IMF Working Papers

Strengthening Fiscal Frameworks in the Presence of Rising Risk of Natural Disasters

By Olusegun Ayodele Akanbi, Jessie Kilembe, Do Yeon Park

February 7, 2025

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Olusegun Ayodele Akanbi, Jessie Kilembe, and Do Yeon Park. "Strengthening Fiscal Frameworks in the Presence of Rising Risk of Natural Disasters", IMF Working Papers 2025, 038 (2025), accessed March 17, 2025, https://0-doi-org.library.svsu.edu/10.5089/9798400298851.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This study investigates the impact of rising risk of natural disasters on rule-based fiscal frameworks. It explores the extent to which countries adhere to their fiscal rules in the presence of rising risk of natural disasters. To ensure a consistent analysis, we construct an index measuring the strenghth of fiscal rules, utilizing principal component analysis for a panel of 104 countries. The study employs a panel two-stage least squares estimation method to assess the impact of natural disaster risks on fiscal rules. The results, which are robust across various country groupings, suggest that natural disaster risks play a significant role in the determination of rule-based fiscal framework. After controlling for other determinants, the results show that countries with established fiscal rules are strengthening these rules in response to rising natural disaster risks. Nonetheless, the results are mixed across different country groups, with varying magnitude of impact. This suggests that countries currently operating fiscal rules will need to enhance their efforts to more comprehensively integrate natural disaster risks into their fiscal frameworks.

Subject: Environment, Expenditure, Fiscal governance, Fiscal policy, Fiscal risks, Fiscal rules, Natural disasters, Public financial management (PFM)

Keywords: Exposure risk index, Fiscal Framework, Fiscal governance, Fiscal risks, Fiscal Rules, Fiscal sustainability, Global, Government climate investment profile, High-ERI country, Natural disaster risk, Natural Disasters, Risk of natural disasters

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