## ppea2019020 ## Source details **Canonical URL:** [ppea2019020](https://www.imf.org/-/media/files/publications/pp/2019/ppea2019020.pdf) ## Other formats - [Markdown version](/-/media/files/publications/pp/2019/ppea2019020.pdf.md) - [Structured JSON version](/-/media/files/publications/pp/2019/ppea2019020.pdf.json) --- ### Executive summary: focus, motivation, and three‑pillar roadmap - Many developing countries—typically small or poor—are vulnerable to natural disasters with large human and economic costs; disaster risk management is a macro‑critical challenge. - The paper frames a national Disaster Resilience Strategy (DRS) as a three‑pillar strategy: - Pillar I — Structural resilience: infrastructure and other investments to limit the impact of disasters. - Pillar II — Financial resilience: creating fiscal buffers and using pre‑arranged financial instruments to protect fiscal sustainability and manage recovery costs. - Pillar III — Post‑disaster (including social) resilience: contingency planning and related investments ensuring a speedy response to a disaster. - A full national DRS requires actions on all three pillars, grounded on a clear diagnostic. - Observed gaps: - Underinvestment in structural resilience due to sizable up‑front costs and limited fiscal space. - Limited use of ex‑ante financing instruments (insurance, risk transfer) because of cost concerns and underdeveloped markets. - Substantial room to strengthen post‑disaster response mechanisms. - Benefits of resilience investment include lower expected losses, higher returns to private investment, improved employment and output performance, and better continuity in public services. - Date on document: April 4, 2019. ### Stylized facts on impacts and vulnerabilities - Frequency and damage from natural disasters have been increasing and are expected to intensify with climate change. - Small states in the Caribbean and the Pacific have annual average damage of 2–3 percent of GDP. - Panel C—Top Ten Natural Disasters: 1980-2017 (Damage as % of GDP): - Dominica, 2017, Storm, 226 - Grenada, 2004, Storm, 184 - Maldives, 2004, Earthquake, 179 - Mongolia, 1996, Wild Fire, 158 - Samoa, 1991, Storm, 157 - Samoa, 1990, Storm, 145 - St. Kitts & Nevis, 1998, Storm, 137 - Vanuatu, 1985, Earthquake/Storm, 131 - Haiti, 2010, Earthquake, 122 - Cambodia, 1991, Flood, 106 - Natural disasters can: - Set back output growth and contribute to significant rises in public debt. - Reduce medium‑term growth potential via repeated shocks to physical capital, higher effective cost of capital, and higher out‑migration. - Generate social costs: lost lives, worsened food insecurity, deterioration in human capital, and disproportionate harm to the poor. ### International support, coordination, and the DRS as anchor - IFIs and development partners offer various support forms, but country capacity to use support is often limited and support can be fragmented. - A fleshed‑out, country‑owned DRS can act as an anchor for coordinated support and mobilize concessional donor support. - Fund endorsement of an associated macroeconomic framework could have a catalytic effect in mobilizing concessional donor support. ### IMF role and instruments (mandate‑consistent) - Surveillance: analyze macroeconomic impact of disasters and resilience building. - Lending: Fund arrangements could support DRS implementation and address balance of payments problems. - Capacity building: targeted TA to strengthen national capacity. - Convening: collaborate with World Bank and others to coordinate private insurers, governments, donors, climate funds, and explore market and debt instruments with disaster clauses. --- ### Pillar I — Structural resilience: costs, benefits, and evidence - Estimated global adaptation costs and country examples: - UNEP (2016): adaptation costs in developing economies currently about US$56–73 billion; potentially rising to US$140-300 billion by 2030. - Fiji: adapting to climate change and natural disasters estimated to require structural investments of around 100 percent of GDP over the next ten years; plausibly achieved by sustaining public investment to GDP ratio at around 10 percent of GDP (coupled with an increase in private investment). - Benefits: - Resilient public infrastructure could increase potential output by 3–11 percent in the ECCU; growth dividend of 0.1–0.4 percentage points per year during transition. - World Bank microstudies: benefit‑cost ratio of investing in resilient infrastructure ranges from $2.5–$11 for every $1 spent across hazards. - Staff analysis for Solomon Islands: prioritizing resilient investment and strengthening PFM yields higher growth and lower public debt over the medium term. - Empirical investment shares and gaps: - CCPAs for Belize, Seychelles, and St. Lucia suggest between one fourth and one third of investment budgets devoted to resilience projects. - Fiji: resilience spending grew fourfold to about US$170 million and was about a tenth of the budget in FY2016/17. - Dominica: about half of public investment since Hurricane Maria in 2017 allocated for disaster‑resilient projects. - CCPAs estimated resilience investment gaps of 2‑3 percent of GDP a year over a decade or more in the CCPA countries. - Ethiopia: current annual investments in climate adaptation US$400 million or 0.5 percent of GDP; would have to more than double to fully implement drought mitigation strategy. - Financing and policy choices: - Drivers of underinvestment: short‑term policymaking biases, tight fiscal constraints, borrowing limits, limited concessional financing. - Options: improved revenue mobilization, expenditure reprioritization, selective higher external borrowing depending on debt sustainability, and additional targeted aid and concessional finance. - Illustrative financing implications (country cases): - Dominica: - Damages: near 100 percent of GDP (tropical storm Erika, 2015) and over 200 percent of GDP (hurricane Maria, 2017). - Staff assumption: government can credibly carry out additional fiscal adjustment of 4 percent of GDP (back loaded and gradual). - Sustaining resilient investment with that adjustment requires an increase in grants of around 2.8 percent of GDP annually to meet public debt target of 60 percent of GDP by 2030, or about US$200 million cumulatively. - Grenada: - Public capital spending would need scaling up by 3 percent of GDP annually to implement resilient investments by 2030. - Estimated additional grant financing: US$15 million annually (or US$185 million in total) to stay within 60 percent of GDP public debt target. - If financed entirely by borrowing, public debt would rise to 70 percent by 2030. - Private sector role: supplement public funding where appropriate; account for contingent public liabilities from PPPs. ### Quantified scenario — Box 2: Savings from ex‑ante interventions (model summary) - Model: dynamic stochastic general equilibrium for six small states (Dominica, Antigua, St. Lucia, St. Vincent, Haiti, Fiji) over 20 years, using historical disaster frequency. - Two policy options: - Option 1: Ex‑post resilience investment (rebuild after disasters; donors cover full rebuilding costs; resilient capital assumed 10 percent more expensive than non‑resilient). - Option 2: Ex‑ante resilient investment (replace depreciating capital with resilient capital annually; government nominal spending 1 percent of GDP higher; donors finance the additional 1 percent of GDP plus post‑disaster reconstruction as in Option 1). - Simulation outcomes: - International community can save on average 10 percent of recipient’s GDP (NPV) by investing ex‑ante; savings fall if resilient premium > 10 percent. - Recipient GDP on average 4 percent higher under ex‑ante resilience. - If disaster frequency increases (one additional large disaster >20 percent of GDP damage in 20‑year period): - Donor savings increase to 14 percent of recipient’s GDP. - Overall GDP level about 6 percent higher under ex‑ante resilience. - Caveats: results sensitive to resilient capital premium and donor financing assumptions. --- ### Pillar II — Financial resilience: multi‑instrument approach and insurance trade‑offs - Disasters generate sizable fiscal/financing shocks; planning and pre‑arranged instruments reduce impairment of credit‑worthiness and financing constraints. - Multi‑instrument strategy (World Bank multi‑layer approach): - (i) Self‑insurance via fiscal buffers. - (ii) Risk transfer via insurance or risk‑sharing. - (iii) Contingent financing via pre‑arranged credit lines with IFIs. - (iv) Concessional financing and humanitarian assistance for very large, rare disasters. - Contingent financing examples: World Bank’s CAT DDO; IDB’s CCL and CCF; ADB contingent credit lines/grants. - Regional sovereign insurance pools (key figures from Table 2): - CCRIF (2007): Avg. premium income: US$21.5m; Avg. coverage: US$650m. - PCRAFI (2013): Avg. premium income: US$2m; Avg. coverage: US$45m. - ARC (2013): Avg. premium income: US$22m; Avg. coverage: US$50m. - SEADRIF (2018): Avg. premium income / Avg. coverage: TBD. - Insurance gaps and constraints: - Two thirds of natural disaster losses in the Caribbean uninsured vs. about half globally. - Caribbean (U.S.