International Monetary Fund Conditionalities May Weaken the Recipient States’ Readiness to Adapt to Climate Change! Evidence from 1995 to 2020

Abstract

While several studies examine the effects of IMF conditionalities and IMF programs in relation to climate change, to our knowledge, there are no studies that empirically examine the effect of IMF conditionalities on recipient states’ readiness to address climate change. Using a two-stage least square instrumental variable approach, we found that IMF conditionalities related to the fiscal balance policy area and, to a lesser extent, the external debt policy area weaken the recipient states’ climate change readiness. These findings are supported by a series of robustness checks. Nonetheless, this reflects that IMF conditionalities that fiscally restrain states can weaken their fiscal capacity to invest in climate change adaptation. Therefore, our research findings carry policy implications for the IMF, and future research is needed to examine the IMF in relation to its climate change initiatives. The limitations of this study are also discussed.