A Possible Approach to Fiscal Rules in Small Islands — Incorporating Natural Disasters and Climate Change
IMF Working Papers, September 6, 2019
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Bibliographic details
- Authors: Ryota Nakatani
- Published: September 6, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513511047.001
Major challenge and scope
- Focus: small island countries facing external shocks (natural disasters, climate change, commodity price changes, uncertain donor grants).
- Geographic example used: Papua New Guinea.
- Research objective: analyze how natural disasters affect long-term debt dynamics and propose fiscal policy rules to insulate economies from unexpected shocks.
Theoretical analysis and framework
- The paper theoretically analyzes the impact of natural disasters on debt sustainability.
- Emphasis on rules-based fiscal frameworks for sustainable and countercyclical macroeconomic policies to build resilience against natural hazards.
Key findings
- Expenditure rules have advantages for small island economies prone to shocks.
- A recurrent expenditure rule based on non-resource and non-grant revenue is particularly effective.
- The proposed recurrent expenditure rule is interdependently determined by:
- government debt targets,
- budget balance targets,
- expected disaster shocks.
- The fiscal policy framework is practically applicable for many developing countries facing increasing frequency and impact of natural disasters and climate change.
Policy recommendations
- Adopt expenditure rules, prioritizing recurrent expenditure rules anchored to non-resource and non-grant revenue.
- Design fiscal rules that explicitly incorporate expected disaster shocks into debt and budget balance targets.
- Use rules-based fiscal frameworks to enable sustainable and countercyclical macroeconomic policies and build resilience.
Subjects and keywords (as provided)
- Subject: Climate change, Environment, Expenditure, Fiscal policy, Fiscal rules, Natural disasters, Public debt
- Keywords: appropriation strategy, budget balance rule, C. expenditure rule, capping expenditure growth, cash-flow constraint, Climate change, expenditure rule, Fiscal rules, government activity, government deficit bias, Natural disasters, Pacific Islands, resource revenue, revenue rule, revenue volatility, stabilization fund, WP
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- Working Paper