at US$58 trillion, equivalent to about 60 percent of global gross domestic product (GDP); - The trade of agricultural products constitutes about 90 percent of the total virtual water, while international trade reduces global water use in agriculture by 5 percent; - Hydropower accounts for nearly 15 percent of global electricity generation; - Irrigation is key to improving food security but remains severely underdeveloped, with over 30 nations having less than 1 percent of cultivated land equipped for irrigation; - Universal access to safe drinking water and sanitation could prevent at least 1.4 million deaths annually, yet one in four people globally still lack access to safe drinking water; - Women and girls spend 200 million hours daily collecting water; - More than 1,600 water-related conflicts have been identified since 2000; - Transboundary water systems account for 60 percent of global freshwater flows and over half of the world’s population lives in transboundary river and lake basins; - Over 80 percent of global trade by volume is transported by sea. ### Objectives, framework, and public sector rationale - Objectives of the chapter: - Map channels through which water resources affect macro-fiscal and balance of payments positions and provide estimates of relationships between key macro-fiscal and water-related indicators. - Develop understanding of macro-fiscal exposure to water scarcity and drought risks based on empirical evidence. - Proposed analytical device: - “Water value chain” as an integrated framework for analyzing macro-criticality and the public sector’s role across the life cycle of water, including total economic value, market failures at different stages, and targeted policy interventions. - Public sector rationale and policy roles: - Water as an economic good per the 1992 Dublin Statement, with multiple use and non-use values requiring a balance between economic efficiency, equity, and sustainability. - Fiscal instruments (taxes, tariffs, subsidies) can internalize environmental costs and mobilize finance but risk inequality and political resistance if poorly designed. - Majority of investment needs expected to be provided by the public sector, yet public sector challenges include low budget execution, large subsidies, and declining efficiency. ### Recent trends, climate outlook, and key statistics - Geographic and per-capita disparities: - Per capita renewable water availability ranges from approximately 43,500 cubic meters (m3) per year in Australia and New Zealand to just 1,420 m3 per year in Northern Africa and Western Asia. - Per capita water withdrawals range from 1,020 m3 per year in Central and Southern Asia to only 69.3 m3 per year in Oceania. - 47 countries face high levels of water stress, particularly in MENA, Central Asia, and South Asia. - Global withdrawal and consumption trends: - Global water withdrawals increased by over 25 percent during the past three decades—from 2.4 trillion m3 in 1990 to nearly 3 trillion m3 in 2020. - Blue water consumed globally is estimated at approximately 980 billion m3 in 2022. - Regional shares of blue water consumption (2022): Central and Southern Asia 43 percent, Eastern and South-Eastern Asia 19 percent, Europe and Northern America 18 percent. - Of total blue water consumed globally, approximately 570 billion m3 or 58 percent takes place in countries currently considered under high water scarcity. - Green water consumption estimated at 6,670 billion m3 in 2022; Europe and North America consume 27 percent of the global total, Eastern and South-Eastern Asia 23 percent, Central and Southern Asia 17 percent, Latin America and the Caribbean 15 percent. - 43 percent of total green water consumption (approximately 2,870 Gm3) takes place in countries considered under medium-high and high drought risk. - Drought and hydrological change: - Global land area affected by drought doubled between 1900 and 2020. - Since the 1980s, droughts have intensified; a 74 percent expansion in drought-affected land occurred between 2018 and 2022 relative to 1981–2017. - Approximately 80 percent of rain-fed cropland globally now experiences at least one month of agricultural drought annually (He and Rosa 2023). - Rivers globally experienced the lowest streamflow levels in 33 years in 2023. - Non-conventional water sources (2020): - Total desalinated water produced approximately 22.7 billion m3. - Direct use of treated municipal wastewater approximately 20.6 billion m3. - Combined about 1 percent of global total water withdrawal. - Climate-driven projections: - Water scarcity projected to worsen in approximately 80 percent of countries by the end of the 21st century, primarily due to population growth and rising per capita water demand. - IPCC AR6: high confidence that climate change has already altered the global water cycle. - Attribution studies: Amazon Basin drought (2023–2024) and Horn of Africa 2022 deficits show large increases in drought likelihood attributable to climate change. - Future warming scenarios: under 2°C of warming more regions projected to experience intensified droughts; at 4°C about half of inhabited regions expected to face increased drought risk. ### Macroeconomic and external-sector channels - Macroeconomic impacts overview: - Water scarcity, variability, and water quality degradation constrain productive capacity in agriculture, industry, and energy, causing lower potential growth, heightened inflationary pressures, and deterioration of external balances in water-stressed economies. - Virtual water and trade: - Examples of embedded water per product: - coffee: approximately 19,000 liters per kilogram of roasted beans - jeans: approximately 7,500-10,000 liters per pair - raw cotton: approximately 10,000 liters per kilogram - Global estimates: - total virtual blue water (embedded in exports and imports): 93 billion m3 per year - total virtual green water: 750 billion m3 per year - Selected entries from Table 1 (Top 10 Countries with Highest Virtual Blue Water in 2022) preserved exactly: - Rank 1 Exporter: United States — Virtual Blue Water Export: 57,083 (Million m3); Total Exports: 1,979 (Billion US$) - Rank 1 Importer: United States — Virtual Blue Water Import: 53,094 (Million m3); Total Imports: 3,175 (Billion US$) - India Export: 23,177 (Million m3); Total Exports: 475 (Billion US$) - China Export: 16,313 (Million m3); Total Exports: 3,645 (Billion US$) - Brazil Export: 12,087 (Million m3); Total Exports: 347 (Billion US$) - Thailand Export: 12,061 (Million m3); Total Exports: 335 (Billion US$) - Mexico Export: 11,919 (Million m3); Total Exports: 593 (Billion US$) - Spain Export: 10,892 (Million m3); Total Exports: 398 (Billion US$) - Australia Export: 10,756 (Million m3); Total Exports: 436 (Billion US$) - Egypt Export: 7,016 (Million m3); Total Exports: 58 (Billion US$) - Germany Export: 6,996 (Million m3); Total Exports: 1,600 (Billion US$) - Iraq Import: 38,082 (Million m3); Total Imports: 75 (Billion US$) - Egypt Import: 19,445 (Million m3); Total Imports: 103 (Billion US$) - China Import: 19,421 (Million m3); Total Imports: 2,158 (Billion US$) - India Import: 15,971 (Million m3); Total Imports: 726 (Billion US$) - Pakistan Import: 13,258 (Million m3); Total Imports: 80 (Billion US$) - Iran Import: 11,616 (Million m3); Total Imports: 55 (Billion US$) - Mexico Import: 9,903 (Million m3); Total Imports: 530 (Billion US$) - Saudi Arabia Import: 9,268 (Million m3); Total Imports: 187 (Billion US$) - Spain Import: 9,258 (Million m3); Total Imports: 482 (Billion US$) - Capital and financial-account impacts: - Lower foreign investment in natural resources and water-related assets; potential higher international borrowing and aid flows; changes in use of weather-linked financial instruments. ### GDP, drought empirical evidence, and sectoral exposure - Long-run projections and estimates: - Global Commission on the Economics of Water estimates