How Climate Adaptation Can Save Peru’s Economy from El Niño and Rising Temperatures

The IMF Working Paper by Zamid Aligishiev and Daria Kolpakova presents an urgent and data-rich analysis of the deepening threat that climate variability poses to Peru’s long-term economic trajectory. Drawing on the analytical frameworks of the International Monetary Fund’s Western Hemisphere Department, and enriched by collaboration with the Banco Central de Reserva del Perú, Ministerio del Ambiente, and other academic contributors, the paper outlines how recurring El Niño Costero events and slow-onset climate change may sap national output, erode public finances, and deepen inequality. It emphasizes that the costs of inaction are steep, but the benefits of timely, targeted adaptation could be transformative.

Peru ranks among the most climate-vulnerable nations in Latin America. From 2003 to 2019, it recorded over 61,000 natural emergencies, predominantly floods, droughts, and landslides. In El Niño years, asset losses and affected populations surge, damaging infrastructure and slashing productivity. Previous episodes, like those of 1982–83, 1997–98, and 2017, inflicted economic losses of up to 11.6% of GDP. These impacts are magnified by Peru’s low adaptive capacity, especially in water resource management and infrastructure. Rising sea surface temperatures from more intense El Niño events and long-term warming are expected to reduce fish stocks in the Humboldt Current and depress agricultural yields, jeopardizing sectors that contribute nearly 8% of GDP and employ more than a quarter of the workforce.

El Niño Costero: A Short-Term Shock with Long-Term Scars

The report meticulously quantifies the economic toll of past El Niño Costero events using the Local Projection method, a statistical model that captures the dynamic effects of climate shocks. The findings are sobering: in the year following a strong El Niño, fish production collapses by an average of 70%, and agricultural output declines by 11%. Recovery takes over a year, with agriculture rebounding more slowly than fisheries. These events also fuel inflation, headline CPI increases by up to 4.4 percentage points, while food inflation can spike even higher due to disrupted harvests and seafood supplies. Core inflation follows with a one-year lag, revealing a persistent pass-through effect from volatile food prices.

These inflationary surges erode consumer purchasing power, especially among low-income households. The fiscal impact is equally severe. The government’s primary balance tends to deteriorate by about two percentage points of GDP, as emergency spending rises and tax receipts shrink. The 2023 El Niño episode followed the script almost precisely: fishing output plummeted by 27.3%, agricultural production dipped 4.9%, and construction and manufacturing both contracted sharply. Over the same period, the central government’s fiscal balance worsened by 1.2 percentage points of GDP.

Climate Change Will Cut Deep into Peru’s Future Growth

Looking beyond short-term effects, the study models Peru’s long-run economic prospects under three climate pathways: SSP1-2.6 (Paris-aligned), SSP2-4.5 (intermediate), and SSP3-7.0 (high emissions). Using a modified version of the IMF’s FGG model, originally designed to assess climate shocks in small open economies, the researchers simulate the macroeconomic damage from both acute disasters and chronic temperature increases. The model distinguishes between standard public capital (vulnerable to climate events) and resilient capital (adaptation-enhanced), allowing for nuanced projections of infrastructure loss and natural capital degradation.

In the worst-case scenario, Peru could see cumulative GDP losses of over 50% by 2100, while even the most optimistic scenario suggests a long-run drag of nearly 14% by mid-century. On an annual basis, this translates to a 0.1 to 0.3 percentage point drop in long-term potential growth rates. These losses exceed those projected by other global models, as this study uniquely incorporates intensifying El Niño events and region-specific vulnerabilities. Importantly, most of the economic pain is front-loaded in milder scenarios, while the SSP3-7.0 trajectory brings more catastrophic losses later in the century.

Resilience Investments Could Deliver Big Gains

The authors argue that these bleak forecasts can be partially reversed through well-targeted investment in climate resilience. They simulate a reform package based on full implementation of Peru’s National Adaptation Plan and Disaster Risk Management Strategy by 2030, combined with climate-proofing 80% of the country’s public infrastructure. The results are promising. Under such a strategy, Peru’s potential GDP could be up to 12.3% higher by 2050, and as much as 31% higher by 2100, compared to a no-action baseline. These gains come from avoided damages, improved productivity, and strengthened public services.

Adaptation measures include not just physical upgrades to roads, bridges, and schools, but also enhanced agricultural systems, early warning networks, and water infrastructure. This kind of structural resilience reduces the intensity of damage from natural disasters while enabling the economy to recover faster and more completely. However, the study also acknowledges the need to improve the quality of public investment execution, which remains hampered by institutional fragmentation and budget under-utilization.

Climate Adaptation Is a Fiscal Win, Not a Burden

Perhaps most compellingly, the paper finds that climate resilience investments can be fiscally self-sustaining. Between 2024 and 2050, the modeled policy package delivers average annual fiscal savings of 1.2% to 1.6% of GDP. These savings grow to between 2.3% and 4.6% of GDP per year by 2100. The gains stem primarily from higher tax revenues generated by stronger long-run growth, coupled with reduced spending on post-disaster reconstruction and emergency response.

In present value terms, the net savings, after accounting for all upfront investment costs, remain strongly positive across all climate scenarios, even with a 6% discount rate. By the end of the century, these net benefits amount to more than 250% of 2023 GDP in the intermediate emissions scenario. The message is clear: adaptation spending is not a luxury, it is a fiscally sound investment in national stability.