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International Monetary Fund
Reeling from multiple shocks, the global economic outlook looks increasingly difficult. Since last October, we have downgraded global growth and revised up inflation projections four times. Two years of pandemic, followed by the war in Ukraine, have taken a heavy toll on activity and global trade, exhausting both policy buffers and people’s patience. Now, a ‘cost-of-living crisis’ threatens livelihoods everywhere, with the most vulnerable hit the hardest, and acute food insecurity is an unbearable hardship in too many parts of the world. Multi-decade inflation highs, tightening financing conditions, rising food and energy insecurity, capital flow disruptions, and record high debt levels point to a particularly difficult and uncertain period ahead—especially in the context of slowing growth in the US, Europe, and China. The increasing frequency and intensity of climate-related disasters—devastating floods, droughts, and wildfires—adds to these challenges. While the ongoing digital revolution brings new opportunities, the recent turmoil in crypto asset markets is a reminder of the risks of unfettered digitalization.
International Monetary Fund

impediments to rapid progress. It depends on collaboration by citizens, governments, corporations, financial institutions, philanthropists, and the scientific community. Perhaps most important, it will require that world leaders expand their ambition and action, including mobilizing finance to help developing economies adapt to climate shocks. There is a path forward in what can become the inclusive growth story of the 21st century. If we rally to reverse the climate threat, then we may suddenly have a net zero world in reach. FD GITA BHATT , editor-in-chief ON

Mr. Marcos d Chamon, Erik Klok, Mr. Vimal V Thakoor, and Mr. Jeromin Zettelmeyer
This paper compares debt-for-climate swaps—partial debt relief operations conditional on debtor commitments to undertake climate-related investments—to alternative fiscal support instruments. Because some of the benefits of debt-climate swaps accrue to non-participating creditors, they are generally less efficient forms of support than conditional grants and/or broad debt restructuring (which could be linked to climate adaptation when the latter significantly reduces credit risk). This said, debt-climate swaps could be superior to conditional grants when they can be structured in a way that makes the climate commitment de facto senior to debt service; and they could be superior to comprehensive debt restructuring in narrow settings, when the latter is expected to produce large economic dislocations and the debt-climate swap is expected to materially reduce debt risks (and achieve debt sustainability). Furthermore, debt-climate swaps could be useful to expand fiscal space for climate investment when grants or more comprehensive debt relief are just not on the table. The paper explores policy actions that would benefit both debt-climate swaps and other forms of climate finance, including developing markets for debt instruments linked to climate performance.
International Monetary Fund. Strategy, Policy, & Review Department
This note provides operational guidance for the use of the Sovereign Risk and Debt Sustainability Framework (SRDSF), which replaces the Debt Sustainability Framework for Market Access Countries. The SRDSF introduces improvements in organization, methodology, transparency, and communication when analyzing public debt issues in countries that mainly finance themselves with market-based debt. After its phased adoption beginning [June 2022], it will become the Fund’s principal tool for assessing public debt sustainability.
International Monetary Fund. Western Hemisphere Dept.
Substantial pre-crisis buffers (primarily government deposits), prudent policies, and official external financial assistance helped Nicaragua recover well from a protracted downturn during 2018-2020 caused by the socio-political crisis of 2018, two major hurricanes in 2020, and the pandemic. Real gross domestic product (GDP) grew by 10.3 percent in 2021 and is projected to grow by 4 percent in 2022, despite hurricane Julia that affected the country in October. Inflation on an annual basis reached 11.4 percent in November 2022, mostly due to increases in import prices. The authorities introduced fiscal measures to mitigate the impact of the increases in oil and wheat prices, and also increased the reference interest rate. Bank deposits are growing strongly and reached the pre-crisis level (in Córdobas). Gross international reserves have doubled since end-2018 (to over US$4 billion; about 6 months of imports, excluding maquila).
International Monetary Fund

,000 denizens live along the coast—vulnerable to strong winds, high seas, and landslides. The situation has become increasingly volatile with the growing frequency and severity of extreme climate events. In 2017, Category 5 Hurricane Maria ripped a catastrophic path of destruction through the island. Whole communities, government buildings, roads and bridges, and power and water services were damaged or destroyed, resulting in the loss of lives and $1.2 billion in damage in just a few hours. With growing climate threats looming, Dominica knew it had to adapt. The

International Monetary Fund

extent of the climate threat. Overcoming chimpanzee politics Good economic institutions and well-designed markets may help break free from the constraints that prevent human cooperation—including by identifying and maximizing correlated payoffs. In this view, the role of economic and financial institutions can be to imagine and design novel ways humans can enter into mutual obligations to cooperate and promote the greater good. Seven insights from evolutionary biology could inform the design of economic institutions and financial markets. The first four pertain

International Monetary Fund

Resilience With climate threats escalating, digital transformations accelerating, and inequality and fragility rising, we need to act now to manage the risks and capitalize on opportunities . Climate change is compounding current challenges, including food insecurity. The ongoing digital revolution is unlocking new opportunities but also raising risks to financial stability. But policy action on both fronts is lagging. The longer we wait, the more costly it will become to act. Growing inequality, fragility, and risk of future pandemics add to the urgency for joint action

Mr. Marcos d Chamon, Erik Klok, Mr. Vimal V Thakoor, and Mr. Jeromin Zettelmeyer

Vulnerability Source: Authors. Figure 2. Number of Countries with Above-Median Climate Risk, by Probability of Fiscal Crisis Risk Source: Authors. Note: Based on an overall sample of 128 low-and middle-income countries. Climate risk is measured using the IMF Climate-driven INFORM Risk Composite Index ( IMF, 2021a ). Fiscal risk is assessed using a machine learning model (see Hellwig 2021 ) supplemented by IMF desk economist judgment. Figure 2 focuses on 59 low- and middle-income countries that have climate threats at or above the median and divides those