Building Resilience to Natural Disasters and Climate Change in the Marshall Islands

The Republic of Marshall Islands (RMI) faces severe challenges due to its vulnerability to climate change and natural disasters, resulting in economic repercussions such as erosion, flooding, droughts, and damage to essential infrastructure. Leveraging a dynamic general equilibrium model—Debt, Investment, Growth, and Natural Disasters (DIGNAD) Model, this paper shows that resilient infrastructure investments and effective public investment management can significantly reduce GDP contraction following rapid onset and slow-moving natural disaster shocks. Tax reform, featured by a permanent increase in the VAT rate, helps facilitate infrastructure restoration against persistent sea-level rise and boost private investment and long-term growth despite dampened consumption. To address substantial financing needs for climate-resilient infrastructure, maximizing climate funding is essential, which includes improving domestic revenue collection and mobilizing external resources from the renewed Compact and development partners. RMI must also strengthen its institutional capacity to access climate finance effectively. Given the limited financial envelope, prioritizing adaptation actions while maintaining fiscal sustainability is vital for the country's future resilience.