Managing Climate Risk in the Marshall Islands Through Resilient Infrastructure and Fiscal Policy

The IMF finds that climate change poses an existential economic threat to the Marshall Islands, where rising seas and natural disasters could cause large, lasting GDP losses if left unaddressed. Its analysis shows that investing early in climate-resilient infrastructure, supported by grants, tax reform, and stronger public investment management, can sharply reduce economic damage and improve long-term resilience.

Prepared by economists from the International Monetary Fund’s Asia and Pacific Department, with analytical grounding in World Bank climate assessments and national policy documents, an IMF paper examines how the Republic of the Marshall Islands can survive and adapt in the face of intensifying climate change. The Marshall Islands, a low-lying Pacific nation made up of fragile coral atolls, is among the most climate-exposed countries in the world. With an average elevation of just two meters above sea level and most of its population living close to the shoreline, the country is already experiencing coastal flooding, saltwater intrusion, water shortages, and damage to essential infrastructure. These pressures are not theoretical future risks but daily realities that threaten livelihoods, public services, and long-term economic stability.

Climate change is also accelerating outward migration. Since 2011, around one-third of the population has moved abroad, mainly to the United States, weakening the domestic workforce and reducing growth potential. The paper makes clear that climate vulnerability in the Marshall Islands is not just an environmental issue, it is a macroeconomic crisis that affects growth, public finances, and the country’s future viability.

The High Cost of Adapting to Rising Seas

Adapting to climate change comes with staggering costs. According to World Bank estimates cited in the paper, fully protecting the Marshall Islands against a 0.5-meter rise in sea levels could cost about US$5 billion in today’s value. That figure is equivalent to nearly 19 years of the country’s current GDP. Protecting the islands against higher sea-level scenarios would cost even more. For a small economy with limited domestic revenue, no access to commercial borrowing, and heavy dependence on grants, full protection is financially impossible.

This reality forces policymakers to make hard choices. The country’s 2023 National Adaptation Plan reflects this by adopting a phased approach. In the near term, the focus is on low-risk, affordable actions such as improving drainage, protecting key infrastructure, and strengthening institutions. Over time, the plan anticipates difficult decisions about which islands can be defended, where relocation may be necessary, and how to balance physical infrastructure investment with social spending.

Testing Policy Choices with Economic Models

To understand which strategies work best, the IMF uses a dynamic economic model known as DIGNAD, designed for small, disaster-prone economies. The model is calibrated specifically to the Marshall Islands, taking into account its reliance on imported materials, high grant dependence, modest long-term growth, and relatively low efficiency in public investment.

The analysis looks at two main climate shock scenarios. The first is a severe one-off disaster, such as a major typhoon, that causes a sudden GDP loss of about 20 percent. The second is a slow but persistent shock from sea-level rise, causing annual GDP losses of around 2 percent. While smaller each year, these recurring losses compound over time and can eventually cause more damage than a single catastrophic event.

Why Resilient Infrastructure Matters Most

The results show that simply increasing standard infrastructure spending helps but is not enough. Using grants to build more roads, buildings, and utilities before a disaster can reduce economic losses when a major shock hits, but it does little to address long-term, recurring damage from rising seas. Raising taxes, such as increasing the value-added tax, also has mixed results. While higher taxes can help finance ongoing repairs under recurring climate shocks, they tend to reduce household consumption and are less effective for one-off disasters.

The strongest results come from investing in climate-resilient infrastructure, assets designed to withstand flooding, erosion, and extreme weather. These investments significantly reduce GDP losses, support faster economic recovery, and stabilize public debt. The benefits are even greater when the government improves how public investment is planned and managed. Better procurement, stronger oversight, and higher efficiency mean that each dollar spent delivers more protection and economic return.

Funding, Institutions, and Hard Choices Ahead

The paper concludes that climate resilience in the Marshall Islands depends on three core pillars. First, adaptation investment must be prioritized over standard infrastructure. Second, the country must maximize access to concessional climate finance, including grants from the United States under the Compact of Free Association, multilateral development banks, and global climate funds. Third, institutions must be strengthened so the country can plan, manage, and absorb climate finance effectively.

Domestic revenue reforms can help create some fiscal space, especially to manage recurring climate damage, but external funding remains essential. Ultimately, the paper stresses that adaptation is not only about money. It is about making careful choices, across islands, sectors, and generations, while maintaining fiscal sustainability. Climate change poses an existential threat, but with timely, well-managed, and resilient investments, the Marshall Islands can significantly reduce the economic damage and protect its future in the decades ahead.