GDP losses of up to 8 percent in high-income countries and 10–15 percent in lower-income countries. - Roson and Damania (2017) projections without water reallocation: average global GDP could decline by 0.19–0.24 percent (SSP1 and SSP3). - Roson (2017) estimates average global GDP losses of 0.37–0.49 percent. - Regional projections (no water reallocation): MENA could face GDP contractions of 11.8–12.2 percent (SSP3 and SSP1 respectively); South Asia 4.9–5.9 percent under SSP3 and SSP1 respectively. - Country-level projections cited: Burkina Faso projected GDP losses reaching 6.8 percent; Niger 11.9 percent; Dominican Republic 16.7 percent. - Drought empirical findings (preserved exactly): - Ortuzar et al. (2023): a 5 percent drop in water availability in key hotspot regions can lead to global GDP losses ranging from 0.1 percent (drought originating in India) to 0.47 percent (drought originating in China); country-specific GDP contractions reaching 2.8 percent (China) to 3.1 percent (India). - Akyapi, Bellon, and Massetti (2025): a positive one standard deviation in harsh drought exposure can reduce per capita GDP growth by 0.21–0.25 percentage points. - Fuje et al. (2023): severe droughts during key crop-growing months can reduce same-year GDP growth by 1.4 percentage points in developing economies and has no impact in advanced economies. - Felbermayr and Gröschl (2014): prolonged rainfall deficits (50 percent below the long-run monthly average for at least 3 consecutive months) can lower per capita GDP growth by 1.3 percentage points. - Tintchev and Jaramillo (2024): in FCSs under high-emissions scenarios, drought conditions could reduce annual GDP per capita growth by 0.32 percentage points in FCSs with debt levels above 60 percent of GDP, and by 0.35 percentage points in those with social spending below 1 percent of GDP. - Sectoral water intensity and corporate responses: - Direct blue water consumption constitutes approximately 90 percent of total blue water intensity for the agricultural sector. - Indirect blue water intensity (embedded via backward inter-industry linkages) dominates for all other industries. - CDP (2024) analysis of 3,163 large firms found approximately 50 percent of firms engaged in water related risk management; one in 5 firms disclose their water-related risks in supply chains. - Hydropower vulnerability: - Wan et al. (2021): a 1 in 10-year drought will cause annual hydropower production to decline by more than 20 percent in 67 out of 134 countries based on hydrological data 1975–2016. - Reduction exceeded 40 percent for 18 countries, larger reductions in Africa, MENA, and Central Asia. - CDRI (2023) analysis: of 20 countries with heavy reliance (>75 percent) on hydropower, 7 out of 20 would experience annual average hydropower production losses estimated at greater than 10 percent under a high emissions scenario. - Lesotho, Costa Rica, and Afghanistan: estimated annual average hydropower production losses of approximately 30 percent relative to expected production levels under no drought. ### Country cases and illustrative impacts - Ecuador 2024 electricity crisis (Box 1): - Hydropower accounted for approximately 75 percent of electricity generation in Ecuador. - Rainfall 43 percent lower than average during 2023-24 El Niño-induced drought. - Toll revenues reduced by US$100 million per month and GDP growth slowed. - Policy responses: boosting thermal generation through rented barges and turbines; reducing VAT on electric generators; subsidizing household electricity bills; temporary cash transfer program; electricity imports from Colombia resumed in late November. - Priorities: diversify generation mix, improve hydropower resilience, strengthen regional interconnections, account for contingent liabilities in fiscal frameworks, and equip social protection systems to respond swiftly. - Zambia 2023/24 drought (Box 2): - Drought affected 84 of 116 districts and impacted an estimated 9.8 million people, nearly half the population. - Agriculture output contraction: 20 percent in 2023 and 9 percent in 2024. - Hydropower (90 percent of generation) from Lake Kariba reduced to less than 10 percent of normal output; load shedding reached up to 21 hours per day. - Copper production declined by 23 percent in 2023. - Exports fell from 11.6 percent of GDP in 2022 to 4.9 percent in 2023; current account moved from surplus of 3.7 percent of GDP in 2022 to deficit of 3 percent of GDP in 2023. - Inflation averaged 15 percent in 2024, up from 11 percent in 2023 and 2022. - Drought-related maize and electricity imports added an estimated US$420 million in financing needs. - Authorities obtained multilateral and bilateral support, including a 30 percent of quota increase in IMF ECF access approved in June 2024. - Social protection: school transfer and emergency cash transfers accounted for K9.3 billion (1.3 percent of GDP); SCT doubled to K400 per month; ECT of K400 per month introduced; recipients of SCT rose to 2.3 million. - Policy lessons: need for climate adaptation investments, energy diversification, improved water management, irrigation, extension services, and climate information. ### Fiscal implications, NRW, and investment needs - Fiscal impacts from water-related risks: - Fuje et al. (2023): Moderate droughts (Palmer Drought Severity Index (PSDI) of –2 during crop-growing seasons) reduce government revenues by 0.5 percent of GDP globally and by 0.7 percent of GDP in EMDEs; no significant effect in advanced economies. - Akyapi, Bellon, and Massetti (2025): Exposure to severe droughts (PDSI below –3 or –4) increases expenditure-to-GDP ratios and contributes to widening fiscal deficits. - Pintus et al. (2024): short-term fiscal deterioration following precipitation shocks in Europe and the United States; effects tend to normalize within a business cycle. - Non-Revenue Water (NRW) and costs: - Global NRW averages 36 percent. - Estimated global volume of NRW is equivalent to the total annual freshwater withdrawals of Germany, France, Spain, Italy, and the United Kingdom combined. - Average economic cost conservatively valued at US$0.31 per m³ of water produced, with country group averages of: - US$0.37 in AEs - US$0.31 in EMs - US$0.24 in LICs - Economic losses from NRW are equivalent to 0.1 percent of global GDP. - Jordan (Box 3) fiscal pressures and projects: - Renewable freshwater availability: 61 m³ per capita in 2021, projected to fall to 35 m³ by 2040. - Over half of drinking water is lost as NRW. - In 2021, customers paid only one-third of the total cost of water and wastewater services. - Aqaba-Amman Conveyor (AAC) will deliver 300 million m³ of desalinated water annually from the Red Sea to Amman. - World Bank estimates of water sector debt by 2040: - 7.9 billion JD with the AAC and efficiency gains - 12.8 billion JD with the AAC without efficiency gains - Projected sector deficits range from 430 million JD to 798 million JD depending on reform progress. - Energy cost scenarios for treating and pumping water post-AAC: 96 fils/kwh (high) and 57 fils/kwh (low); high cost scenario (196 MJD/a) equals 3 times the cost of the Disi pipeline; 121 MJD/a equals 1.85 times the cost of the Disi pipeline. - Reform targets: NRW reduced from 50 percent in 2022 to 45 percent by end-2024; Roadmap aims for full O&M cost recovery by 2032 and full recovery including BOT capital charges by 2042; performance-based management contract for Yarmouk Water Company expected to be tendered by end of 2025. - Wastewater reuse targets: increase TWW use to 35 percent of freshwater by 2027 and 45 percent by 2030. - Investment and SDG costs: - Public spending on water averages just 0.6 percent of global GDP, with execution rates significantly below those of other sectors. - Investment needs to achieve SDGs by 2030 for water and sanitation goals estimated at: - 0.27 percent of GDP for EMs - 1.7 percent of GDP for LICs - Low-income