Appropriate management of water requires greater policy coherence vis-a-vis macro-fiscal planning. This renewed emphasis calls for an improved analytical framing and strengthening of public sector capacities. The paper proposes an analytical framing of water resilience relevant to macro-fiscal planning termed ‘water value chain’ outlining channels through which water resilience affects the macroeconomy and a country’s fiscal position. Focusing on three major policy themes in the water value chain, namely: (i) management of water resources, (ii) ensuring adequate and reliable access, and (iii) enhancing the efficiency of water use, the paper further assesses public sector capacity building needs associated as identified in the IMF’s Climate Policy Diagnostic (CPD) and policy reforms being pursued under the IMF’s Resilience and Sustainability Facility (RSF).

Climate change leads to more severe periods of drought. Especially in drought prone regions as Ethiopia there are economic, environmental and social consequences. In this article we take a welfare economic perspective. There are welfare costs due to its direct cost, welfare costs related to risk aversion, and welfare costs related to the fact that drought might impact intertemporal variability.Then we focus on the equity aspect of drought. Increased drought has an impact on inequality as rich and poor households are impacted differently. We analyse the equity impact using the Atkinson Social Welfare Function and arrive at eight cost components: four efficiency related and four equity related. This information can be used to inform policymakers and to advise them which policy measures to take. It can inform about the welfare impact of different policy measures. We apply the approach to rural households in Eastern Ethiopia facing drought.

Zambia’s reliance on rain-fed agriculture makes its economy and population highly vulnerable to frequent droughts and irregular rainfall. This paper assesses the role of social protection, specifically the Social Cash Transfer (SCT) program, in mitigating drought-induced poverty and consumption declines. Using the MicroZAMOD microsimulation model and district-level rainfall data, we find that droughts significantly increase poverty and reduce household consumption, disproportionately affecting the poorest households. While the current SCT program provides some relief, reforms to eligibility criteria, particularly removing the household composition requirement, could improve targeting, expand coverage, and strengthen resilience against climate-related economic shocks.

Environmental regulations can reduce economic output when firms struggle to adopt cleaner production methods. We examine how public infrastructure can complement regulations by mitigating their economic costs. Using detailed firm-level data and a staggered difference-in-differences design, we find that sewage treatment plants (STPs) provided by local governments significantly enhance wastewater treatment among polluting firms. This infrastructure provision reduced firms’ production adjustments required for regulatory compliance, attenuating output losses by approximately 30%. To further analyze optimal policy design, we develop an equilibrium model that captures the joint decision-making of governments in providing STPs and firms in managing wastewater discharge. Our model also quantifies the social welfare gains from increased public goods provision, offering insights into effective water environmental governance.