$175 billion, 1980‑2017): Insured losses U.S.$115 billion (66%); Insurance gap U.S.$60 billion (34%). - Worldwide (U.S.$2,030 billion, 1980‑2017): Insured losses U.S.$1123 billion (55%); Insurance gap U.S.$907 billion (45%). - Sovereign constraints: weak fiscal positions, high premia; parametric insurance and catastrophe bonds cost 1.5–3.2 times expected annual payout. - Regional pools have coverage limits and basis risk; private insurance penetration low due to high premia, uninsurable construction, and limited social tradition of purchasing insurance. - Trade‑offs from staff simulations (1,000 states of the world): - Insurance increases growth protection but adds fiscal costs via premia, raising debt. - Four premium cost categories simulated: Lowest Premium; Medium‑Low Premium; Medium‑High Premium; Highest Premium. - Prioritizing fiscal sustainability favors lower‑cost packages with lower payouts; prioritizing growth requires more expensive packages with higher payouts. - For severely exposed, small countries, protecting growth is costlier and may be infeasible without donor support. - Policy recommendations and options: - Self‑insurance funds: aim annual contributions at least equivalent to (i) expected annual damages (which could start from 0.4 percent of GDP for highly vulnerable countries) and/or (ii) parametric insurance deductibles. - Contingent credit line approvals require demonstration of fiscal and debt sustainability; CAT‑DDO approvals require adequate macroeconomic policy frameworks. - Donor support can subsidize insurance premia (directly or indirectly), augment regional pool capital (e.g., GRiF), diversify pooling across pools, expand cat bond markets, and develop state‑contingent debt instruments. - Increase private insurance penetration via regional pooling, government‑sponsored pools, incentives where market failures exist, strengthened regulation, and financial literacy. - Government‑sponsored pools examples: National Flood Insurance Program (US), Florida Hurricane Catastrophe Fund, California Earthquake Authority, New Zealand’s Earthquake Commission, Turkish Catastrophe Insurance Pool (2000). - Box 3 — Climate‑resilient debt instrument options: 1. Disaster‑linked clauses in debt contracts (automatic extension/deferral of principal/interest when qualifying disaster occurs): - Deferral reduces gross financing needs; creditors bear reprofiling risk and could demand yield premium; mitigation: make maturity extension NPV‑neutral via coupon enhancement. - Adoption hurdles: small issuer base, first‑mover yield premiums; possible accelerants: short external commercial maturities allowing coordinated reissuance; liability management across sovereigns; bilateral official creditor standardization; inclusion in restructurings (examples: Grenada 2015, Barbados 2018). 2. Insurance for specified debt service payments: - Payouts used to service debt, reducing stock of debt. - Merits: applies to new and existing debt; pooling across countries could reduce costs. - Drawbacks: requires ex‑ante premia by fiscally constrained countries; thin markets yield high costs; justified only if insurance lowers coupon rates materially or strengthens market access post‑disaster. --- ### Pillar III — Post‑disaster and social resilience: preparedness, response, and procurement - Early development of detailed emergency response plans (disaster recovery frameworks) is warranted to: - Clarify institutional arrangements, responsibilities, and post‑disaster decision processes. - Strengthen rapid mobilization of financial and physical resources to contain disruption to public services (water, electricity, medical services, schools, citizen security, financial services). - Social protection: - Established social protection systems enable faster, better‑targeted humanitarian response; absence leads to delays, poor targeting, and corruption risk. - Ethiopia’s Productive Safety Net Program cited as scalable, transparent cash transfer example. - Public procurement: - High‑quality procurement influences response effectiveness; weak procurement undermines response and can deter donors from using government systems. - Regional preparedness examples: - Caribbean: 18 countries established CDEMA for coordinated emergency response and a regional risk information system. - Central America: Coordination Center for the Prevention of Natural Disasters covers six countries. - Pacific: Pacific Islands Emergency Management Alliance; Pacific Catastrophe Information System; early warning successes in Vanuatu. - Africa: Africa Regional Strategy for Disaster Reduction adopted in 2004; Africa Risk Capacity agency provides coordination in Sahel; EAC and Indian Ocean countries cooperating on storm information. - Constraints: limited logistical capacities, fragmented external support, limited national capacity. - Opportunities: pooling regional expertise, peer learning, adopting successful policies from Indonesia/Philippines/Japan/New Zealand, targeted development partner support for response planning. --- ### Toward enhanced coordinated action: DRS development and division of labor - Rationale: - Multiple stakeholders (Bretton Woods, regional banks, bilaterals, climate funds, private insurers) provide support; weak‑capacity states struggle to coordinate. - Authorities in Caribbean and Pacific stressed fragmented practices and favored an “alliance” or “grand bargain” for coordination. - DRS characteristics and role: - Country‑owned, identifying policy actions across three pillars. - Grounded on comprehensive forward‑looking diagnostic of vulnerability and preparedness; identify key projects and investment plan; flag financing shortfalls; review post‑disaster response adequacy. - Could build on existing plans but must integrate macroeconomic and debt sustainability considerations. - Support needed to develop a DRS: - Substantial external assistance for a well‑grounded diagnostic; CCPA could be a starting point but needs supplementation for full diagnostic. - Technical support to identify and cost structural resilience projects. - External evaluation of disaster financing strategy (IFIs or bilateral TA). - IMF surveillance to support medium‑term macroeconomic framework and financing options. - Engagement with climate funds aided by development partners. - For many small/low‑income countries, domestic fiscal space unlikely to be sufficient; additional concessional support likely needed to avoid threatening debt sustainability. - Illustrative division of labor (indicative roles): - World Bank and other MDBs: lead vulnerability assessment, prioritize investments, TA for DRFIs and post‑disaster resilience. - IMF: lead macroeconomic policy framework reflecting disaster costs and resilient investment returns; fiscal action identification; balance of payments support; capacity building. - Bilaterals: TA for preparedness; concessional financing; insurance cost alleviation; preparing climate fund proposals. - Climate funds: consider DRS and IFI endorsement as screening devices to simplify administrative requirements. - Official sector insurance (e.g., CCRIF): collaborate with IFIs on financial resilience strategies. ### The Climate Change Policy Assessment (CCPA) — role and scope - CCPA helps small states analyze economic impacts of climate change and disasters: projected economic impact, costing of planned responses, and recommendations on fiscal/structural reforms. - To serve as a full DRS diagnostic, CCPA would need re‑orientation to focus on current and near‑term disaster risks. - CCPA pilots and plans: - Pilots completed: Seychelles, St Lucia, Belize (since 2017). - In progress/planned: Grenada (in progress), Micronesia (planned), Tonga (planned). - Extending CCPAs requires assessment of pilots, formalizing Bank participation, and additional budgetary resources. --- ### The Fund’s operational role: surveillance, lending toolkit, and capacity building - Surveillance: - Country teams should highlight risks of inaction and analyze returns to structural and financial resilience. - Baseline macro frameworks and DSAs should incorporate costs and benefits of resilience strategies; natural disaster shocks are required scenario in the new LIC DSA and considered for MAC‑DSA tail shocks. - Pacific country staff methodology: adjust long‑term baseline projections by expected disaster impact times country probability; adjustments range from 0.2 percent of GDP up to 0.6–0.7 percent of GDP per year for most vulnerable Pacific countries. - Fund lending toolkit: - Disbursing arrangements for BOP needs while implementing resilience programs. - Precautionary three‑year SBA as insurance against adverse shocks. - Non‑financial signaling instruments (Policy Coordination or Policy Support Instruments) to signal Fund endorsement. - Post‑disaster assistance via RFI or RCF for urgent BOP needs. - Note: SCF is the only concessional facility designed for precautionary use with maximum length of two years; LIC Facilities Review is reassessing SCF length and RCF access levels. - Program design and conditionality: - Macroeconomic frameworks integrate short‑run costs and long‑term benefits of resilience investment. - Structural conditionality focus on priority DRS actions, designed with the World Bank and