countries require annual investments of 1.7 percent of GDP for water and sanitation alone. - Subsidies to cover operational and capital costs of water utilities in EMDEs range from 0.35 to 1.95 percent of GDP annually. ### Policy directions, pricing framework, and IMF engagement - Policy design considerations: - Balance economic efficiency (pricing, allocation) with equity and sustainability. - Design fiscal instruments to internalize environmental costs, promote conservation, and mobilize private finance while protecting vulnerable populations via targeted social protections. - Complement water pricing reforms with policies that rationalize water use in agriculture, trade, and energy and redirect gains toward protecting the poor. - Strengthen institutional capacity for integrated, data-driven policy frameworks and cross-border cooperation. - Integrated pricing framework (Box 4) — conceptual formula and elements preserved: - p_e = ∑w_i * r_i + ∑e_i(c_i) + ∑w_j * s_j + ∑e_j(c_j) + t + ∑S_i,j - r = unit cost of water resource abstraction from source i - s = unit cost of water supply process j - e = shadow price reflecting scarcity and externalities; assume e′(c) > 0 and convex - c = consumption/abstraction of water from source i or supply process j - w = weight associated with abstraction from source i or supply process j - t = unit cost of water transmission and distribution - S = unit producer subsidy to abstraction from source i or water supply process j - Central estimates of shadow prices surveyed: - US$0.50/m3 for irrigation. - US$1.45/m3 for domestic use in urban areas. - US$15.54/m3 for industrial use. - Meta-analysis findings: - Global economic value of groundwater quality is US$518 per hectare per annum on average. - Cost of water pollution in the European Union could be as high as US$12 per kilogram per year of nitrogen and phosphorus pollution. - IMF engagement and programmatic support: - Enhancing data collection and sharing; assessing macro-fiscal impacts and quantifying fiscal risks; promoting integration of water-related constraints into macroeconomic and development planning; providing technical advice on fiscal instruments, public investment management, water pricing and subsidy reform, and governance improvements. - RSF program integration: out of 26 RSF programs approved through July 2025, 16 countries include water-related reforms (examples: Benin, Cabo Verde, Mauritania, Pakistan, Egypt, Madagascar, Morocco, the Gambia, Jordan). ### Priority analytical work and policy focus - Integrating water shocks into fiscal risk assessments: - Develop and refine modeling tools to quantify fiscal impacts of droughts, floods, and long-term water scarcity on public spending, revenues, and contingent liabilities. - Explore use of artificial intelligence to enhance collection, integration, and analysis of water-related data and forecasting of water shocks. - Existing IMF tools include the Quantitative Climate Risk Assessment Fiscal Tool (Q-CRAFT) and the Debt-Investment-Growth and Natural Disasters (DIGNAD) model. - Balancing efficiency, equity, and sustainability in water pricing reform: - Clarify policy priorities and address social imbalances through complementary instruments such as well-designed social safety nets. - Economic pricing should reflect direct supply and infrastructure costs, scarcity, and externalities; distributive impact analyses are needed. - Adaptive water governance in climate-stressed countries: - Assess legal, financial, and policy frameworks that enable sound water management and adaptation. - Study experiences of climate-vulnerable and water-stressed countries to identify governance functions that support growth and macro-stability. *Source: Macro-Criticality of Water Resources — wpiea2025251-source-pdf* ### Introduction ........................................................................................................... ### Introduction ### Water's economic and social importance - Water is a vital source of life and a foundational input to economic activity, underpinning long-term development and supporting nearly every sector of the economy. - Water is one of the most critical factors of production, central to agriculture, industry, energy, and transport, and essential for the production of goods and services and the movement of people and commodities. - Access to safe water and sanitation is essential for poverty reduction, human health, and inclusive growth; ensuring availability and sustainable management for all would yield broad-based benefits. ### Key statistics and empirical facts (preserved verbatim) - The annual economic value of water and freshwater ecosystems is estimated at US$58 trillion, equivalent to about 60 percent of global gross domestic product (GDP); - The trade of agricultural products constitutes about 90 percent of the total virtual water, while international trade reduces global water use in agriculture by 5 percent; - Hydropower accounts for nearly 15 percent of global electricity generation; - Irrigation is key to improving food security but remains severely underdeveloped, with over 30 nations having less than 1 percent of cultivated land equipped for irrigation; - Universal access to safe drinking water and sanitation could prevent at least 1.4 million deaths annually, yet one in four people globally still lack access to safe drinking water; - The lack of access to water places a heavy economic burden on women and girls who spend 200 million hours daily collecting water; - More than 1,600 water-related conflicts have been identified since 2000 with significant increase over the decades; - Transboundary water systems account for 60 percent of global freshwater flows and over half of the world’s population lives in transboundary river and lake basins; - Over 80 percent of global trade by volume is transported by sea. ### Structural and analytical context provided in the chapter - Annex I contains key definitions used in this study. - The chapter frames water as a macro-critical resource with implications across the water value chain, macroeconomic impacts, external sector, GDP, sectoral impacts, and fiscal implications. - The study includes focused analyses on: Recent Trends and Climate Change Outlook; Water Value Chain; Macroeconomic Impacts; External Sector; GDP; Sectoral Impacts; Fiscal Implications (including Fiscal Impacts from Water-Related Risks, Spending Needs, Water-Related Spending, SDG Costs, Adaptation Spending Needs, Subsidies, Non-Revenue Water); and IMF Engagement on Water. - The chapter is supported by figures and tables that map global classifications, regional contributions to blue and green water consumption, projected changes in water stress under climate change, water value-chain linkages to macro-fiscal outcomes, water intensity of economic activities, impacts of severe droughts on government expenditure, public spending in the water sector, additional SDG 6 spending needs, water investment as a share of adaptation finance, subsidies to water utility companies, levels and costs of non-revenue water (NRW), and RSF reform measures related to water. ### Key implications highlighted - Water’s estimated annual economic value (US$58 trillion) underscores its centrality to global GDP and the potential macroeconomic stakes of water-related risks. - International trade affects agricultural water use (trade reduces global water use in agriculture by 5 percent) and virtual water flows are dominated by agricultural product trade (about 90 percent of total virtual water). - Underinvestment in irrigation (over 30 nations with less than 1 percent of cultivated land equipped for irrigation) points to unrealized potential for food security improvements. - Persistent gaps in access to safe drinking water (one in four people lacking access) and sanitation have direct health consequences (could prevent at least 1.4 million deaths annually) and