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Aliona Cebotari and Karim Youssef
Natural disasters are a source of economic risks in many countries, especially in smaller and lower-income states, and ex-ante preparedness is needed to manage the risks. The paper discusses sovereign experience with disaster insurance as a key instrument to mitigate the risks; proposes ways to judge the adequacy of insurance; and considers ways to enhance its use by vulnerable countries. The paper especially aims to inform policy decisions on disaster insurance. Through simulations of natural disasters and various insurance options, we find that sovereign decisions on optimal risk transfer involve balancing trade-offs between growth and debt, based on government risk preferences and country risk exposure. The choice of optimal insurance for smaller countries turns out to be more constrained by cost considerations due to their higher exposure, likely resulting in underinsurance; donor grants could help them achieve a more optimal protection. We also find that optimal insurance packages are those that are least costly relative to expected payouts (i.e. have the lowest insurance multiple), which are also the packages that insure less severe (more frequent) disasters.
International Monetary Fund. Strategy, Policy, &, Review Department, International Monetary Fund. Western Hemisphere Dept., and International Monetary Fund. Asia and Pacific Dept

the top of the trade-off curve in chart 1). These provide the best value for money from the sovereign’s perspective. In staff’s analysis, packages with the lowest insurance multiples are also the ones that have the lowest deductibles, that is, where insurance starts with higher-frequency disasters. 1. Debt-Growth Trade-Offs: By Insurance Multiple Source: IMF staff estimates. Note: Each dot shows the average, for a given insurance package, of the difference in debt and growth outcomes between insurance and no-insurance scenarios over 1000 simulations. 2

International Monetary Fund

could be conducted using general equilibrium frameworks—where possible—complemented by DSA analysis and staff’s own scenario analysis, (for example, assessments could consider downside scenarios featuring sharply lower growth or prolonged stagnation and how policies may interact with these). Such scenarios would shed light on the debt-growth trade-offs of discretionary fiscal policy (both expansionary and contractionary relative to the baseline), including based on the extent of slack in the economy and spending needs (and hence likely multipliers) and the marginal

Aliona Cebotari and Karim Youssef

and by the larger less exposed country – in both cases, the packages with smaller multipliers lie on top of the tradeoff curves, whichever direction the curve is bent, i.e. on a sort of “efficient frontier”. Debt-Growth Tradeoffs: By Multiple (each dat=an insurance package with different risk transfer) 1/ Source: IMF staff estimates. 1/ Each dot shows the average, for a given insurance package, of the difference in debt and growth outcomes between insurance and no insurance scenarios over 1,000 simulations. Efficient Frontiers: Tradeoffs by

International Monetary Fund. Strategy, Policy, &, Review Department, International Monetary Fund. Western Hemisphere Dept., and International Monetary Fund. Asia and Pacific Dept
This paper discusses how countries vulnerable to natural disasters can reduce the associated human and economic cost. Building on earlier work by IMF staff, the paper views disaster risk management through the lens of a three-pillar strategy for building structural, financial, and post-disaster (including social) resilience. A coherent disaster resilience strategy, based on a diagnostic of risks and cost-effective responses, can provide a road map for how to tackle disaster related vulnerabilities. It can also help mobilize much-needed support from the international community.
International Monetary Fund
Fiscal space is a multi-dimensional concept reflecting whether a government can raise spending or lower taxes without endangering market access and debt sustainability. Making such a determination requires a comprehensive approach considering, among other things, initial economic and structural conditions, market access, the level and trajectory of public debt, present and future financing needs, and dynamic analysis of the liquidity and solvency of the fiscal position under alternative policies. Balancing these considerations involves careful analysis and judgment. Fund staff has over the years developed a variety of indicators to inform assessments of fiscal space in bilateral and multilateral surveillance. The Fund’s core operational framework for such analysis is the debt sustainability framework, which includes a number of indicators, while allowing room for staff judgment. Surveillance also relies importantly on indicators developed by the Fiscal Affairs Department (FAD)––including those that have been used in the internal Vulnerability Exercise and Fiscal Monitors––while more recent methods based on fiscal stress tests and probabilistic approaches proposed in IMF (2016) are also promising. In addition, teams have used scenario analysis and general equilibrium modeling approaches to evaluate fiscal policy choices and their implications for sustainability. When applied to fiscal space, each indicator and approach has pros and cons and none covers all the relevant factors. Ultimately, therefore, assessing fiscal space requires judgment, informed by a broad range of tools. This note seeks to bring together various approaches developed by Fund staff to outline a consistent set of considerations and indicators to help inform assessments of fiscal space, especially for advanced and emerging markets. The intent is to facilitate continued consistency between country team assessments by providing some common considerations and approaches to inform their judgment. The proposed framework will support Fund surveillance and policy advice going forward, informing discussions of the appropriate fiscal stance at all stages of the economic cycle.
International Monetary Fund. Strategy, Policy, &, Review Department, and International Monetary Fund. Fiscal Affairs Dept.