partners. - Capacity development to help countries meet program objectives. - Capacity development areas where the Fund can support: - Medium‑term fiscal and budgeting frameworks, revenue mobilization, PFM strengthening, public asset and investment management (PIMA). - Financial infrastructure and risk transfer understanding: asset registries, risk management units, banking regulation/supervision TA. - Convening stakeholders to tackle market‑based risk transfer hurdles and explore debt instruments with disaster clauses. - Promote business continuity plans for central banks/commercial banks and stress testing of banks’ loan portfolios to disaster shocks. - Use regional workshops and on‑line training to exploit scale economies (examples: PFTAC regional workshops, CARTAC workshops). ### Issues for discussion posed to Directors (selected) - Is the three‑pillar strategy a useful lens? - Is closer coordination among development partners necessary for countries with insufficient institutional capacity? - Is a government‑owned DRS useful to facilitate donor coordination? - Would a DRS supported by key development partners catalyze concessional financing? - Should Fund surveillance give greater attention to resilience building in vulnerable countries? - Is the Fund lending toolkit broadly appropriate for supporting DRS implementation? - Is there merit in further Fund‑Bank work on state‑contingent debt instruments? - Does the CCPA deliver significant value‑added in its pilot CCPAs? --- ### Annex highlights — World Bank Group support, SSA features, cat bonds, and country examples - WBG DRM financing: - Annual WBG DRM funding increased from $3.7 billion in FY2012 to $5.3 billion in FY2018. - IDA lending to 23 IDA‑eligible small states increased from $604 million in IDA15 to about $1.2 billion in IDA17. - PPCR portfolio: 30 projects totaling $490 m (about 40 percent of $1.2 billion PPCR envelope). - CAT‑DDO: some 13 countries have benefitted for a cumulative amount in excess of US$3 billion. - Market‑based risk transfer intermediated by World Bank: cumulative amount in excess of US$4 billion. - Global Risk Financing Facility (GRiF): expected donor contribution of US$145M from Germany and UK (further contributions under discussion). - CERC under IPF enables rapid post‑disaster response without requiring fiscal and debt sustainability for approval. - Annex II — Sub‑Saharan Africa (SSA) disaster features: - Floods and slow‑moving disasters (droughts) account for 80 percent of loss of life and 70 percent of recorded economic losses in SSA. - SSA population projected to more than quadruple to nearly 3.7 billion by 2100 (IMF, 2015); region least prepared due to rain‑fed agriculture dependence, limited resources, and elevated poverty and food insecurity. - Chart finding: SSA populations highly exposed to droughts—about a quarter of the population affected on average during worst droughts after 2000. - Annex IV — Cat bonds structure and challenges: - Cat bond premium averaged 1.9 times expected loss for investors; “insurance multiple” range 1.2–3.2. - SPV issues cat bond; issuance does not increase sovereign debt stock; payout triggers liquidate SPV investments to make payments. - Challenges: high costs, parametric trigger calibration, capacity constraints; World Bank as intermediary can deliver cost savings and has facilitated joint sovereign issuance for Pacific Alliance. - Annex V — Optimal risk transfer differences by country size: - Smaller countries: costlier to protect growth because losses and premia are larger as share of GDP; stronger trade‑offs between growth and debt favor debt‑biased, less costly packages unless donors subsidize. - Larger countries: insurance implications for debt and growth smaller; payout limits can still bind and affect optimal choices. - Premium subsidies can shift countries toward higher coverage with better growth protection. - Country examples summarizing resilience policies: - Fiji: pledged transition to renewable energy by 2030; “Build Back Safer” after 2016 cyclone Winston; sovereign Green Bond issued on London Stock Exchange in 2017; Investment Needs by Sector: Transport 51%; Floods/Coastal Protection 23%; Water 12%; Health/Education 6%; Energy 5%; Other 3%. - Bangladesh: Climate Fiscal Framework 2014; Bangladesh Delta Plan 2100; Green Climate Fund grants as of May 2018: $85.4 million; policy guidelines on Green Banking; banks/NBFIs requested to allocate 10 percent of CSR budgets to flood/cyclone/drought areas; domestic revenue less than ten percent of GDP. *Source: IMF staff chapter: "BUILDING RESILIENCE IN DEVELOPING COUNTRIES VULNERABLE TO LARGE NATURAL DISASTERS" (ppea2019020).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Focus and motivation - Many developing countries are vulnerable to natural disasters that can have large human and economic costs; disaster risk management for these countries is a macro-critical challenge. - The IMF has underscored macroeconomic risks of climate change and natural disasters for many countries (typically either small or poor), including limited capacity to develop, finance, and implement a full disaster risk-management strategy. - This paper discusses components of a national Disaster Resilience Strategy (DRS), drawing on consultations with other international organizations and on discussions at recent high-level conferences on building disaster resilience in the Caribbean and in the Pacific regions, and examines how support from international financial institutions (IFIs) and other development partners might be better coordinated. - Date on document: April 4, 2019. ### A roadmap for resilience (three-pillar strategy) - The paper frames disaster risk management as a three-pillar strategy: - Pillar I — Structural resilience: infrastructure and other investments to limit the impact of disasters. - Pillar II — Financial resilience: creating fiscal buffers and using pre-arranged financial instruments to protect fiscal sustainability and manage recovery costs. - Pillar III — Post-disaster (including social) resilience: contingency planning and related investments ensuring a speedy response to a disaster. - A full national DRS requires actions on all three pillars, grounded on a clear diagnostic. - Observed gaps: - In many small or low-income countries, substantial underinvestment in structural resilience reflects sizable up-front costs and limited fiscal space. - Limited use of ex-ante financing instruments such as insurance reflects both cost concerns and underdeveloped markets. - While steps are being taken to facilitate speedy recovery and reconstruction, there is substantial room to strengthen response mechanisms to improve post-disaster resilience. - Benefits of investing in resilience include lower expected losses from disasters, higher returns to private investment, improved employment and output performance, and better continuity in public services after a disaster. ### Stylized facts on impacts and vulnerabilities - Frequency and damage from natural disasters have been increasing over time and are expected to intensify with ongoing climate change. - Small states in the Caribbean and the Pacific are particularly vulnerable, with annual average damage of 2–3 percent of GDP. - Panel C—Top Ten Natural Disasters: 1980-2017 (Damage as % of GDP) includes: - Dominica, 2017, Storm, 226 - Grenada, 2004, Storm, 184 - Maldives, 2004, Earthquake, 179 - Mongolia, 1996, Wild Fire, 158 - Samoa, 1991, Storm, 157 - Samoa, 1990, Storm, 145 - St. Kitts & Nevis, 1998, Storm, 137 - Vanuatu, 1985, Earthquake/Storm, 131 - Haiti, 2010, Earthquake, 122 - Cambodia, 1991, Flood, 106 - Natural disasters can cause large and long-lasting macroeconomic effects in vulnerable countries: - Large disasters can substantially set back output growth and contribute to a significant rise in public debt (Figure 2 analysis). - Recurrent disasters reduce medium-term growth potential via repeated adverse shocks to physical capital, higher effective cost of capital, and higher levels of out-migration. - Disasters generate significant social costs: lost lives, worsening food insecurity, deterioration in human capital, and disproportionate harm to the poor. ### International support and coordination - IFIs and other development partners offer various forms of support to disaster-vulnerable countries, but many countries have limited capacity to take full advantage of such support, which can be fragmented and poorly coordinated. - A fleshed-out nationally owned DRS could act as the anchor or platform for coordinated support from development partners, needed both to develop and implement the DRS. - A DRS endorsed by stakeholders, including Fund endorsement of the associated macroeconomic framework, could have a catalytic effect in mobilizing concessional donor support. ### IMF role and instruments - Within its mandate, the Fund can support resilience building in disaster-vulnerable countries by: - Surveillance: analyzing the macroeconomic impact of disasters and of resilience-building. - Lending: Fund arrangements could support implementation of a DRS, including providing financing to address associated balance of payments problems. - Capacity building: targeted support in areas of Fund