Key Findings: Adapting to Climate Change in the Middle East and Central Asia
On March 30 IMF published a paper titled "Feeling the Heat: Adapting to Climate Change in the Middle East and Central Asia".
Climate change is among humanity’s greatest challenges, and the Middle East and Central Asia region is on the frontlines of its human, economic, and physical ramifications. Much of the region is located in already difficult climate zones, where global warming exacerbates desertification, water stress, and rising sea levels. This trend entails fundamental economic disruptions, endangers food security, and undermines public health, with ripple effects on poverty and inequality, displacement, and conflict. Considering the risks posed by climate change, the central message of this departmental paper is that adapting to climate change by boosting resilience to climate stresses and disasters is a critical priority for the region’s economies.
ME&CA countries are already feeling the brunt of climate change. Analysis of data spanning the past century reveals that the region’s three main climate stresses have further intensified since the 1990s: temperatures have risen by 1.5° C, twice the global increase of 0.7° C; precipitation, already sparse, has become more erratic than in any other region; and climate disasters, such as droughts and floods, have occurred more often than in the past. Since 2000, climate disasters have resulted, on average per year, in $2 billion in direct material damages, 7 million affected people, and 2,600 deaths. Analysis also suggests that continued climate change will exacerbate both current climate stresses and damages, particularly in countries with low resilience (above all, fragile and conflict-affected states). This mainly reflects their rain-dependent agriculture and structural vulnerabilities.
Climate change is a major threat to growth, prosperity, and macro-financial and socio-political stability. Econometric analysis finds that changing temperature and precipitation patterns have eroded per capita incomes and shifted the sectoral composition of output and employment over the past three decades. Middle East, North Africa, Afghanistan, and Pakistan (MENAP) countries have been harder hit than their Caucasus and Central Asia (CCA) peers, given their initially hotter and drier climates. Moreover, climate disasters have adversely affected growth, fiscal, and external sector dynamics, mainly within the two years following the events but also with permanent output and tax revenue losses in CCA countries. These economic effects of climate change have disproportionally affected vulnerable groups, aggravating poverty and inequality, and contributing to social tensions, migration, and conflict.
Therefore, climate adaptation is an urgent priority for the region. There is no one-size-fits-all panacea, given each country’s specific set of climate stressors, capacity, and vulnerabilities. Nevertheless, some common principles apply to the region. First, adaptation needs full embedding in countries’ medium-term inclusive growth agendas. This involves including climate risks and policies in all relevant policy frameworks and structural reform agendas. In parallel, “no-regret” measures can help boost much-needed climate resilience, notably social measures (mainly better social protection, health care, and education) and infrastructure investments (such as in water and early warning systems). Policies also need to ensure that the private and financial sectors can play their role. If implemented in the near term, green policies can even help spur a resilient recovery from the COVID-19 crisis.
Adaptation will need significant additional spending and hence financing. Current estimates vary widely and cover public infrastructure investment needs in a moderate-emission scenario only. These alone, however, could still amount to up to 3.3 percent of GDP per year for individual ME&CA countries over the next ten years (IMF 2020c). At the same time, fiscal space is limited in many ME&CA countries, particularly in the aftermath of the COVID-19 pandemic, necessitating a mix of domestic policy reforms and greater international support. While some costs of adaptation could be met by reprioritizing public spending (for example, replacing general fuel subsidies with targeted ones), these countries are well advised to tap various multilateral and bilateral financing sources and to help catalyze private investment in adaptation to complement that of the public sector.
Takeaways and Policy Implications:
Worsening climate stressors. Climate change is already widely felt throughout ME&CA and set to further intensify the region’s key climate stresses: temperature extremes, precipitation anomalies, and more frequent and severe disasters.
Increasing damages, amplified by low climate resilience. Human and material damages are set to rise, reflecting the interplay between worsening natural hazards (especially droughts, storms, and floods) and low climate resilience, which in turn reflects countries’ (1) high exposure (especially of people and specific sectors, such as rain-fed agriculture, tourism, and hydropower); and (2) elevated vulnerability (mainly reflecting weak macro buffers, socioeconomic development, and institutions). Population growth, urban- ization, and environmental degradation further heighten the region’s vulnerability.
Economic and social development under threat. Changing climate conditions threaten the region’s pros- perity, socioeconomic development, and stability. They have, for instance, already shown to dampen growth and trigger sectoral and employment shifts, notably within the agricultural sector. MENAP countries were harder hit than their CCA peers, given their hotter and drier climates at the outset. Climate disasters have often been followed by a substantial and immediate growth decline and large macro- fiscal effects across ME&CA, particularly in CCA countries that experienced permanent output losses and fiscal effects.
Given the urgency and extent of the fallout from climate change, ME&CA countries need to move from good intentions to robust action. While policy priorities differ across countries depending on their specific set of climate hazards, resilience, and capacity, some common adaptation policy priorities arise:
Across the region: Most importantly, all ME&CA countries need to: mainstream adaptation into existing policy frameworks and accelerate relevant structural reforms, notably those that strengthen governance and institutions (including disaster preparedness and management capacities); focus on no-regret measures to shore up much-needed climate resilience, which include upgrading social safety nets and social spending (health, and education) and adapting crucial infrastructure to intensifying climate stresses (notably water resource management, irrigation schemes, and early warning systems); ensure adequate participation of the private sector (which is a crucial complement to that of the public sector); and enhance the role of the financial sector.