large social costs (200 million hours daily spent by women and girls collecting water). - Transboundary water dependence (60 percent of freshwater flows; over half of world’s population in transboundary basins) highlights the need for international cooperation and governance mechanisms. *Source: Introduction — wpiea2025251-source-pdf* ### 2023. iris.who.int/bitstream/handle/10665/370026/9789240075610-eng.pdf?sequence=1 ### Macro-Criticality of Water Resources ### Overview and Purpose - Examines macro-criticality of water resources and macro-fiscal implications. - Objectives: - Map channels through which water resources affect macro-fiscal and balance of payments positions and provide estimates of relationships between key macro-fiscal and water-related indicators. - Develop understanding of macro-fiscal exposure to water scarcity and drought risks based on empirical evidence. - Proposes “water value chain” as an integrated framework for analyzing macro-criticality and the public sector’s role across the life cycle of water, including total economic value, market failures at different stages, and need for granular, context-specific policy interventions and macro-fiscal assessment. ### Rationale for Public Sector Intervention / Related Literature - Conceptual foundation: water as an economic good per the 1992 Dublin Statement on Water and Sustainable Development (ICWE 1992), with multiple use and non-use values requiring balance between economic efficiency, equity, and sustainability. - Key thematic findings from cross-disciplinary literature: - Hydrology, ecology, engineering, public health, development, and economics each contribute distinct insights into water management and its socioeconomic implications. - UN SDG 6 underscores centrality of water to human development; despite progress most countries are not spending enough (Gaspar et al. 2019). - World Bank findings: water-related shocks can reduce GDP growth, increase fiscal pressures, and heighten social tensions; calls for “water-smart” growth strategies and adaptive infrastructure, data systems, and cross-border cooperation. - Global Commission on the Economics of Water (GCEW, 2023) calls for reevaluation of the water cycle as a global common good, full-cost pricing with targeted social protections, and mobilization of public and private finance. - Fiscal instruments and public finance: - Majority of investment needs expected to be provided by the public sector, but public sector faces low budget execution, large subsidies, and declining efficiency (Joseph et al., 2024; Andres et al., 2019). - Taxes, tariffs, and subsidies can internalize environmental costs and mobilize finance but risk inequality and political resistance if poorly designed (OECD 1997; OECD 1999; OECD 2003). - Prior IMF work: Kochhar and others (2015) emphasized incentives, water pricing reform, integrated approaches across agriculture, trade, and energy, and macro-fiscal risks of water shocks. - Identified knowledge gaps: - Scattered evidence limits integrated macro-fiscal policy interventions across the water value chain. - While relationship between water scarcity, drought, and GDP is relatively well established, other macro-fiscal dimensions—fiscal risks, public investment needs, institutional capacity—remain underexplored. ### Recent Trends and Key Statistics - Geographic and per-capita disparities: - Per capita renewable water availability ranges from approximately 43,500 cubic meters (m3) per year in Australia and New Zealand to just 1,420 m3 per year in Northern Africa and Western Asia. - Per capita water withdrawals range from 1,020 m3 per year in Central and Southern Asia to only 69.3 m3 per year in Oceania. - 47 countries face high levels of water stress, particularly in MENA, Central Asia, and South Asia. - Global withdrawal and consumption trends: - Global water withdrawals increased by over 25 percent during the past three decades—from 2.4 trillion m3 in 1990 to nearly 3 trillion m3 in 2020. - Blue water consumed globally is estimated at approximately 980 billion m3 in 2022. - Regional shares of blue water consumption (2022): Central and Southern Asia 43 percent, Eastern and South-Eastern Asia 19 percent, Europe and Northern America 18 percent. - Of total blue water consumed globally, approximately 570 billion m3 or 58 percent takes place in countries currently considered under high water scarcity. - Green water consumption estimated at 6,670 billion m3 in 2022; Europe and North America consume 27 percent of the global total, Eastern and South-Eastern Asia 23 percent, Central and Southern Asia 17 percent, Latin America and the Caribbean 15 percent. - 43 percent of total green water consumption (approximately 2,870 Gm3) takes place in countries considered under medium-high and high drought risk. - Drought and hydrological changes: - Global land area affected by drought doubled between 1900 and 2020. - Since the 1980s, droughts have intensified; a 74 percent expansion in drought-affected land occurred between 2018 and 2022 relative to 1981–2017. - Approximately 80 percent of rain-fed cropland globally now experiences at least one month of agricultural drought annually (He and Rosa 2023). - Rivers globally experienced the lowest streamflow levels in 33 years in 2023. - Non-conventional water sources (2020): - Total desalinated water produced approximately 22.7 billion m3. - Direct use of treated municipal wastewater approximately 20.6 billion m3. - Combined about 1 percent of global total water withdrawal. - Climate-driven projections and attribution: - Water scarcity projected to worsen in approximately 80 percent of countries by the end of the 21st century, primarily due to population growth and rising per capita water demand. - IPCC AR6: high confidence that climate change has already altered the global water cycle (increased atmospheric moisture, rainfall intensity, evapotranspiration, glacial melt). - Attribution studies: - 2023–2024 Amazon Basin drought: climate change increased likelihood of meteorological drought tenfold and agricultural drought thirtyfold. - 2022 Horn of Africa long-rain season precipitation deficit: climate change made the deficit 2–7 times more likely, with dryness increasing by 8–26 percent. - Future warming scenarios: - Under 2°C of warming (continuation of current trends), more regions projected to experience intensified agricultural and ecological droughts; Mediterranean, Southern Africa, South America, and Sub-Saharan Africa particularly vulnerable. - At 4°C of warming, about half of all inhabited regions globally are expected to face increased drought risk; only a few regions, such as Northeast Africa and South Asia, may experience some relief. - Regional megatrends: - Southwestern North America: megadrought likely worst in 1,200 years (Williams et al., 2020). - Sahel: up to 25 percent rainfall reductions by 2100 under high-emissions scenarios (IPCC AR6 WG1 Chapter 11). - MENA: megadroughts now three times more likely due to climate change. - 2023/2024 Amazon drought highlights Central and South America vulnerability. ### Macro-Fiscal Channels and Institutional Challenges - Water management affects macroeconomic and fiscal performance via: - Direct impacts on economic activity and livelihoods, creating additional spending and investment needs in infrastructure, health, and social assistance during severe/prolonged scarcity and drought. - Risks to government revenues and expenditures from water sector policies and resource status. - Balance of payments implications through effects on production, trade, and resource-dependent sectors. - Institutional and governance gaps: - Most countries lack public sector capacities for integrated water resources management (UN Water 2024). - Water institutions often fragmented; some countries lack basic mandates to regulate key activities like water services provision. - In many developing countries, vicious