expertise to strengthen national capacity. - The Fund, collaborating with the World Bank and others, can convene stakeholders—private insurers, governments, donors, climate funds—to tackle issues such as impediments to market-based risk transfer (e.g., exploring financial viability of debt instruments with disaster clauses) and better connecting small states with climate funds. ### Institutional and analytic framing of the report - The paper builds on earlier Fund work (including IMF (2016a) and IMF (2017a)) and on substantial World Bank and other agency work on disaster preparedness and management (Annex I). - Focus is on small states and larger low-income countries with significant fiscal and institutional capacity constraints; such countries will require assistance from development partners to develop and implement a DRS. - Report structure (selected): Introduction; Stylized facts; Building resilience (Pillars I–III); Toward a framework for enhanced coordinated action; The Fund’s role in building resilience; Issues for discussion. *Source: EXECUTIVE SUMMARY — ppea2019020* ### 10. Fiscal space, institutional capacity, and ex-ante preparedness can help mitigate the ### 10. Fiscal space, institutional capacity, and ex-ante preparedness can help mitigate the cost of natural disasters ### State Capacity and Disaster Preparedness - The Sendai Framework for Disaster Risk Reduction for 2015-2030 emphasizes: - developing an understanding of the risks to which a country is exposed; - strengthening disaster risk governance; - investing in risk reduction; - enhancing preparedness for effectively responding to disasters. - The World Bank’s Disaster Risk Management (DRM) and Disaster Risk Financing and Insurance (DRFI) strategies are organized around five principles: (i) risk identification, (ii) risk reduction, (iii) risk preparedness, (iv) financial protection, and (v) resilient recovery. - Small or poor states face larger challenges in developing/implementing a Disaster Resilience Strategy (DRS) due to: - greater exposure (small size, dependence on agriculture or tourism); - limited domestic capacity/resources to develop a DRS; - difficulty managing engagement with multiple development partners and financial markets. - Institutional capacity and access to multilateral climate finance vary across countries (CPIA score range noted in figure context: 1=Low : 6=High). ### National Disaster Resilience Strategy (Three complementary pillars) - The national DRS can be grouped into three pillars: - Structural Resilience: prioritized investments to limit disaster impact (resilient infrastructure, early warning systems, building codes, land use/zoning, retrofitting). - Financial Resilience: fiscal buffers, pre-arranged financial instruments, risk-transfer instruments, ex-ante financing arrangements; integration into macro-fiscal and macro-financial frameworks. - Post-Disaster and Social Resilience: contingency planning for public and social services, rapid access to financing. - Actions under each pillar should be grounded in a diagnostic of vulnerability and preparedness, fit within a coherent medium-term macroeconomic policy framework, ensure debt sustainability, and be supported by strengthened institutional and public financial management arrangements. ### Pillar I: Structural Resilience — Costs, Benefits, and Evidence - Costs of building structural resilience: - UNEP (2016) estimates adaptation costs in developing economies currently at about US$56–73 billion, 2–3 times higher than currently available financing, and potentially rising to US$140-300 billion by 2030. - Fiji: adapting to climate change and natural disasters estimated to require structural investments of around 100 percent of GDP over the next ten years; could be plausibly achieved by sustaining public investment to GDP ratio at around 10 percent of GDP (coupled with an increase in private investment). - Benefits of structural resilience: - Resilient public infrastructure could increase potential output by 3–11 percent in the ECCU, with a growth dividend of 0.1–0.4 percentage points per year during transition to the new steady state. - Staff analysis for the Solomon Islands indicates higher growth outcomes and lower public debt over the medium term from prioritizing resilient investment and strengthening PFM and public investment efficiency. - World Bank microstudies summary: benefit-cost ratio of investing in resilient infrastructure ranges from $2.5–$11 for every $1 spent across various hazards. - Empirical progress and investment shares: - Bank-Fund Climate Change Policy Assessments (CCPAs) for Belize, Seychelles, and St. Lucia suggest between one fourth and one third of investment budgets are devoted to resilience-building projects. - Fiji: government spending on resilience grew fourfold over the preceding five years to about US$170 million, and was about a tenth of the budget in FY2016/17. - Dominica: about half of public investment since Hurricane Maria in 2017 allocated for disaster-resilient projects. - Somalia: recovery and resilience framework being incorporated into 9th National Development Plan. - Investment gaps: - CCPAs estimated resilience investment gaps of 2-3 percent of GDP a year over a decade or more in those countries. - Ethiopia: would have to more than double current annual investments in climate adaptation (of US$400 million or 0.5 percent of GDP) to fully implement strategy for mitigating drought impacts on agriculture. ### The Way Forward — Financing and Policy Choices - Underinvestment drivers: short-term policymaking biases, tight fiscal constraints, limits on borrowing capacity (elevated debt, poor credit-worthiness), and limited concessional financing. - Policy responses and financing options: - Generate additional fiscal space via improved revenue mobilization and/or prioritizing expenditures; in some circumstances, higher external borrowing could be appropriate depending on debt sustainability outlook. - Additional aid flows targeted at high-return projects are likely needed; full implementation of DRS in highly exposed countries may require significant new aid flows from bilateral or multilateral sources, including climate funds. - Illustrative country cases and estimated financing implications: - Dominica: - Damages: near 100 percent of GDP (tropical storm Erika, 2015) and over 200 percent of GDP (hurricane Maria, 2017). - Staff assumption: government can credibly carry out additional fiscal adjustment of 4 percent of GDP (back loaded and gradual). - Given additional fiscal adjustment, sustaining resilient investment will require an increase in grants of around 2.8 percent of GDP annually to meet public debt target of 60 percent of GDP by 2030, or about US$200 million cumulatively. - Grenada: - Preliminary estimates: public capital spending would need to be scaled up by 3 percent of GDP annually to implement resilient investments by 2030. - To finance this, staff estimates additional grant financing of US$15 million annually (or US$185 million in total) would be required for Grenada to stay within regional public debt target of 60 percent of GDP. - If such grants do not materialize and the increase in public investment is financed entirely by new borrowing, public debt as a share of GDP would rise to 70 percent by 2030. - Role of private sector: - Private sector can supplement public funding where costs and benefits favor private solutions; contingent public sector liabilities from PPPs should be allowed for. - Donor perspective and coordination: - Investing in resilience can produce net savings for bilateral donors who would otherwise provide post-disaster recovery support. - Coordinated donor action to scale aggregate resilience investment can yield large cuts in post-recovery costs and produce positive externalities for donors. ### Quantified Scenario: Savings from Ex-Ante Interventions (Box 2 summary) - Model setup: dynamic stochastic general equilibrium model for six small states (Dominica, Antigua, St. Lucia, St. Vincent, Haiti, Fiji) over 20 years with disaster realizations based on historical frequency. - Two policy options compared: - Option 1: Ex-post resilience investment (rebuild after disasters; donors cover full rebuilding costs; resilient capital assumed 10 percent more expensive than non-resilient). - Option 2: Ex-ante resilient investment (replace depreciating capital with resilient capital annually; government nominal spending 1 percent of GDP higher; donors finance the additional 1 percent of GDP plus post-disaster reconstruction as in Option 1). - Simulation outcomes: - International community can save on average 10 percent of recipient’s GDP (net present value) by investing in ex-ante resilience and avoiding expensive rebuilding costs (savings lower if resilient infrastructure premium exceeds assumed 10 percent). - Recipient countries benefit with GDP on average 4 percent higher under ex-ante resilience building. - If disaster frequency increases (one additional large natural disaster exceeding 20 percent of GDP damage in the 20-year period), benefits rise: - Savings for donors increase to 14 percent of recipient’s GDP. - Overall GDP level is about 6 percent higher under ex-ante resilience building. - Implementation