Across country groups, depending on their level of climate resilience and available fiscal space:
Higher- and middle-income ME&CA countries with high resilience and fiscal space, that is, mainly hydrocarbon-rich GCC and some CCA countries. Relative to their regional peers, they are less exposed thanks to smaller, less rain dependent agricultural sectors and less vulnerable thanks to a higher level of socioeconomic development. The quality of their adaptation strategy would benefit from strengthening administrative capacity to ensure a holistic and well-prioritized approach. Bolstering international cooperation would also allow their strategy to exploit latest technologies and know how, which could even help transition to a more sustainable and resilient low-carbon growth model. This would be particularly important for the many hydrocarbon exporters in the ME&CA region that need to respond to the transition risks from a global low-carbon future with measures to diversify their economies away from, and reduce the dependency of government revenues on, hydrocarbons.
Middle-income ME&CA countries with medium resilience but without fiscal space, that is, mainly hydro- carbon-poor MENAP and some CCA countries. In terms of climate resilience, they fall in the middle of the region’s range, reflecting significant exposure (with their large, mostly rain-fed agricultural sector) and vulnerability (due to high poverty, low human development, inadequate social safety nets, and weak public infrastructure and institutions). To make space for adaptation spending while preserving debt sustainability, these countries need to focus on both: (i) enhancing domestic revenue mobiliza- tion and expenditure efficiency and (ii) tapping more into international assistance. They should also improve the quality of public services (especially in education and health care) and better target social safety nets, while—where administrative capacity allows—introducing state-dependent social transfers (for example, activated when precipitation drops below a certain level) and indexation of cash transfers (for example, to food prices that typically rise during a drought). In addition, these countries should strengthen financial inclusion and insurance (possibly subsidized) against natural hazards, particularly for farmers, and leverage PPPs (with appropriate PPP related risk management safeguards) for infra- structure development.
Lower-income, fragile and conflict-affected ME&CA countries with low resilience, mainly in MENAP. They lack their peers’ fiscal space but additionally have particularly low climate resilience and institutional capacity. Their immediate focus needs to be on strengthening disaster preparedness and coping capacities, while trying to build broader institutional capacity and social resilience. To gradually upgrade social spending and infrastructure, these countries need international support for financing (ideally on concessional terms) and capacity development. Domestic revenue mobilization will help sustain spending needs without becoming dependent on external support and assuming too much debt that could threaten their debt sustainability.
In the near term, all countries could leverage green policies for a sustained recovery from the COVID-19 crisis. Green investment and policies (mitigation and adaptation) can serve that purpose while dealing with the problems that existed before COVID-19: (i) mitigation to help minimize the intensification of global warming and thus climate hazards and (ii) adaptation by investing in climate-resilient infrastructure and addressing vulnerabilities.
Limited adaptation progress so far underscores the need for domestic consultation and international cooperation. Given the re-distributional impact of climate policies within and across countries, policymakers need to acknowledge political economy sensitivities. This means consulting stakeholders and designing compensation mechanisms to galvanize broad societal support for climate policies. Furthermore, while cross-country cooperation can support the effectiveness of a country’s adaptation policy, international cooperation is crucial to address often binding capacity and funding bottlenecks.
To live up to its mandate and assist its members with addressing these climate challenges, the IMF is strategically and systematically integrating climate change into its core activities (IMF 2021b). In this context, this paper is the first regional contribution for ME&CA. Next steps will include (i) translating the paper into a more granular and tailored analysis of climate risks and adaptation challenges at the country level; and (ii) advancing the thematic focus from adaptation to other climate-related issues important for the region (notably mitigation and transition management). At the same time, the IMF continues to adapt its core activities to meet its members’ needs:
Surveillance. Given the IMF’s mandate, it focuses on helping members assess the macroeconomic impact of climate change and building financial and institutional resilience to natural disasters and extreme weather events through appropriate economic and financial policies. The IMF is ramping up policy and analytical work to lay the foundation to comprehensively incorporate climate change in its surveillance. This notably includes accounting for the macroeconomic effects of climate change and adaptation measures in medium-term macroeconomic frameworks (for example, potential growth estimations), incorporating climate shocks into standard cross-country analytical tools (for example, debt sustainability analysis, financial sector assessments, and external balance assessments), and deriving customized policy advice (for example, on how to build adequate macroeconomic buffers and identify crucial structural reforms) that takes into account each country’s particular circumstances and capacity.
Financial support. The IMF can provide financial support to member countries hit by adverse climate effects through three types of facilities: (i) existing standard facilities to address balance of payments (BOP) needs that arise from certain climate adaptation measures; (ii) emergency financing instruments to help countries address BOP needs arising from severe climate-related shocks; and (iii) the Catastrophe Containment and Relief Trust (CCRT) to provide debt service relief for the poorest and most vulnerable countries hit by catastrophic natural disasters or public health disasters. In addition, the recently proposed Resilience and Sustainability Trust (RST) can help support member countries address risks to prospective BOP stability stemming from selected long-term structural challenges. Moreover, IMF program design could focus on adaptation, for example, through quantitative and structural conditionality (for example, floor on adaptation spending and subsidy reforms) or fiscal adjustment (through revenue and expenditure measures) to strengthen fiscal buffers and reallocate spending to adaptation.
Capacity development. Technical assistance and training, particularly in the fiscal and financial realm, will help IMF member countries upgrade climate-related skills. The IMF can also help identify and cost adaptation gaps across sectors and risks, for instance by supporting countries in the production of Disaster Resilience Strategies. In addition, the IMF is participating in global efforts to narrow data gaps for climate indicators. IMF capacity development can also help support stronger institutions and frameworks for climate-related spending (for example, green public financial management).