cycle of under-investment, infrastructure deterioration, poor service quality, and low revenue collection hampers equitable and reliable access. - Need for integrated macro-fiscal planning: - Paper emphasizes integrating water risks into macro-fiscal planning and policy decisions, using the water value chain framework to identify market failures and tailor policy interventions. ### Frameworks, Gaps, and Policy Directions - Proposed approach: - Water value chain as an integrated framework to analyze total economic value, stages of market failure, and macro-fiscal implications across the life cycle of water. - Policy design considerations: - Balance economic efficiency (pricing, allocation) with equity and sustainability. - Design fiscal instruments (taxes, tariffs, subsidies) to internalize environmental costs, promote conservation, and mobilize private finance while protecting vulnerable populations. - Complement water pricing reforms with policies that rationalize water use in agriculture, trade, and energy and redirect gains toward protecting the poor. - Strengthen institutional capacity for integrated, data-driven policy frameworks and cross-border cooperation. - Research and operational priorities: - Address underexplored macro-fiscal dimensions: fiscal risks, public investment needs, institutional capacity. - Leverage advances in climate and hydrological science, empirical and modeling evidence, and IMF-supported operations and capacity development to inform reforms. *IMF WORKING PAPERS — Macro-Criticality of Water Resources, INTERNATIONAL MONETARY FUND* ### section 4, blue and green water underpin macro-critical water consuming sectors including agriculture, energy ### section 4, blue and green water underpin macro-critical water consuming sectors including agriculture, energy ### Water value chain and fiscal-policy role - The water value chain traces stages in which water becomes usable and useful resources in an economy and where costs and benefits arise to affect macroeconomic and fiscal outlooks. - Starting from blue and green water as the natural resource base, one can systematically diagnose the state of water, fiscal policy, and macroeconomy interactions. - Water supply-demand imbalances manifest in various forms and to varying degrees in each stage of the value chain (examples provided in the source): - groundwater depletion and contamination - low flows of transboundary river - aging and inadequate public infrastructure - water pollution and overconsumption - The water value chain is a framework for determining economic values of water and policy interventions to target market failures and/or externalities along the value chain. - The public sector’s role (as noted in section 5 of the source) includes: - ensuring sustainable use of surface and ground water resources - providing adequate supply through public investment - creating an enabling environment for private sector participation - promoting efficiency improvement in end-use sectors ### Macroeconomic impacts — overview - Water-related risks are increasingly macro-critical, with direct implications for: - economic performance - external stability - Water scarcity, variability, and water quality degradation can constrain productive capacity, particularly in: - agriculture - industry - energy - Consequences include: - lower potential growth - heightened inflationary pressures - in water-stressed economies, deterioration of external balances due to rising food and energy imports ### External sector transmission channels and virtual water statistics - Significant water is embedded in traded goods; greater water scarcity and drought can reduce net exports of water-intensive goods. - Examples of water embedded per product (as stated in the source): - coffee: approximately 19,000 liters per kilogram of roasted beans - jeans: approximately 7,500-10,000 liters per pair - raw cotton: approximately 10,000 liters per kilogram - Global estimates of virtual water: - total virtual blue water (blue water embedded in final demand exports and imports): 93 billion m3 per year - total virtual green water: 750 billion m3 per year - Table 1 (Top 10 Countries with Highest Virtual Blue Water in 2022) — selected entries preserved exactly: - Rank 1 Exporter: United States — Virtual Blue Water Export: 57,083 (Million m3); Total Exports: 1,979 (Billion US$) - Rank 1 Importer: United States — Virtual Blue Water Import: 53,094 (Million m3); Total Imports: 3,175 (Billion US$) - Other notable entries (exactly as listed): - India Export: 23,177 (Million m3); Total Exports: 475 (Billion US$) - China Export: 16,313 (Million m3); Total Exports: 3,645 (Billion US$) - Brazil Export: 12,087 (Million m3); Total Exports: 347 (Billion US$) - Thailand Export: 12,061 (Million m3); Total Exports: 335 (Billion US$) - Mexico Export: 11,919 (Million m3); Total Exports: 593 (Billion US$) - Spain Export: 10,892 (Million m3); Total Exports: 398 (Billion US$) - Australia Export: 10,756 (Million m3); Total Exports: 436 (Billion US$) - Egypt Export: 7,016 (Million m3); Total Exports: 58 (Billion US$) - Germany Export: 6,996 (Million m3); Total Exports: 1,600 (Billion US$) - Iraq Import: 38,082 (Million m3); Total Imports: 75 (Billion US$) - Egypt Import: 19,445 (Million m3); Total Imports: 103 (Billion US$) - China Import: 19,421 (Million m3); Total Imports: 2,158 (Billion US$) - India Import: 15,971 (Million m3); Total Imports: 726 (Billion US$) - Pakistan Import: 13,258 (Million m3); Total Imports: 80 (Billion US$) - Iran Import: 11,616 (Million m3); Total Imports: 55 (Billion US$) - Mexico Import: 9,903 (Million m3); Total Imports: 530 (Billion US$) - Saudi Arabia Import: 9,268 (Million m3); Total Imports: 187 (Billion US$) - Spain Import: 9,258 (Million m3); Total Imports: 482 (Billion US$) - Capital and financial accounts impacts outlined: - lower foreign investment in natural resources and water-related assets - lower direct foreign investment or portfolio investment in water-related private enterprises - higher international borrowing (external debt or trade credits) and aid flows to cover current account or budget impacts from water scarcity/drought - potential changes in the use of finance derivative weather-linked instruments depending on financial sector and insurance prevalence ### GDP and economy-wide projections - By 2050, water scarcity driven by altered precipitation patterns, rising temperatures, and increasing water demand is projected to significantly impact global economic output. - Selected estimates and projections from the source: - Global Commission on the Economics of Water estimates GDP losses of up to 8 percent in high-income countries and 10–15 percent in lower-income countries. - Roson and Damiana (2017) projections without water reallocation: average global GDP could decline by 0.19–0.24 percent (SSP1 and SSP3). - Roson (2017) estimates average global GDP losses of 0.37–0.49 percent. - Regional projections (no water reallocation, as reported): - MENA region could face GDP contractions of 11.8–12.2 percent (SSP3 and SSP1 with no water reallocation, respectively) - South Asia: 4.9–5.9 percent under SSP3 and SSP1 scenarios, respectively, with no water reallocation - Country-level projections cited: - Burkina Faso: projected GDP losses reaching 6.8 percent under dry and pessimistic climate scenarios (World Bank 2024a) - Niger: projected GDP losses reaching 11.9 percent - Dominican Republic: projected GDP losses reaching 16.7 percent ### Drought impacts and empirical findings - Droughts produce both direct and indirect economic consequences; selected empirical findings preserved exactly: - Ortuzar et al. (2023): a 5 percent drop in water availability in key hotspot regions can lead to global GDP losses ranging from 0.1 percent (drought originating in India) to 0.47 percent (drought originating in China); country-specific GDP contractions reaching 2.8 percent (China) to 