December 12, 2016
PRESS OFFICER:
Phone: +1 202 623-7100Email: MEDIA@IMF.org
On December 1, 2016, the Executive Board of the International Monetary Fund (IMF) discussed a staff paper on “ Small States’ Resilience to Natural Disasters and Climate Change—Role for the Fund”, which explores how the Fund’s macroeconomic policy advice, capacity building support, and lending facilities and instruments can help meet the evolving needs of small states facing risks from natural disasters and climate change.
The staff paper provides a range of data and analyses highlighting the particular vulnerability of small states to both natural disasters and climate change. It outlines the key elements of a risk management framework which, if adopted ahead of disasters, can reduce their economic and human cost. It further describes the role of macroeconomic policies within this framework. On financing, the paper highlights the importance of developing contingent financing plans ahead of the impact of a disaster and the need for access to climate change financing for risk mitigation programs.
The paper discusses small states’ use of Fund’s financing both in general terms, and in the immediate aftermath of natural disasters. On the latter, the paper includes staff proposals to increase annual access limits under the Rapid Credit Facility (RCF) and Rapid Financing Instrument (RFI) for all countries affected by severe natural disasters. Based on directors’ views, formal proposals for reform of the RCF and RFI will be submitted for Board consideration in the coming weeks.
To help small states develop sound macroeconomic approaches for managing climate change, including to meet their national commitments under the Paris Agreement, the paper proposes that the Fund could conduct assessments of climate change policies for selected small states on a pilot basis, in collaboration with the World Bank.
Executive Board Assessment [1]
Executive Directors welcomed the discussion on strengthening small states’ resilience to natural disasters and climate change, noting the particularly high exposure of small states to these risks. They agreed that the Fund has a role to play in helping small states build resilience to these risks, while remaining within its mandate and in close cooperation with other international organizations, notably the World Bank Group.
Directors concurred that strengthened domestic policies are crucial to reduce costs associated with natural disasters and climate change. In this regard, they underscored the importance of identifying risks and vulnerabilities in advance, investing in programs and projects that can reduce risk exposures, and developing contingency plans for risks that cannot be entirely avoided. Directors noted that the macroeconomic aspects of resilience‑building should be integrated into countries’ core budget, public investment planning, and debt management frameworks. They also noted the importance of continued adjustment of Fund policy tools, including debt sustainability analyses and reserve adequacy frameworks, to capture natural disaster and climate change risks.
Directors agreed that small states should seek to develop more ex ante financing arrangements for use after natural disasters. They encouraged the broader use of contingent financing arrangements, regional insurance pooling, and catastrophe bond options. Directors generally considered that the Fund could deepen discussions with the insurance industry and development partners to better assist small states. They also encouraged the Fund to provide capacity development to small states to help them assess their options in these areas.
Directors emphasized that small states’ adaptation to climate change will require enhanced access to financing, ideally on highly concessional terms. In this connection, they noted the importance of developing less complex and cumbersome application procedures for access to climate fund resources.
Directors noted that small state members are less frequent users of Fund arrangements than larger peers. Against this backdrop, a few Directors suggested that small states could use Fund arrangements to support policies to build resilience to natural disasters and climate change. Some others, however, did not see a case to use such arrangements, noting that this depends on balance of payment needs. Instead, a few Directors saw scope for using the Policy Support Instrument in small states to build resilience to these risks.
Directors welcomed the ongoing use of the Rapid Credit Facility (RCF) and Rapid Financing Instrument (RFI) by countries hit by natural disasters. Noting that annual access under these instruments can be small in relation to the most destructive disasters hitting vulnerable economies, including small states, Directors generally supported staff’s proposal to raise the annual access ceiling from the current 37.5 percent of quota to 60 percent of quota for countries experiencing severe disaster‑related damages. Most Directors considered the proposed eligibility threshold of disaster damages of at least 30 percent of GDP as overly restrictive, and suggested allowing for higher access in a larger range of circumstances, including lowering such disaster damage threshold to 20 percent of GDP or lower. While many Directors also suggested considering an increase in cumulative access ceilings for the RCF and RFI, a number of others supported staff’s proposal to keep cumulative access limits unchanged at 75 percent of quota for both facilities, and a few of these Directors recommended assessing this issue in the comprehensive review of facilities for low‑income countries in 2018. Directors looked forward to receiving a formal proposal on access limits and applicable higher‑access disaster damage threshold for Board consideration in a timely manner, while underlining that any proposal must safeguard the self‑sustainability of the Poverty Reduction and Growth Trust. Noting that few small states are eligible for the Catastrophe Containment and Relief (CCR) Trust, many Directors suggested that consideration be given to expanding the eligibility criteria to give small states greater access to relief through the CCR Trust in the event of very large and rare natural disasters.
Directors stressed that macroeconomic policies should play an important role in small states’ plans to mitigate and, particularly, adapt to climate change. Accordingly, most Directors saw merit in an IMF assessment of such policies, on a pilot basis, focusing on requests from small states seeking to use these assessments to improve access to climate change financing. These Directors called on staff to closely collaborate with other organizations, notably the World Bank Group, when undertaking these assessments. A few Directors, however, did not see a need for conducting such assessments, citing potential resource costs and risks of overstepping the Fund’s responsibilities, and therefore recommended that macroeconomic policies related to climate change be assessed as part of regular Article IV consultations.
Directors emphasized the role of Fund capacity building in helping small states build resilience to natural disasters and adapt to the challenges from climate change. They underlined the importance of leveraging regional technical assistance centers, and further tailoring capacity building to the absorptive capacity and policy priorities of small states.
[1] An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
