September 07, 2018

It is a cruel irony of climate change in the 21st century that the developing countries least responsible for the historical growth of cumulative global emissions are also generally those most vulnerable to its worst impacts. As the effects of hurricanes, landslides, coastal flooding, and rising sea levels become more deleterious and destructive, so too do the public finances of affected countries become more prone to regular instability and volatility. In extreme cases, economies may get caught in negative, self-reinforcing debt burdens. For small-island nations like St. Lucia, the stakes are indelibly high.

St Lucia

St. Lucia is perhaps already a harbinger of things to come, as extreme climate impacts in the country have already imposed average annual losses to GDP of 3.4 percent over the past several decades. At the same time, successive and rising fiscal deficits have contributed to a public debt totaling $3.2 billion. But St. Lucia has not thrown in the towel in the battle against climate change. It is a regional pioneer on climate policy, having been the first Caribbean country to sign an NDC (‘Nationally Determined Contribution’) under the Paris Agreement. It is also now the second small-island country, after Seychelles, to pilot a collaborative World Bank-IMF assessment report, which catalogs existing and future fiscal policies that could help the country achieve macroeconomic stability as it prepares for a changing climate.

St. Lucia Major Natural DisastersThe World Bank-IMF assessment report on St. Lucia is novel in several ways. First, it explicitly assigns a central policy-making role to finance ministries, which have often been unduly neglected in most climate discussions. This framing should become more common since it is inconceivable that governments in developing countries will fully implement and enhance their NDCs if the fiscal policy tools available to finance ministries are left underutilized. Second, the World Bank-IMF report goes beyond a narrow focus on policy design and asks the broader macroeconomic questions that fiscal policymakers confront: what does intensified climate change imply for St. Lucia’s already vulnerable macroeconomic outlook, and which climate policies and measures can minimize welfare losses while boosting fiscal preparedness and debt sustainability? Third, the report adopts a unique methodological approach, utilizing a robust, model-based diagnostic framework that is transferable to other countries. More specifically, the report’s integration of a macro-fiscal model with a geophysical, climate change module provides useful, multilevel insights on policy-climate interactions. With such tools at hand, climate-fiscal policymakers will be far better equipped for strategic and foresighted planning.

While St. Lucia’s mitigation policies are developed and finalized (with recommendations contained in the report), it is the country’s adaptation challenges that are perhaps most central to the concerns of the finance ministry. If left unchecked, climate impacts are sure to exacerbate preexisting macroeconomic woes. As a critical pioneering step, the government has begun to address these issues in its latest National Adaptation Plan (NAP), launched in April 2018.

With an economy mainly based on tourism (41.8% of GDP in 2017, with nearly half of all employment indirectly linked to tourism), St. Lucia’s attractive tropical climate can be both a blessing and a curse. The island is no stranger to natural disasters: since the devastation wrought by Hurricane Allen in 1980, St. Lucia has endured more than ten major storms, floods, and landslides that together generated losses and damages totaling over 120% of GDP. But as shown in model simulations presented in the IMF-World Bank report, under a scenario with worsening climate change, the average effects of a future natural disaster would reduce total GDP in St. Lucia by a further 43% (under IPCC scenario RCP8.5), relative to a scenario without intensified global warming. St. Lucia risks not only climate-induced declines in economic output in the coming decades but also potential losses to the tourism that generates much of that output.

St. Lucia’s risks of climate-related losses and damages are almost autocatalytic in their destructive potential, but the foresighted actions of the finance ministry and fiscal policymakers can be an essential stabilizing force.  By finalizing several pieces of legislation to reduce emissions in energy and transport sectors, developing a financing strategy for mitigation and adaptation programs, and setting aside adaptation and relief funds annually for natural disaster preparedness, St. Lucia can carve a stable and sustainable financial path forward as it confronts a changing climate. Its remaining fiscal and debt priorities, detailed in the IMF-World Bank report, are a microcosm of the policy challenges faced by deputations of finance ministries around the world. St. Lucia’s pioneering climate efforts provide a repository of transferable lessons to finance ministries in other developing nations.