3.1 percent (India). - Akyapi, Bellon, and Massetti (2025): a positive one standard deviation in harsh drought exposure can reduce per capita GDP growth by 0.21–0.25 percentage points. - Fuje et al. (2023): severe droughts during key crop-growing months can reduce same-year GDP growth by 1.4 percentage points in developing economies and has no impact in advanced economies. - Felbermayr and Gröschl (2014): prolonged rainfall deficits (50 percent below the long-run monthly average for at least 3 consecutive months) can lower per capita GDP growth by 1.3 percentage points. - Tintchev and Jaramillo (2024): in FCSs under high-emissions scenarios, drought conditions could reduce annual GDP per capita growth by 0.32 percentage points in FCSs with debt levels above 60 percent of GDP, and by 0.35 percentage points in those with social spending below 1 percent of GDP. ### Sectoral impacts and water intensity - Global average direct and indirect blue water intensity of economic activities: - Direct blue water consumption constitutes approximately 90 percent of total blue water intensity for the agricultural sector. - Indirect blue water intensity (embedded via backward inter-industry linkages) dominates for all other industries. - Corporate responses to water risk (CDP 2024 analysis of 3,163 large firms with annual revenue exceeding US$250 million): - approximately 50 percent of firms are engaged in water related risk management (examples: inclusion of water related aspects in procurement requirements and collection of water data) - one in 5 firms disclose their water-related risks in supply chains - Water as a critical input (primarily through non-consumptive use) to: - energy production - mining - maritime transport - Hydropower vulnerability and illustrative estimates: - Wan et al. (2021): a 1 in 10-year drought will cause annual hydropower production to decline by more than 20 percent in 67 out of 134 countries based on hydrological data 1975–2016. - Estimated reduction exceeded 40 percent for 18 countries, with larger reductions in Africa, MENA, and Central Asia. - CDRI (2023) analysis of 20 countries with heavy reliance (>75 percent) on hydropower: under a high emissions scenario, 7 out of 20 countries would experience annual average hydropower production losses estimated at greater than 10 percent of production due to droughts. - Lesotho, Costa Rica, and Afghanistan: among the most exposed, experiencing estimated annual average hydropower production losses of approximately 30 percent relative to expected production levels under no drought. - Recent country example and economic consequences: - Panama during the 2023-24 El Niño-induced drought: rainfall 43 percent lower than average; cargo ships forced to wait for weeks; restrictions on ship depths; special auctioning system for shippers; toll revenues reduced by US$100 million per month and GDP growth slowed (Reuters, 2024). - Additional sector impacts: - shifts in water availability impact mining and industrial processing, though magnitude is less understood due to limited evidence (Caretta et al. 2022) ### Illustrative case — Ecuador 2024 electricity crisis (Box 1) - Context and key facts (as presented in the source): - In late 2024, Ecuador experienced the most intense drought in decades that triggered a severe electricity crisis. - Hydropower accounted for approximately 75 percent of electricity generation in Ecuador. - The sharp decline in river flows curtailed hydroelectric output, leading to nationwide blackouts beginning in September. - Policy responses implemented by authorities: - boosting thermal generation through rented barges and turbines - reducing VAT on electric generators - subsidizing household electricity bills - launching a temporary cash transfer program - electricity imports from Colombia resumed in late November - Structural vulnerabilities highlighted: - hydropower dominance exposes the system to hydrological variability intensified by climate change and El Niño events - operational challenges at key facilities, including Coca Codo Sinclair, which lacks a reservoir and is undergoing repairs that limit its capacity - a persistent structural deficit in electricity generation, particularly during the dry season - a growing mismatch between supply and rising demand, especially from industry *Source: IMF staff, section 4 of the PDF chapter titled "Macro-Criticality of Water Resources" (IMF Working Papers).* ### Box 1. Ecuador: Macroeconomic Implications of the 2024 Electricity Crises (continued) ### Box 1. Ecuador: Macroeconomic Implications of the 2024 Electricity Crises (continued) ### Macroeconomic implications of the 2024 electricity crisis - The electricity crisis weighed on export performance in Q4 2024 and increased reliance on high-cost electricity imports. - The crisis underscores the need to integrate climate risks into macroeconomic and structural policy frameworks. - Critical priorities to reduce vulnerability to climate shocks: - Diversification of the generation mix. - Improving the resilience of hydropower infrastructure. - Strengthening regional interconnections. - Social and fiscal policy implications: - Fiscal frameworks should account for contingent liabilities arising from climate-related disruptions. - Social protection systems must be equipped to respond swiftly to mitigate the impact on vulnerable households. - Overall policy objective: safeguard macroeconomic stability and support Ecuador’s transition to a more resilient and inclusive growth path. *Sources: World Bank CCDR (2024b), IMF Ecuador Article IV 2024, IMF Selected Issue Paper “Securing Electricity Sufficiency and Reliability”.* ### Fiscal implications #### Fiscal Impacts from Water-Related Risks - Fiscal impacts (to revenue, expenditure, and other fiscal variables, such as public debt) arising from water scarcity and drought have been less studied than other macroeconomic variables. - Recent empirical evidence highlights fiscal vulnerabilities associated with drought shocks, particularly in emerging markets and developing economies (EMDEs). #### Empirical findings from cross-country and country studies - Fuje et al. (2023): - Moderate droughts (Palmer Drought Severity Index (PSDI) of –2 during crop-growing seasons) reduce government revenues by 0.5 percent of GDP globally. - In EMDEs the revenue impact is 0.7 percent of GDP. - No significant effect in advanced economies. - In fiscally constrained EMDEs, droughts also lead to a decline in public spending and deteriorate fiscal balances, especially when access to official development assistance is limited. - Akyapi, Bellon, and Massetti (2025): - Exposure to severe droughts (PDSI below –3 or –4) increases expenditure-to-GDP ratios and contributes to widening fiscal deficits, with the magnitude of impact varying by country exposure. - Note: Figure 7 reports the direct impact of drought on additional expenditure; governments may face significant indirect/opportunity costs when reallocating expenditures away from priority items (such as infrastructure and social spending) toward emergency response. - Pintus et al. (2024): - Studying Europe and the United States, document short-term fiscal deterioration following precipitation shocks, including a temporary increase in deficits and debt, though effects tend to normalize within a business cycle. #### Visualization and referenced material - Figure 7: Impact of Severe Droughts on Government Expenditure (Percent of GDP) — Source: IPCC; Akyapi, Bellon, and Massetti (2025); and IMF staff calculations. ### Box 2. Zambia: Fiscal Challenges Amid the 2023/24 Drought - Zambia experienced its most severe drought in over 40 years, triggered by an El Niño-induced dry spell during the 2023–2024 agricultural season and prolonged drought conditions into 2024. - The crisis affected 84 of the country’s 116 districts—primarily in the Southern, Eastern, and Western regions. - The drought