{"id":79284,"date":"2025-07-15T09:54:22","date_gmt":"2025-07-15T08:54:22","guid":{"rendered":"https:\/\/www.lse.ac.uk\/granthaminstitute\/?post_type=news&p=79284"},"modified":"2025-07-15T09:55:29","modified_gmt":"2025-07-15T08:55:29","slug":"overlooking-nature-is-no-longer-an-option-for-fiscal-policy-and-debt-sustainability-analyses","status":"publish","type":"news","link":"https:\/\/www.lse.ac.uk\/granthaminstitute\/news\/overlooking-nature-is-no-longer-an-option-for-fiscal-policy-and-debt-sustainability-analyses\/","title":{"rendered":"Overlooking nature is no longer an option for fiscal policy and debt sustainability analyses"},"content":{"rendered":"\n

Environmental degradation is a structural economic risk rather than a peripheral concern. Nicola Ranger, Carlo Pasqua and Christopher Adam explain why, as international financial institutions review the IMF-World Bank Debt Sustainability Framework, integrating nature must be a core priority.<\/p>\n\n\n\n

Integrating nature into fiscal policy is a critical priority for economic stability and we have the data and tools needed to do this – as our new report<\/path><\/svg><\/a> from the Grantham Research Institute and University of Oxford shows. Across the globe, more than half of GDP<\/path><\/svg><\/a> depends in whole or in part on the ecosystem services delivered by our natural capital (or stock of productive natural assets). This dependency is particularly pronounced in low-income countries (LICs). Economic activity in these countries is closely tied to ecosystem services such as water availability, soil fertility, pollination and protection from natural hazards – but these services are increasingly under threat due to environmental degradation.<\/p>\n\n\n\n

Despite this evidence, the primary international instrument used to assess debt risks and inform international finance and fiscal policies in LICs – the IMF-World Bank Debt Sustainability Framework for Low-Income Countries (LIC-DSF) – has yet to systematically integrate nature-related risks. We were commissioned to assess the implications for LICs and international finance and concluded that this omission risks producing unrealistic macroeconomic baselines, overlooking latent vulnerabilities and disincentivising investments that would otherwise enhance long-term economic resilience and growth.<\/p>\n\n\n\n

Nature as a macro-critical factor<\/h2>\n\n\n\n

The adverse economic impacts of environmental degradation are increasingly evident. In Pakistan<\/path><\/svg><\/a> for instance, degraded natural systems contribute significantly to health burdens, with the costs of environment-related health impacts estimated at 6.5% of GDP in 2015. In Malawi<\/path><\/svg><\/a>, agriculture accounts for more than 20% of GDP and 80% of employment, yet research by the World Bank shows that approximately 80% of Malawi’s land is degraded, resulting in declining agricultural productivity and threatening long-term economic output and fiscal stability. In Honduras<\/path><\/svg><\/a> deforestation has worsened landslide and flood risk, increasing reconstruction costs and trade disruptions.<\/p>\n\n\n\n

These effects are not isolated events: rather, the degradation of natural capital represents a systemic threat that is already undermining growth, disrupting fiscal sustainability and impairing sovereign creditworthiness across many LICs. Empirical evidence indicates that environmental degradation materially affects economic fundamentals:<\/p>\n\n\n\n