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June 8 — Failing to manage growing global water challenges could dampen countries’ economic prospects, the International Monetary Fund said in a report released June 8.
Many countries are already facing water stress, supply variability, lack of access to safe drinking water and sanitation and water pollution—all of which have economic impacts. These issues are likely to worsen over time as population and income growth drive up water use to a level that cannot be met by existing supplies, the paper said.
Water supply and demand imbalances are expected to be exacerbated further by climate change.
Some naturally water-deficient countries, including Singapore, have figured out how to overcome these challenges, while others, such as Yemen, have fallen to a near-crisis situation.
The IMF says the key to better managing water supply and demand is getting water pricing right—and that means reforming water subsidies, which the fund estimates at $456 billion globally.
“When you don’t get the prices right for water, I think you’re bound to have misallocation today and misallocation tomorrow,” David Lipton, the IMF deputy managing director, said at a World Resources Institute discussion marking the paper’s launch.
Lipton said misallocation today in countries such as India can put constraints on agricultural productivity and lead to poor sanitation, disease and malnourishment. Misallocation tomorrow comes in the form of inadequate maintenance and investment in water infrastructure, he said.
Through public water utilities, most countries subsidize water by charging less than the price needed to cover all supply costs, according to the IMF.
These subsidies end up creating incentives for water overuse and underinvestment and, in developing countries especially, they tend to benefit upper-income groups rather than the poor.
So the IMF wants to do for water subsidies what it did two years ago for the world’s $5.3 trillion in energy subsidies. Since the fund released a similar report on energy subsidies, several countries, including Indonesia, have implemented reforms.
“We think in the case of water, as in cases of energy subsidies and climate change, these are things that can impact macroeconomic stability, can affect long-term growth and as a result these are macrocritical subjects for us to be involved in and to play a role in shaping policy,” Lipton said.
The IMF offered three policy options for better pricing water.
“One option is to establish a dual tariff structure that provides a certain amount of water at subsidized prices to everyone and charges a higher tariff beyond that level,” the report said. A second option is to subsidize water at public pumps.
“The third option is to subsidize water connections for the poor, improving their access to water at prices below those charged by private vendors,” it said.
The ideal approach will vary by country, the IMF said. For example, some may prefer to establish markets for water rights like the pilot program planned for seven Chinese provinces, it said.
Either way, parallel reforms for water use in areas like agriculture, trade and energy are also necessary, the paper said.
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