Mr. Tamim Bayoumi, Mr. Saad N Quayyum, and Sibabrata Das
The paper analyzes the impact of natural disasters on per-capita GDP growth. Using a quantile regressions and growth-at-risk approach, the paper examines the impact of disasters and policy choices on the distribution of growth rather than simply its average. We find that countries that have in place disaster preparedness mechanisms and lower public debt have lower probability of witnessing a significant drop in growth as a consequence of a natural disaster, but our innovative methodology in this paper finds that the two policies are complements since their effectiveness vary across different disaster scenarios. While both are helpful for small to mid-size disasters, lower debt—and hence more fiscal space—is more beneficial in the face of very large disasters. A balanced strategy would thus involve both policies.
Mr. Serkan Arslanalp, Mr. Robin Koepke, and Jasper Verschuur
This paper proposes an easy-to-follow approach to track merchandise trade using vessel data and applies it to Pacific island countries. Pacific islands rely heavily on imports and maritime transport for trade. They are also highly vulnerable to climate change and natural disasters that pose risks to ports and supply chains. Using satellite-based vessel tracking data from the UN Global Platform, we construct daily indicators of port and trade activity for Pacific island countries. The algorithm significantly advances estimation techniques of previous studies, particularly by employing ways to overcome challenges with the estimation of cargo payloads, using detailed information on shipping liner schedules to validate port calls, and applying country-specific information to define port boundaries. The approach can complement and help fill gaps in official data, provide early warning signs of turning points in economic activity, and assist policymakers and international organizations to monitor and provide timely responses to shocks (e.g., COVID-19).
Vybhavi Balasundharam, Ms. Leni Hunter, Iulai Lavea, and Mr. Paul G Seeds
Pacific island countries (PICs) rely on national airlines for connectivity, trade, and tourism. These airlines are being struck hard by COVID-19. Losses will weigh on public sector balance sheets and pose risks to economic recovery. With a backdrop of tight fiscal space and increasing government debt, losses in airlines are adding to fiscal risks in some PICs. This paper discusses tools to evaluate and manage the fiscal risks from national airlines in the Pacific. We present a snapshot of the current state of Public Financial Management (PFM) practices in PICs and detail the best practices. This exercise would illustrate the areas in which PICs have scope to improve their risk management with regard to national airlines. We then discuss the use of diagnostic tools and capacity development to enhance monitoring and risk management. Greater transparency and accountability in the airlines, combined with rigorous oversight, would be the first step towards improved financial management of national airlines.
Mr. Alessandro Cantelmo, Mr. Leo Bonato, Mr. Giovanni Melina, and Mr. Gonzalo Salinas
Resilience to climate change and natural disasters hinges on two fundamental elements: financial protection —insurance and self-insurance— and structural protection —investment in adaptation. Using a dynamic general equilibrium model calibrated to the St. Lucia’s economy, this paper shows that both strategies considerably reduce the output loss from natural disasters and studies the conditions under which each of the two strategies provides the best protection. While structural protection normally delivers a larger payoff because of its direct dampening effect on the cost of disasters, financial protection is superior when liquidity constraints limit the ability of the government to rebuild public capital promptly. The estimated trade-off is very sensitive to the efficiency of public investment.
Pacific island countries are exposed to significant risks from natural disasters. As a disaster relief measure, Fiji allowed pre-retirement pension withdrawls in the wake of Cyclone Winston in 2016. Motivated by this policy action, we provide a normative analysis of the use of early pension withdrawals after disasters, by setting up a life-cycle saving model with myopic households facing large natural disaster shocks. The model demonstrates the key trade-off between building up sufficient retirement savings and ensuring the access to savings against natural disaster shocks, and sheds light on welfare implications of early pension withdrawals.
Ricardo Marto, Mr. Chris Papageorgiou, and Mr. Vladimir Klyuev
We present a dynamic small open economy model to explore the macroeconomic impact of natural disasters. In addition to permanent damages to public and private capital, the disaster causes temporary losses of productivity, inefficiencies during the reconstruction process, and damages to the sovereign's creditworthiness. We use the model to study the debt sustainability concerns that arise from the need to rebuild public infrastructure over the medium term and analyze the feasibility of ex ante policies, such as building adaptation infrastructure and fiscal buffers, and contrast these policies with the post-disaster support provided by donors. Investing in resilient infrastructure may prove useful, in particular if it is viewed as complementary to standard infrastructure, because it raises the marginal product of private capital, crowding in private investment, while helping withstand the impact of the natural disaster. In an application to Vanuatu, we find that donors should provide an additional 50% of pre-cyclone GDP in grants to be spent over the following 15 years to ensure public debt remains sustainable following Cyclone Pam. Helping the government build resilience on the other hand, reduces the risk of debt distress and at lower cost for donors.
Ms. Shari Boyce, Mr. Sergei Dodzin, Mr. Xuefei Bai, Ezequiel Cabezon, Mr. Fazurin Jamaludin, Mr. Yiqun Wu, and Ms. Rosanne Heller
The work on the small states is an important component of the IMF’s global policy agenda. Among the 36 member countries covered by the IMF Asia and Pacific Department (APD), 13 countries are developing small states—most of which are Pacific islands. As part of APD’s ongoing effort to increase its engagement with regional small states and their development partners and enhance information sharing within the IMF, this issue marks the launch of the APD Small States Monitor, a quarterly bulletin featuring the latest economic developments, country notes from the most recent Article IV staff reports, special topics, past and upcoming events, and forthcoming IMF research on small states. In future issues, we will also host contributions from the authorities of small states and their development partners on key policy topics. Our goal is to exchange knowledge and deepen our understanding of the policy challenges these economies face to better tailor our policy advice.
Vanuatu has a comparatively favorable economy and cautious macroeconomic policies that have helped maintain stability and confidence. Financial sector policies also have been appropriately cautious. The economy must maintain low debt in the longer term, but as funding is needed for infrastructure, maintenance, and social services, new revenue measures have to be identified. This revenue could help strengthen the state while maintaining growth potential, especially in the tourism and agricultural sectors. The financing options for new large infrastructure projects have to be assessed.
This 2006 Article IV Consultation highlights that following two years of contraction, output growth in Vanuatu recovered beginning in 2003, spurred by stronger performance in construction and a pickup in tourist arrivals. Growth reached 7 percent in 2005 and an estimated 5½ percent in 2006, well above the average for Pacific island countries. The overall external balance has benefited from rising foreign direct investment, aid, and private capital inflows, with reserves increasing to more than 7 months of imports. If good macroeconomic policies continue and political stability is maintained, near-term prospects are positive.
This Selected Issues paper and Statistical Appendix summarizes the factors explaining Vanuatu’s recent growth performance, which has weakened since the mid-1990s. The paper highlights that Vanuatu’s annual rate of growth averaged ¾ percent during 1997–2001, compared with 4¾ percent during 1992–1996. The paper compares Vanuatu’s external competitiveness with several other small island economies in the South Pacific region. The paper describes the development and structure of Vanuatu’s offshore financial center, examines its macroeconomic impact, and highlights some key recent developments. It also provides a preliminary assessment of the prospects for the sector.