and inflation), and the level and trajectory of fiscal variables, including both stocks and flows (debt and gross financing needs). These simulations rest on standardized assumptions and aim to shed light on the debt-growth tradeoff of discretionary fiscal policy, under upside and downside scenarios. Country teams exercise judgment about which scenario more likely applies in their specific conjunctural context. Final judgment . Applying staff judgment to arrive at the final assessment of the degree of fiscal space based on the signals provided by the three stages

International Monetary Fund. Strategy, Policy, &, Review Department, and International Monetary Fund. Fiscal Affairs Dept.
This paper reviews the experience with the fiscal space assessment framework that was piloted during 2017–18. In 2016, staff proposed an operational definition of fiscal space and a new four-stage framework for its assessment. These were discussed informally by the Board in June, and a Board paper “Assessing Fiscal Space: An Initial Consistent Set of Considerations” incorporating Directors’ views was published in December. Fiscal space was narrowly defined as the room for undertaking discretionary fiscal policy relative to existing plans without endangering market access and debt sustainability. The framework was developed in response to the need to provide a more systematic approach to assessing fiscal space in the Fund’s surveillance. It was designed as a tool to inform the availability of fiscal space over a 3 to 4 year horizon for discretionary action, as opposed to the optimality of its use. Indeed, it was stressed that the availability of space does not necessarily mean that it should be used or should not be further expanded. The framework was piloted in the Article IV consultations of 34 advanced economies and emerging markets, comprising almost 80 percent of global GDP in PPP terms.
Angana Banerji, Mr. Valerio Crispolti, Ms. Era Dabla-Norris, Mr. Romain A Duval, Mr. Christian H Ebeke, Davide Furceri, Mr. Takuji Komatsuzaki, and Mr. Tigran Poghosyan

, including initial debt levels; the credibility of reform plans and strength of implementation; and the availability of other policy levers to support demand beyond fiscal policy. 16 As such, the debt-growth trade-offs associated with discretionary support for certain labor market reforms would need to be carefully calibrated to country circumstances. A second caveat is that the numerical framework does not factor in any output effect from fiscal stimulus over the medium term, which could materialize if there is hysteresis when cyclical conditions are weak or if stimulus

Ahmed El-Ashram
The question of how scaling up public investment could affect fiscal and debt sustainability is key for countries needing to fill infrastructure gaps and build resilience. This paper proposes a bottom-up approach to assess large public investments that are potentially self-financing and reflect their impact in macro-fiscal projections that underpin the IMF’s Debt Sustainability Analysis Framework. Using the case of energy sector investments in Caribbean countries, the paper shows how to avoid biases against good projects that pay off over long horizons and ensure that transformative investments are not sacrificed to myopic assessments of debt sustainability risks. The approach is applicable to any macro-critical investment for which user fees can cover financing costs and which has the potential to raise growth without crowding-out.