caveats: results sensitive to assumptions about cost premium for resilient infrastructure and donor financing of ex-ante investments. _Italic: IMF staff chapter: "10. Fiscal space, institutional capacity, and ex-ante preparedness can help mitigate the cost of natural disasters" (from the provided PDF content)._ ### Box 2. Savings from Ex-Ante Interventions (concluded) ### Box 2. Savings from Ex-Ante Interventions (concluded) ### Pillar II: Financial Resilience — managing fiscal costs of disasters - Disasters can be partially contained but not eliminated; they create sizable fiscal/financing shocks that need to be planned for. - Absent planning, disaster-hit countries face significant financing needs when credit-worthiness is impaired, constraining and/or increasing the cost of access to financing. ### Multi-instrument ex-ante financing (World Bank’s multi-layer risk approach) - A multi-instrument strategy helps manage fiscal and macroeconomic impacts by matching instruments to layers of risk: - (i) Self-insurance through fiscal buffers. - (ii) Risk transfer through insurance or other risk-sharing mechanisms. - (iii) Contingent financing via pre-arranged credit lines with IFIs. - (iv) Reliance on concessional financing and humanitarian assistance for very large and rare disasters. - Examples of contingent financing instruments: World Bank’s CAT DDO, Inter-American Development Bank’s contingent credit line (CCL) and facility (CCF), and Asian Development Bank’s Contingent Credit Line and contingent grants. ### Country experience and instruments in use - Self-insurance initiatives: Bahamas, Dominica, Grenada, Jamaica, St. Kitts and Nevis, St. Vincent and the Grenadines. - Regional savings fund consideration: five Pacific Island countries considered pooling resources. - Contingent credit lines for immediate emergency funding: IDB and/or World Bank in Jamaica, Dominican Republic, Kenya, Seychelles; ADB contingent financing for Pacific Islands (Cook Islands, Samoa, Tonga, Tuvalu). - Risk transfer via parametric insurance through regional pooling arrangements; Bank and IFC support development of natural disasters and property insurance (including in Fiji). ### Regional sovereign insurance pools — key figures (from Table 2) - CCRIF (2007) - Hazards insured: Earthquake, Tropical cyclone (hurricanes), Excess rainfall, Drought - Insured members (20) and other eligible members (15) listed - Avg. premium income: US$21.5m - Avg. coverage: US$650m - PCRAFI (2013) - Hazards insured: Tropical cyclone, Earthquake/tsunami, Excess rainfall - Insured members (5) and other eligible members (10) listed - Avg. premium income: US$2m - Avg. coverage: US$45m - ARC (2013) - Hazards insured: Drought; Extreme weather (drought, excess rainfall, heatwaves and tropical cyclones) - Insured members (6) and other eligible members (6) listed - Avg. premium income: US$22m - Avg. coverage: US$50m - SEADRIF (2018) - Mainly flood risk - Signatories to agreement: Cambodia, Indonesia, Japan, Lao PDR, Myanmar, Singapore - Avg. premium income / Avg. coverage: TBD ### Reasons for limited use of instruments; insurance gaps (findings) - Two thirds of natural disaster losses in the Caribbean are uninsured, compared to about half in the rest of the world. - Sovereign constraints: - Weak fiscal positions, competing demands, and cost considerations limit self-insurance or purchase of substantial disaster insurance. - Cost of parametric insurance and catastrophe bonds estimated to be in the range of 1.5–3.2 times the expected annual payout. - Regional pools have limits on maximum coverage and face basis risk where payouts may not match actual losses. - Private insurance penetration is low due to high premia, unfit construction not meeting insurability standards, and lack of social tradition of purchasing insurance. - Empirical insurance gap figures: - Caribbean (U.S.$ 175 billion, 1980-2017): Insured losses U.S.$115 billion (66%); Insurance gap U.S.$60 billion (34%). - Worldwide (U.S.$ 2,030 billion, 1980-2017): Insured losses U.S.$1123 billion (55%); Insurance gap U.S.$907 billion (45%). - Example country-level ex-ante loss and possible disaster cost distribution: - Ex-ante loss for this country = 0.4% of GDP. - Possible disaster cost outcomes shown up to 16-46% of GDP in some chance scenarios; also outcomes <0.1% of GDP and ranges 0.1-16% of GDP illustrated. ### Trade-offs in choosing insurance (staff simulations and Figure 8) - Higher risk transfer can enable faster recovery and protect growth, but increases fiscal costs through premium payments. - Optimal financial protection depends on country-specific trade-offs and risk preferences. - Staff simulations of parametric insurance packages over 1,000 states of the world yield trade-offs between: - Change in GROWTH due to insurance (percentage points difference, average over 10 years). - Change in DEBT due to insurance (Percent of GDP, after 10 years). - Insurance package cost categories in simulations: Lowest Premium; Medium-Low Premium; Medium-High Premium; Highest Premium. - Prioritizing fiscal sustainability may lead to less costly packages with lower payouts (less beneficial growth outcomes — gray and yellow coverage in Figure 8). - Prioritizing higher growth outcomes may require more expensive packages with higher payouts (orange and blue packages). - For severely-exposed countries, protecting growth via insurance is costlier; focusing solely on fiscal considerations may lead to suboptimal insurance choices without additional financial support. ### The Way Forward — policy recommendations and options - Country-specific decisions should consider how choices complement each other and country-specific factors. - For self-insurance funds: - Aim for annual contributions equivalent to at least: - (i) the expected value of annual damages from disasters (which could range upward from 0.4 percent of GDP for highly vulnerable countries); and/or - (ii) the deductible under existing parametric insurance schemes. - Many vulnerable countries may face high opportunity costs and capacity requirements, arguing for smaller funds and alternative arrangements (e.g., contingent financing). - Contingent credit line approval by IFIs often requires demonstration of fiscal and debt sustainability; CAT-DDO approvals require adequate macroeconomic policy frameworks. - Development partner support can ease fiscal constraints and enhance growth by subsidizing insurance premia directly (e.g., matching premia) or indirectly (e.g., augmenting capital of regional pools). The Global Risk Financing Facility (GRiF) launch is a recent supportive step. - Additional ways to expand coverage and reduce disaster costs: - Diversify risk within and across regional pools; share risks among pools to reduce costs. - Develop additional risk transfer tools: expand cat bond market, support state-contingent debt instruments, and develop innovative indemnity-based insurance proportional to actual losses. - Increase private insurance penetration via: regional pooling of private insurance risk; government-sponsored pools for natural disasters; incentives to private risk-transfer providers where market failures exist; strengthened local (re)insurance supervision and regulation; and enhanced financial literacy. - Government-sponsored pools examples in advanced economies: National Flood Insurance Program (US), Florida Hurricane Catastrophe Fund, California Earthquake Authority, New Zealand’s Earthquake Commission. Example in emerging markets: Turkish Catastrophe Insurance Pool (established in 2000). ### Box 3. A Case for Climate-Resilient Debt Instruments — design options and trade-offs - Two IMF/World Bank explored instrument design options to complement financial resilience efforts: 1. Embedding “disaster-linked clauses” in debt contracts that allow automatic extension (deferral) of principal and/or interest payments when a qualifying disaster occurs. - Deferral reduces gross financing needs after a disaster, lowering the likelihood of costly restructurings/arrears. - Creditors would bear implied risk of payment reprofiling and could demand a compensatory yield premium; one mitigation is making maturity extension NPV-neutral for creditors (e.g., coupon enhancement attached to extended debt). - A draft term sheet prepared by ICMA and Clifford Chance to facilitate use by interested sovereigns. - First-mover obstacles: small issuer bases may yield modest relief for initial issuances and require higher yields; faster progress possible where: - the debtor has short external commercial debt maturities allowing large reissuance with clauses in a short period; - via liability management operations coordinated among sovereigns with international support; - bilateral official creditors adopt standardized disaster-linked clauses (under review in the Paris Club); - in debt restructurings where all creditors receive new debt with disaster-linked clauses (examples: Grenada 2015 and Barbados 2018). 