impacted an estimated 9.8 million people, nearly half of the population. - Sources for Zambia box: - Ministry of Green Economy and Environment. Zambia: 2023/24 rainfall deficit situation. Lusaka. [Cited on July 20th, 2024]. Internal document. - Zambian authorities and IMF staff calculations. *IMF Working Paper excerpt: Macro-Criticality of Water Resources — INTERNATIONAL MONETARY FUND* ### Box 2. Zambia: Fiscal Challenges Amid the 2023/24 Drought (Continued) ### Box 2. Zambia: Fiscal Challenges Amid the 2023/24 Drought (Continued) ### Overview of the drought event - The 2023–2024 drought is described as one of the most severe experienced by Zambia, disrupting agriculture, livestock, energy, and mining, and worsening food security and health. - The President declared the prolonged drought a national disaster on February 29th, 2024. ### Agricultural and energy impacts - The drought destroyed large parts of Zambia’s maize crop, resulting in: - 20 percent contraction in agriculture output in 2023. - 9 percent contraction in agriculture output in 2024. - Hydropower generation (which accounts for 90 percent of the country’s power generation) was severely impacted by low water levels in Lake Kariba, which covers around 80 percent of the country’s electricity supply. - Generation from Lake Kariba was reduced to less than 10 percent of normal output. - Load shedding reached up to 21 hours per day, severely disrupting essential services, businesses, and households. - Copper production declined by 23 percent in 2023. ### External sector and inflation effects - Exports fell from 11.6 percent of GDP in 2022 to 4.9 percent in 2023. - The current account balance moved from a surplus of 3.7 percent of GDP in 2022 to a deficit of 3 percent of GDP in 2023. - Inflation averaged 15 percent in 2024, up from 11 percent in 2023 and 2022, driven by: - rising food and fuel costs, - emergency electricity tariff hikes, - previous depreciation of the exchange rate. ### Fiscal impacts, revenue, and financing - Mining royalties dropped from 2.1 percent of GDP in 2022 to 1.4 percent of GDP in 2023, before rising 27 percent in 2024 due to increased copper production and exports. - Drought-related maize and electricity imports added an estimated US$420 million in financing needs. - Authorities secured multilateral and bilateral support, including a 30 percent of quota increase in IMF ECF access approved in June 2024, to help ease fiscal and external financing pressures. - The Government revised the 2024 budget to prioritize humanitarian aid, early recovery, and resilience efforts and reduced investment spending. - The budget outturn for 2024 was better than expected from the revised budget, helped by significantly stronger-than-projected growth, but with lower overall financing and generally constrained spending; social spending targets were achieved. ### Social protection and targeted emergency spending - Disaggregated budget data is mainly available for school transfer and emergency cash transfers (ECT), accounting for K9.3 billion (1.3 percent of GDP). - Social cash transfer (SCT) was doubled to K400 per month via a drought-related top-up. - An emergency cash transfer (ECT) of K400 per month was introduced for households severely affected by the drought. - Total number of recipients of SCT rose to 2.3 million. - Additional spending covered: - school feeding programs (expanded to cover an additional 37 districts—106 out of 116), - water resource management, - livestock disease control. ### Energy policy responses and sector prioritization - In 2024, amid power shortages, authorities approved an emergency electricity tariff increase and boosted electricity and oil imports. - Electricity access was prioritized for the mining sector and large corporations to support critical economic activity. - The government shifted to alternative energy sources, including imported diesel, to sustain growth in mining, construction and other sectors; households bore the brunt of load shedding. ### Policy lessons and priorities for resilience - The drought underscores the urgent need for: - climate adaptation investments, - energy diversification to reduce dependence on hydropower, - improved water management, - irrigation, - extension services, - climate information to support sustainable, inclusive growth, - broader reforms to ensure a reliable energy supply for businesses, expand rural energy access, and strengthen climate resilience. *Source: IMF, Zambia Third, Fourth, and Fifth Reviews 2023-2025; World Bank, Poverty Equity Brief, October 2024; World Bank Country Partnership Framework. 2024; Declaration of Drought as A National Disaster and Emergency. – cabinet office* ### 1.95 percent of GDP annually. ### 1.95 percent of GDP annually. ### Non-Revenue Water (NRW) — levels and costs - Global NRW averages 36 percent. - The estimated global volume of non-revenue water is equivalent to the total annual freshwater withdrawals of Germany, France, Spain, Italy, and the United Kingdom combined. - The average economic cost is conservatively valued at US$0.31 per m³ of water produced, with country group averages of: - US$0.37 in AEs - US$0.31 in EMs - US$0.24 in LICs - Economic losses from NRW are equivalent to 0.1 percent of global GDP. ### Jordan: scarcity, fiscal pressures, and sustainability (Box 3) - Scarcity and projections: - Renewable freshwater availability: 61 m³ per capita in 2021, projected to fall to 35 m³ by 2040. - Operational and financial status: - Over half of drinking water is lost as NRW. - In 2021, customers paid only one-third of the total cost of water and wastewater services. - Major infrastructure and financing: - Aqaba-Amman Conveyor (AAC) project will deliver 300 million m³ of desalinated water annually from the Red Sea to Amman. - World Bank estimates of water sector debt by 2040: - 7.9 billion JD with the AAC and efficiency gains - 12.8 billion JD with the AAC without efficiency gains - Projected sector deficits range from 430 million JD to 798 million JD depending on reform progress. - Energy cost scenarios for treating and pumping water post-AAC: 96 fils/kwh (high) and 57 fils/kwh (low); high cost scenario (196 MJD/a) equals 3 times the cost of the Disi pipeline; 121 MJD/a equals 1.85 times the cost of the Disi pipeline. - Reform agenda and targets: - Water Sector Financial Sustainability Roadmap (FSR) adopted in 2022. - NRW reduced from 50 percent in 2022 to 45 percent by end-2024. - Revised tariff plan published out to 2028. - Under the IMF’s Resilience and Sustainability Facility (RSF), Jordan will update the FSR by early 2027, maintaining an annual NRW reduction target of at least 2 percentage points on average. - Roadmap aims for full operational and maintenance (O&M) cost recovery by 2032 and full recovery including BOT capital charges by 2042. - A performance-based management contract for Yarmouk Water Company (YWC) is expected to be tendered by end of 2025. - Wastewater and reuse: - Jordan supplies about one-quarter of irrigation water from treated wastewater (TWW). - Authorities plan to tender five-year O&M contracts for at least 50 percent of national wastewater treatment capacity (excluding As-Samra) by May 2027. - Targets to increase TWW use to 35 percent of freshwater by 2027 and 45 percent by 2030. ### IMF engagement and programmatic support - The IMF’s role includes: - Enhancing data collection and sharing. - Assessing macro-fiscal impacts and quantifying fiscal risks. - Promoting integration of water-related constraints into macroeconomic and development planning. - Providing technical advice on fiscal instruments, public investment management, water pricing and subsidy reform, and governance improvements. - RSF program integration: - Out of the 26 RSF programs approved through July 2025, 16 countries include water-related reforms. - Water-related reforms addressed in RSF programs include: - Water pricing reforms (urban and