Natural disasters and foreign exchange reserves: The role of renewable energy and human capital

Abstract

The occurrence of natural disasters is as old as the history of human beings, thus, the SDG 11.5 target underscores the importance of reducing natural disasters and their corresponding losses. Natural disasters suddenly disturb the inflow of foreign reserves and restrict the purchase of necessary goods, thus, causing welfare loss. Due to limited literature, this research shows the effect of natural disasters on foreign exchange reserves in 24 high, 26 upper-middle, 32 lower-middle, and 16 low-income countries. The two-step generalized method of moments shows that disaster-related loss reduced the level of foreign reserves in all panels, excluding high-income countries. The favorable impact of infrastructure, capital formation, renewable energy, FDI inflow on foreign reserves implies practical implications like (a) infrastructural investment is recommended to strengthen the economy, (b) capital formation is recommended for the production of exportable items, (c) enhance human capital through healthcare, education, employment, training, and skills development, (d) installation of renewable energy systems at discounted rates to tackle energy crisis and reduce import bills, and (e) increase FDI inflow, especially in disaster management and planning. Resilience-building is a vital tool for hazard management and planning. This study encourages countries to follow the Sendai Framework 2015–2030 to increase resilience.