2. Insurance for specified debt service payments: countries purchase insurance to cover a predefined set of debt obligations (scheduled amortization, interest, or both). - Payouts from insurer would be used to service debt, reducing the stock of debt as those payments would not be financed by the country. - Merits: broad applicability to new and existing debt; cost savings potentially larger for insurance on debt to be issued; pooling across countries could trim costs. - Drawbacks: requires ex-ante premia paid by countries with constrained fiscal positions; thin insurance markets may yield high costs relative to expected return; tying insurance to debt service is justified only if it produces significantly lower coupon rates on new issues and/or strengthens market access post-disaster. *Source: IMF staff estimates.* ### 30. As noted earlier, building resilience via the mechanisms discussed under pillars I and ### ppea2019020 - 30. As noted earlier, building resilience via the mechanisms discussed under pillars I and ### Pillar III: Post-Disaster Resilience - Early action is warranted to develop a detailed emergency response plan (disaster recovery framework) to guide government and public responses after a disaster; such a plan would: - Clarify institutional arrangements, responsibilities, and the post-disaster decision-making process. - Strengthen rapid mobilization of financial and physical resources to contain disruption to public services including water, electricity, medical services, schools, citizen security, and critical financial services. - Existing social protection systems are important instruments for speedy humanitarian response: - Without established social protection mechanisms, support to severely hit population segments is likely to be delayed, poorly targeted, and vulnerable to corruption abuse. - An established social protection system, including primary care networks, that can be scaled up would enable a faster and more efficient humanitarian response. - Example: Ethiopia’s Productive Safety Net Program—an efficient and transparent government cash transfer program—has features that make it easy to scale up to address food insecurity and dispense aid. - Public procurement quality influences disaster response effectiveness: - Technical support may be needed to ensure adequate capacity to process supplies and procurement challenges linked to large aid inflows. - Weak procurement systems would undermine government response effectiveness and deter donors from using government instruments and systems. ### Regional preparedness examples and progress - Many disaster-vulnerable countries have enacted legislation, policies, platforms, and coordination institutions for disaster risk management and early warning, with focus on regional expertise pooling: - Caribbean: 18 countries have established a regional inter-governmental agency (The Caribbean Disaster Emergency Management Agency, CDEMA) for coordinated emergency response; CDEMA supports all phases of the disaster management cycle and is developing a regional risk information system. - Central America: Common institutions from the regional Policy on Comprehensive Disaster Risk Management include the Coordination Center for the Prevention of Natural Disasters in Central America, covering six countries. - Pacific: The Pacific Islands Emergency Management Alliance works with national and regional agencies; the Pacific Catastrophe Information System enhances data collection and information sharing. Early warning systems have been successful in Vanuatu. - Africa: The Africa Regional Strategy for Disaster Reduction was adopted by the African Union in 2004; in line with the Sendai Framework in 2015, governments committed to a revised Program for Action. Coordination in SSA is still developing; the Africa Risk Capacity Agency provides some regional coordination (particularly in the Sahel); EAC countries are working on coordination; Indian Ocean countries share storm information. ### The Way Forward (constraints and opportunities) - Constraints: - Many disaster-vulnerable countries face limited logistical capacities (e.g., evacuations, providing effective relief). - Fragmented external support and limited national capacity hinder ex-ante preparedness. - Opportunities and recommended approaches: - Further develop pooling of regional expertise to provide economies of scale. - Foster peer-learning and sharing of resources across countries. - Deploy policies and strategies successfully adopted in other exposed economies (examples: Indonesia, Philippines, Japan, New Zealand). - Targeted support from development partners to help disaster response planning and minimize disruption to public and social services can yield high returns. ### Toward a Framework for Enhanced Coordinated Action — The case for enhanced coordination - Multiple stakeholders provide support: Bretton Woods Institutions, regional development banks, bilateral development partners, climate funds, private insurance companies. - States with strong institutional capacity can make effective use of available instruments; weak-capacity states are constrained in producing coherent strategies. - Caribbean and Pacific Island authorities highlighted fragmented practices and expressed support for an “alliance” or “grand bargain” among stakeholders for coordinated action. - The PFTAC 25th anniversary event (December 2018) underscored the need for a coherent medium-term approach and noted complexities of multiple agencies with differing criteria and requirements. - National disaster risk management strategies supported by IFIs often do not fully integrate fiscal and debt sustainability aspects into macroeconomic frameworks. ### Developing a Disaster Resilience Strategy (DRS) - The DRS is the key building block for coordinated support and should: - Be country-owned and identify main policy actions across the three pillars. - Be grounded on a comprehensive forward-looking diagnostic of vulnerability and preparedness; identify key projects for an investment plan; flag shortfalls in disaster financing strategy; review adequacy of post-disaster response systems. - Be a shorthand-term for a comprehensive country-owned resilience-building strategy identifying development partner support; build on existing plans and align with national development strategy. - Many small countries (e.g., Fiji, Jamaica, St. Lucia) have begun resilience measures with World Bank and MDB support, but these may address only selected elements of the three-pillar strategy. - Substantial additional support and engagement from development partners is likely needed to flesh out and implement a DRS: - Development of a well-grounded diagnostic would require substantial external assistance; a Climate Change Policy Assessment (CCPA) could be valuable but would need supplementation for a full diagnostic. - Technical support to identify and cost key structural resilience projects is required. - External evaluation of disaster financing strategy enhancements is necessary (IFIs or bilateral TA). - IMF surveillance could support development of a medium-term macroeconomic framework incorporating required investments and financing adjustments. - Engagement with climate funds will need support from development partners and peer-learning. - For many small/low income countries, domestic fiscal space generation is unlikely to be sufficient; additional external concessional support for a comprehensive DRS will likely be needed to avoid threatening debt sustainability. - Adoption of a DRS supported by multiple development partners, including IFIs, should have a catalytic effect in mobilizing donor support; Fund endorsement of associated macroeconomic frameworks would build confidence. ### Box: The Climate Change Policy Assessment (CCPA) — role and scope (summary) - The CCPA is a tool developed by Fund and Bank staff to help small states analyze and develop policy responses to expected economic impacts of climate change and related natural disasters; it includes assessment of projected economic impact, costing of planned policy responses, and recommendations on fiscal and structural reforms. - Key questions addressed include climate change risks and expected impact; general preparedness; mitigation commitments and strategy; adaptation needs and plans; financing strategy for mitigation and adaptation; risk management strategy; and national processes integration. - The CCPA provides a framework for identifying policy gaps, prioritizing projects and financing, strengthening coordination, and coordinating TA by the Fund and Bank. To serve as a proper diagnostic for a DRS, the CCPA would need re-orientation to focus on current and near-term disaster risks. - CCPA pilots and plans: - Since 2017, CCPA pilots have been completed for Seychelles, St Lucia, and Belize. - A CCPA is in progress for Grenada and planned for Micronesia and Tonga. - Extending CCPA use would require: (i) assessing pilot lessons and deciding with the Bank to broaden use; (ii) agreement on formalizing Bank participation in producing CCPAs; and (iii) finding additional budgetary resources. ### A potential division of labor across stakeholders - An agreed framework identifying roles of development partners in supporting a DRS would help avoid duplication and create synergies. Illustrative roles: - World Bank and other development banks: Lead in identifying and assessing disaster vulnerabilities and prioritizing investment needs (based on Bank-Fund CCPA or