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In terms of pre-emptive measures, it is important that countries receive sufficient support to finance successful adaptation to climate change. Countries at risk should build sufficient policy buffers in good times to support recovery, including through overall prudent debt management. However, they often face pressures on their fiscal positions from recovery expenditures and already high debt burdens, limiting their ability to invest sufficiently in climate adaptation. Despite existing exceptions for SIDS, many environmentally vulnerable countries have per capita incomes that make them ineligible to access concessional financing windows.
Most countries also cannot self-insure to the degree necessary. The use of state-contingent debt instruments, which are structured to automatically pay less or postpone payments to creditors during difficult times, could increase the resilience of sovereign balance sheets. There has been increasing international interest in how they might be designed. Efforts are warranted to advance such analyses, including encouraging both the private and official sectors to experiment in issuing such instruments.
If a severe natural disaster does hit, provision of timely support is critical. Governments and international institutions have devised a number of quick disbursing loan facilities and insurance programmes to address sudden needs for international funds. There may also be a need to seek debt relief from private and official creditors. Prompt and constructive engagement with creditors can support an orderly and efficient debt restructuring to take place. In this context, steps have been taken and proposals made to address the financial constraints of environmentally vulnerable and highly indebted countries, aiming to ensure debt sustainability while explicitly accounting for climate change adaption needs and the impact of natural disasters. Grenada’s 2015 debt restructuring introduced a “hurricane clause,” which allows for a moratorium on debt payments in the event of a natural disaster. ECLAC has proposed a debt-for-climate adaptation swap for the Caribbean, involving discounted purchases from official and private creditors by the Green Climate Fund and channelling them to a Caribbean resilience fund to receive the freed national funds from the participating countries for disbursement to selected climate adaptation investments. A task force comprising several regional institutions was formed in December 2017 to advance work on the proposal (see here). In view of the systemic nature of the challenge that poses risks to the long-term debt sustainability in affected regions and the scale of climate change adaptation needs, the international community could also consider a greater use of global risk pooling mechanisms.
The IMF has continued to implement new facilities to help countries cope with natural disasters and other shocks. IMF’s Catastrophe Containment and Relief Trust (CCR) was established in 2015 to expand the scope of qualifying events for debt relief under its predecessor Post-Catastrophe Debt Relief Trust from catastrophic natural disasters to public health disasters. Liberia, Sierra Leone, and Guinea tapped the CCR in 2015 to cope with the fallout from the Ebola outbreak. Assistance through the CCR Trust is currently available to low-income countries eligible for concessional borrowing through the Poverty Reduction and Growth Trust and which also have either a per capita income below the International Development Association’s (IDA) operational cutoff (currently US$1,165) or, for small states with a population below 1.5 million and a per capita income below twice the IDA cutoff (currently US$2,330, see here) .
The IMF also increased access limits to its emergency lending windows by 50 percent in 2015 through the Rapid Credit Facility (RCF) and Rapid Financing Instrument (RFI). The RCF provides rapid and concessional financial assistance to LICs facing an urgent balance of payments need, without the need for program-based conditionality, while the RFI provides rapid financial assistance to all member countries facing an urgent balance of payments need, without the need to have a full-fledged program in place. The interest paid on RCF loans was also set permanently at zero percent. Since 2015, Ecuador, Iraq and Vanuatu received financial assistance via RFI, while Central African Republic, Dominica, the Gambia, Haiti, Liberia, Madagascar, Nepal, and Vanuatu received financial assistance via RCF.