rural) - Management and allocation of water resources (including data-sharing) - Financial sustainability and management of the water sector - Examples of country support: Benin, Cabo Verde, Mauritania, Pakistan, Egypt, Madagascar, Morocco, the Gambia, and Jordan. ### Macroeconomic impacts, vulnerabilities, and financing needs (Conclusions) - Historical and climatic trends: - Global water withdrawals have risen by over 25 percent in the past three decades. - Atmospheric evaporative demand has increased by 40 percent since the 1980s. - Almost 50 countries face high water stress. - Economic impacts of drought and scarcity: - Droughts can lead to GDP losses of up to 3 percentage points in countries like India and China. - Droughts can lead to GDP losses of 1.4 percentage points in developing economies during key crop-growing months. - Moderate droughts reduce government revenues by 0.5–0.7 percent of GDP in EMDEs. - Severe droughts increase expenditure-to-GDP ratios and widen fiscal deficits. - Sectoral exposure: - Agriculture consumes 98 percent of blue water in low-income countries and is particularly vulnerable. - Downstream industries such as food processing and textiles are exposed through inter-industry linkages. - Fiscal and investment statistics: - In EMDEs, subsidies to cover operational and capital costs of water utilities range from 0.35 to 1.95 percent of GDP annually. - Public spending on water averages just 0.6 percent of global GDP, with execution rates significantly below those of other sectors. - Investment needs for water and sanitation to meet SDGs and climate adaptation: - Low-income countries require annual investments of 1.7 percent of GDP for water and sanitation alone. - Infrastructure spending needs to achieve SDGs by 2030 for water and sanitation goals estimated at: - 0.27 percent of GDP for EMs - 1.7 percent of GDP for LICs ### Priority areas for further analytical work and policy focus - Integrating water shocks into fiscal risk assessments: - Develop and refine modeling tools to quantify fiscal impacts of droughts, floods, and long-term water scarcity on public spending, revenues, and contingent liabilities. - Explore the use of artificial intelligence to enhance collection, integration, and analysis of water-related data and forecasting of water shocks. - Existing IMF tools include the Quantitative Climate Risk Assessment Fiscal Tool (Q-CRAFT) and the Debt-Investment-Growth and Natural Disasters (DIGNAD) model. - Balancing efficiency, equity, and sustainability in water pricing reform: - Clarify policy priorities and address social imbalances through complementary instruments such as well-designed social safety nets. - Economic pricing should reflect direct supply and infrastructure costs, scarcity, and externalities, while distributive impact analyses assess feasibility and equity implications. - Adaptive water governance in climate-stressed countries: - Assess legal, financial, and policy frameworks that enable sound water management and adaptation. - Study experiences of climate-vulnerable and water-stressed countries to identify governance functions that support growth and macro-stability. ### Integrated approach to water pricing (Box 4) - Conceptual framework for efficient price of water, p_e: - p_e = ∑w_i * r_i + ∑e_i(c_i) + ∑w_j * s_j + ∑e_j(c_j) + t + ∑S_i,j - Definitions: - r = unit cost of water resource abstraction from source i - s = unit cost of water supply process j - e = shadow price reflecting scarcity and externalities; assume e′(c) > 0 and convex - c = consumption/abstraction of water from source i or supply process j - w = weight associated with abstraction from source i or supply process j - t = unit cost of water transmission and distribution - S = unit producer subsidy to abstraction from source i or water supply process j - Fiscal policy roles highlighted: 1. Setting appropriate prices/cost structures for resource abstraction (r) and water supply sectors (s), accounting for external costs (e). 2. Providing right incentives and/or targeted subsidies (S) for certain water supply sectors. 3. Establishing end-use water tariff p_k at the level that fully recovers the economic cost of water, p_e. *Source: wpiea2025251-source-pdf* ### Box 4. Integrated Approach to Water Pricing (Continued) ### Box 4. Integrated Approach to Water Pricing (Continued) ### Integrated pricing framework and applications - The aggregate measure p_e provides the economic cost of water across the value chain in an integrated manner. - The same framework can be applied to specific sub-sectors (for example, an irrigation scheme, groundwater, or urban water supply). - Hypothetical case illustrated: - p_e > p_k indicates the existence of implicit and explicit subsidies. - In that case, the producer recovers financial costs, but the end-user price does not internalize scarcity and externalities. - When p_e = p_k, the end-user price is set at the efficient price, allowing full economic cost recovery. ### Valuing water scarcity and externalities - Valuing water scarcity and externalities are key elements of establishing an efficient water price. - Central estimates of shadow prices of water (based on around 30 studies surveyed by this paper): - US$0.50/m3 for irrigation. - US$1.45/m3 for domestic use in urban areas. - US$15.54/m3 for industrial use. - Environmental damages from abstraction and production include water contamination and discharge of pollutants. - Emerging literature on externalities: - Meta-analysis of about 200 studies: global economic value of groundwater quality is US$518 per hectare per annum on average (Brouwer and Neverre 2020). - Cost of water pollution in the European Union is expected to be as high as US$12 per kilogram per year of nitrogen and phosphorus pollution (EC 2021). ### Measuring economic cost of water and water subsidy - The Figure (in the source) illustrates how p_e and p_k relate to subsidies and economic cost recovery. - Source for the Box: IMF staff. *IMF Working Papers — Macro-Criticality of Water Resources* ### Annex III. Methodology for Input-Output Analysis ### Annex III. Methodology for Input-Output Analysis ### Data source and scope - Main data source: the multi-region multi-sector input-output Eora database (https://worldmrio.com/). - Coverage: 186 countries, each region, and satellite data of blue, green and grey water consumption. - Aggregation for analysis: estimated 26-industry models for ease of interpretation. ### MRIO framework and Leontief formulation - Approach: multi-regional input-output (MRIO) model as described by Zhang et al (2011), with water consumption and water intensity included as primary inputs alongside monetary trade. - Fundamental accounting identities reproduced from the source: - X_i = ∑_{j=1}^{n} x_{ij} + y_i - X = A X + Y - X = (I − A)^{-1} Y - Definitions of variables as given: - X_i is the gross economic output of industry i. - n is total number of industries. - x_{ij} records the outputs from industry i to industry j. - y_i is the final demand of industry i. - X is the vector of total outputs. - A represents the technical coefficients matrix. - Y records the vector of final demands. - After solving X, obtain the Leontief inverse matrix (I − A)^{-1}. ### Water intensity definitions and calculations - Direct blue water intensity: - direct_i = water consumption_i / X_i - Interpreted as blue water consumption per monetary unit of production for industry i in a country (blue water intensity defined as blue water consumption by one monetary unit of production). - Gross (upstream-inclusive) water consumption using the Leontief inverse: - gross_i = ∑ direct_i × (I − A)^{-1} - Indirect water intensity: - indirect_i = gross_i − direct_i - Interpreted as the upstream indirect water consumption attributable to an industry's production via inter-industry linkages. *Source: Annex III. 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