alternative diagnostics); provide unified policy advice on financial resilience; offer TA for disaster risk finance strategies and contingent financial support; provide TA for post-disaster and social resilience (e.g., social safety net design). - The Fund: Lead in developing macroeconomic policy framework reflecting disaster costs and returns from resilient investment; identify fiscal actions including domestic revenue mobilization and expenditure management; contribute unified policy advice on financial resilience (market insurance vs. fiscal buffers or climate-resilient debt instruments); provide balance of payments support (precautionary/disbursing arrangements or post-disaster assistance); deliver targeted capacity building. - Bilateral development partners: Supply TA for disaster preparedness; provide concessional financing for projects or budget support for resilience investments; help alleviate insurance costs; assist in preparing proposals for climate fund financing. - Climate Funds: Could consider DRS and IFIs’ endorsement of resilience efforts and macroeconomic policies as screening devices to simplify administrative requirements and qualification criteria. - Official sector insurance companies (e.g., CCRIF): Could work with IFIs to help design country financial resilience strategies. - The division of labor is illustrative; detailed principles require further discussion and will depend on country circumstances and agencies’ prior engagement. Example country interest: Dominica and Grenada have expressed strong interest in collaborating with development partners to develop a DRS. ### The Fund’s role in building resilience - The Fund can support resilience building in disaster-vulnerable countries consistent with its mandate to analyze and advise on macro-critical issues and support capacity development: - Expand Fund surveillance to address natural disaster impacts and the case for resilience building. - Support implementation of countries’ resilience-building strategies through Fund-supported arrangements with financing to meet balance of payments needs where justified. - Support development of domestic macro-fiscal analytical capacity and related institutions through capacity-building activities. - Help countries integrate financing of resilience building into national macro-fiscal frameworks and assess fiscal sustainability where costs are upfront and benefits accrue over the longer term. - A sound macroeconomic analysis of longer-term debt dynamics may help reassure markets regarding fiscal and debt sustainability. *International Monetary Fund — BUILDING RESILIENCE IN DEVELOPING COUNTRIES VULNERABLE TO LARGE NATURAL DISASTERS (excerpt).* ### 46. In disaster-vulnerable countries, country teams should highlight the risks of inaction in ### 46. In disaster-vulnerable countries, country teams should highlight the risks of inaction in ### Risks of inaction and analytical guidance - Country teams should highlight the risks of inaction in the face of disaster risk and analyze the returns to building structural and financial resilience. - Where countries are implementing resilience-building strategies, the baseline macroeconomic framework and debt sustainability analyses should seek to incorporate both the costs and benefits of the investment strategy. - The returns to potential resilience-building strategies can be explored via a fleshed-out alternative macroeconomic framework and DSA. ### Recent coverage and approaches in surveillance - The coverage of disaster risks and resilience-building in surveillance of disaster-vulnerable countries has increased significantly in the past few years. - Various approaches have been adopted by country teams, partly reflecting data limitations and country-specific features. - A wide range of options are provided in IMF (2016a) for incorporating the impact of natural disasters in the macroeconomic framework. - Based on a review of Article IV staff reports during 2017–2018 and a survey of country teams, many desks included disaster costs in baseline projections—with some country teams developing innovative methodologies (e.g., for the Pacific Islands, see Lee, Zhang and Nguyen (2018) (Box 5), and for Dominica see 2018 Article IV). - Several country teams have incorporated the impact of natural disasters as a shock to the baseline macroeconomic framework, typically via the debt sustainability assessment. - Including a natural disaster shock is now a required scenario for disaster-vulnerable countries in the new LIC Debt Sustainability Framework and is being considered as one of the tail shocks in the ongoing MAC-DSA review. - Debt sustainability analysis could be augmented to include the costs and benefits of countries securing insurance, by simulating debt paths under various disaster shocks and identifying optimal risk transfer options. - The longer-term benefits of resilience investment have often been overlooked in assessments of debt sustainability, thereby overstating the scale of future debt burdens. - The Fund’s methodology for assessing external positions has been updated to include analysis as to how natural disasters affect the external balance and real exchange rates (IMF, 2019). ### Box 5 — Integrating the Cost of Natural Disasters in the Pacific Islands (summary) - Staff investigated the impact of natural disasters in Pacific Island Countries (Lee, Zhang, and Nguyen, 2018). - The paper highlights intensity of natural disasters for each Pacific country based on distribution of damage and population affected and estimates impact on economic growth and international trade using a panel regression. - Results show that severe disasters have a significant and negative impact on economic growth and lead to a deterioration of the fiscal and trade balances. - Staff identify a simple and consistent method to adjust staff’s economic projections and debt sustainability analysis for disaster shocks: - Staff explicitly adjust long-term baseline projections in line with the expected impact of disasters for the region times the probability of a disaster occurring in their specific country each year, subtracting this from a non-disaster projection. - The projections vary given vulnerability—adjustments range from 0.2 percent of GDP up to 0.6–0.7 percent of GDP per year and are largest for Vanuatu, Samoa, Solomon Islands and Tonga (recent Article IV reports adopted this approach). - Further work is looking at fiscal balances in Pacific countries using a similar cross-country panel regression methodology (Nishizawa et al, forthcoming). - International financial support following disasters in the Pacific has varied widely and unpredictably from 1.7 to 18.5 percent of GDP in recent years. - Findings are aimed at helping countries better incorporate economic impact of natural disasters into budgets and consider types of financing needed. - Insurance has been inadequate in the Pacific at the national and regional level and private insurance markets are largely missing for households and firms; efforts by IFIs and bilateral partners exist but could be better coordinated and scaled up. ### Fund lending toolkit to support resilience - Building resilience to natural disasters is a medium-term endeavor best supported through medium-term program engagement. - Anchoring a Fund arrangement on support of a medium-term resilience building strategy would be appropriate where natural disaster risk is macro-critical. - Existing Fund lending toolkit options include: - A disbursing arrangement for countries facing balance of payments needs in implementing their resilience-focused medium-term program. - A precautionary three-year SBA, for countries with potential BOP needs, as an insurance against an adverse shock (whether disaster-related or other) while implementing their Fund-supported program. - A non-financial signaling instrument (the Policy Coordination or Policy Support Instruments) to signal Fund endorsement and facilitate access to Fund resources in case of a BoP need from an adverse shock. - Post-disaster financial assistance via the RFI or RCF, to assist countries with an urgent BOP need when hit by adverse exogenous shocks such as a natural disaster. - Note: The only concessional facility designed for use on a precautionary basis is the SCF, which currently has a maximum length of two years; the maximum length of the SCF is being reassessed in the context of the ongoing LIC Facilities Review. - The LIC Facilities Review is considering the case for increasing access levels to the RCF (and, potentially, the RFI), including a higher cumulative limit for countries vulnerable to large natural disasters. ### Program design and conditionality - Fund-supported programs could tailor program design toward supporting resilience building: - The macroeconomic framework would integrate short-run costs and longer-term benefits of resilience investment. - Structural conditionality would focus on priority actions in the resilience-building strategy, designed in consultation with the World Bank and other development partners. - Capacity-development support would help countries meet program objectives. ### Supporting capacity development - In most disaster-vulnerable countries, significant capacity