The Philippines faces an escalating economic threat from climate change that could wipe out as much as two percent of its annual output if the government fails to implement aggressive adaptation strategies, according to the International Monetary Fund (IMF).

In a staff report released following its latest mission, the Washington-based lender warned that the long-term impact of intensifying typhoons and rising sea levels poses a significant risk to the archipelago’s fiscal stability.

Without intentional intervention, IMF said these climate-driven losses are projected to far exceed the current annual average of 0.3 percent of gross domestic product.

Based on official government macroeconomic targets through 2028, a two percent hit to the economy would result in staggering financial damage. Given the 2024 nominal GDP estimate of ₱26.45 trillion, such a loss would have totaled ₱528.9 billion last year.

As the economy expands, the cost of inaction grows proportionally higher. Under current projections, the annual loss could reach ₱572.5 billion this year and climb to ₱753.7 billion by 2028, when GDP is forecast to hit ₱37.69 trillion.

The IMF’s warning comes as the Philippines struggles with a slowdown in momentum. Economic growth cooled to four percent in the third quarter, dragging the year-to-date average to five percent. This performance trails the government’s minimum growth target of 5.5 percent, a shortfall the IMF attributed to an unusually high frequency of tropical cyclones and bottlenecks in public infrastructure spending.

While the government has sought to improve the quality of its disbursements following public criticism over the management of flood-control funds, the delays have weighed on total output.

Recent weather events, including Typhoon Nando and Super Typhoon Uwan, have inflicted “devastating” damage on livelihoods across Luzon and the Visayas, the IMF noted. These disruptions frequently spill over into the financial sector by stoking inflation.

Climate-induced supply shocks currently add as much as 0.6 percentage point to annual inflation, complicating the Bangko Sentral ng Pilipinas’s mandate to keep price growth within its two percent to four percent target range.

The IMF signaled support for the BSP’s efforts to integrate climate risks into monetary policy, noting the delicate balance the central bank must strike.

While the BSP has already slashed its benchmark interest rate by a cumulative 200 basis points to 4.5 percent to spur growth, the lender warned that aggressive tightening to combat climate-driven food inflation could backfire by raising the cost of reconstruction and deepening output losses.

The IMF suggested the central bank may need to tolerate temporary price spikes to support the broader recovery, provided that long-term inflation expectations remain anchored.