Fiscal Impacts of Climate Disasters in Emerging Markets and Developing Economies

IMF Working Papers, December 15, 2023

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Research analyzes macro-fiscal implications of three common climate disasters: droughts, storms, and floods.
Study combines macroeconomic data with comprehensive ground and satellite disaster indicators spanning the past three decades across 164 countries.
Focus on differential effects between emerging markets and developing economies (EMDEs) and advanced economies (AEs).

Droughts in EMDEs:
- Reduce output growth by 1.4 percentage points.
- Reduce government revenue by 0.7 percent of GDP.
- Fiscal expenditure does not increase following a drought, likely reflecting limited fiscal space.
Storms in EMDEs:
- Drag output growth.
- Have negligible impact on fiscal revenue.
- Government expenditure increases due to reconstruction and clean-up efforts.
Floods:
- Localized floods show only limited impact on growth and fiscal positions in EMDEs.
Advanced economies (AEs):
- Tend to experience negligible growth and fiscal consequences from climate-induced shocks.

Droughts erode tax bases in EMDEs where agriculture tends to be the principal sector, translating into lower government revenue.
Limited fiscal response after droughts suggests constrained fiscal space and weaker ability to increase spending in response to agricultural shocks.
Storm-related increases in government expenditure reflect reconstruction and clean-up demands even when revenue effects are negligible.
Differential impacts between EMDEs and AEs underscore structural and fiscal capacity differences.

Strengthen disaster preparedness and climate change adaptation in EMDEs to mitigate disproportionate macro-fiscal damages.
Increase international support targeted to disaster preparedness and climate change adaptation for EMDEs, given the more detrimental effects of climate shocks in these countries.
Prioritize policies that protect tax bases and enhance fiscal space to enable effective post-disaster fiscal responses, particularly in agriculture-dependent EMDEs.

Analysis covers droughts, storms, and floods over the past three decades across 164 countries using macroeconomic, ground, and satellite disaster indicators.
Identified subject themes include Environment, Expenditure, Fiscal policy, Fiscal space, Fiscal stance, Natural disasters, Public debt.

IMF Working Paper: Fiscal Impacts of Climate Disasters in Emerging Markets and Developing Economies