development is likely to be needed to implement the main components of a DRS. - The World Bank plays a key role across the three pillars of the DRS. - The IMF has been helping countries integrate resilience-building plans into fiscal frameworks, including through fiscal rules (Grenada and Jamaica). - Close cooperation and coordination among multilaterals and development partners is essential to cover DRS elements, provide consistent technical advice, and enhance absorptive capacity. - On building structural resilience (Pillar I), the Fund can support: - Developing medium-term fiscal and budgeting frameworks to ensure consistency of infrastructure spending plans with domestic revenue and external financing prospects, prudent debt management, and building fiscal buffers. - Strengthened domestic revenue mobilization via TA on tax policy frameworks, legislation, and revenue administration in the context of a Medium-Term Revenue Strategy. - Enhanced Public Financial Management via TA to build robust PFM systems, improving returns on public outlays on resilient infrastructure and enhancing access to concessional financing (example: PFTAC working with GIZ to ensure PEFA assessments and reform roadmaps include measures facilitating access to Climate Funds). - Robust public asset and investment management practice—Public Investment Management Assessment (PIMA) can help institute strong procurement and management practices. - On building financial resilience (Pillar II), the Fund could support: - Building financial infrastructure and understanding of risks and risk transfer: setup of asset registries, risk management units, and institutional/governance arrangements related to financial resilience choices; TA on banking regulations and supervision to account for disaster vulnerabilities in bank risk assessments. - Using convening powers with the World Bank and other institutions to coordinate stakeholders—private insurers, governments, regional pools, donors, climate funds—to resolve hurdles to market-based risk transfer, explore debt instruments with disaster clauses, and address scale obstacles to insurance development (World Bank lead role in Global Risk Financing Facility (GRiF)). - On ex-ante preparedness for disaster recovery (Pillar III), Fund engagement is limited but includes: - Promoting business continuity plans for central banks and commercial banks (PFTAC regional workshops). - Assessing resilience of banks’ loan portfolios to disaster shocks through stress-testing (CARTAC workshops include tests of vulnerability to hurricanes and other plausible disaster shocks). - Capacity development efforts should involve close collaboration among providers and exploit similarities across countries to realize scale economies (regional workshops, online courses). Example: regional workshops on medium-term fiscal frameworks and fiscal resilience to natural disasters in the Pacific by PFTAC, APD, and ICD in 2015 and 2017. ### Issues for discussion (questions posed to Directors) - Do Directors see the three-pillar strategy as a useful lens through which to view the challenges of building resilience in disaster-vulnerable countries? - Do Directors see a compelling case for closer coordination among development partners in supporting resilience-building efforts in countries with insufficient institutional capacity to manage this coordination directly? - Do Directors see a government-owned “Disaster Resilience Strategy” as a useful instrument for facilitating donor coordination? - Do Directors agree that a DRS supported by key development partners could catalyze higher levels of concessional financing from bilateral donors, climate funds, and other financing sources? - Do Directors see a need for Fund surveillance to give greater attention to resilience-building in disaster-vulnerable countries, recognizing that bilateral surveillance inevitably involves selectivity in regard to the topics covered? - Do Directors agree that the Fund lending toolkit is broadly appropriate for supporting disaster-vulnerable countries that are implementing a resilience-building strategy? - Do Directors see merit in the Fund, in collaboration with the Bank, conducting further work on the role of state-contingent debt instruments in disaster-vulnerable countries? - The CCPA is still operating in a pilot phase. Do Directors see significant value-added for country authorities in the three CCPAs circulated to the Board so far? *Source: IMF staff summary from provided content.* ### Annex I. The World Bank Group’s Support for Building Resilience ### Annex I. The World Bank Group’s Support for Building Resilience ### WBG role and overall financing - The WBG has mainstreamed disaster risk management (DRM) into its operations with support from GFDRR and development partners. - Annual WBG funding of DRM projects increased from $3.7 billion in fiscal year (FY) 2012 to $5.3 billion in FY 2018. - WBG DRM projects have been implemented across agriculture, environment and natural resources, transport, social protection, information and communications technology (ICT), and water. - Special attention to small states: several small states (population less than 1.5 million) vulnerable to natural disasters are given access to concessional IDA resources as an exception to regular IDA eligibility criteria. - Total IDA lending to the 23 IDA-eligible small states increased from $604 million in IDA15 to about $1.2 billion in IDA17. - The WBG provides a Small States Forum platform for high-level dialogue on development needs. ### Structural resilience: funds and programmatic approaches - WBG hosts Funds promoting climate-resilient development: Climate Investment Fund (CIF), Forest Carbon Partnership Facility (FCPF), and the Global Environment Facility (GEF)/Adaptation Fund (AF) Secretariat. - CIF’s Pilot Program for Climate Resilience (PPCR): - The WBG has the largest PPCR portfolio with 30 projects totaling $490 m (about 40 percent of the total $1.2 billion funding envelope). - PPCR uses a two-phased programmatic approach that mainstreams resilience in government agencies and provides risk-appropriate concessional financing for associated investments. ### Financial resilience: instruments and facilities - Disaster Risk Financing and Insurance (DRFI) program has supported more than 60 countries in developing and implementing financial protection strategies, including regional sovereign catastrophe risk pools. - Development Policy Loan with Catastrophe Deferred Drawdown Option (CAT-DDO): - Instrument to strengthen DRM and financial preparedness and support post-disaster recovery. - To date, some 13 countries have benefitted from CAT-DDO for a cumulative amount in excess of US$3 billion. - Market-based risk transfer solutions intermediated by the World Bank (e.g., catastrophe swaps and cat bonds) for a cumulative amount in excess of US$4 billion. - Global Risk Financing Facility (GRiF): - Launched during the October 2018 Annual Meetings of the World Bank and IMF. - Aims to enable earlier and more reliable response and recovery through pre-arranged crisis risk financing instruments, including market-based instruments. - Delivered through a Multi-donor Trust Fund hosted by GFDRR and implemented by WB/DRFIP with expected donor contribution of US$145M from Germany and UK and further contributions under discussion. ### Post-disaster resilience: contingent financing - Contingent Emergency Response Component (CERC) under investment project financing: - A contingent line that does not require fiscal and debt sustainability for its approval. - Investment project financing comprises about 60-70 percent of World Bank financing and is used in most countries, making CERC an important instrument for rapid post-disaster response. - CERC enables quick disbursements to finance critical emergency goods or emergency recovery and reconstruction works and associated services, establishing an ex-ante mechanism for rapid post-disaster needs. --- ### Annex II. Natural Disasters in Sub-Saharan Africa ### Nature and impacts of disasters in SSA - Floods and slow-moving disasters such as droughts account for 80 percent of loss of life and 70 percent of recorded economic losses linked to natural hazards in SSA. - Slow-onset disasters (droughts, recurring weather-related epidemics) can cause substantial economic disruptions, with persistence increasing risk of prolonged impact; full economic impact often not quantified or recorded. - Cascading effects from rapid-onset hazards (floods, earthquakes) can evolve into public health emergencies (e.g., malaria, cholera) as health systems are overwhelmed and populations concentrate in emergency camps. ### 2015/16 Southern Africa droughts (El-Niño) — social and economic consequences - Social costs: failed crops, depleted grain stocks, de-herding; loss of income and savings; lack of access to water and food contributed to malnutrition and missed schooling; temporary falls into poverty and increased social tensions and migration. - Economic costs: decimated agricultural production leading to lower growth; deteriorated fiscal situations as governments scaled-up food distribution programs; electricity supply impacted by shortage of hydro-power, hampering energy-intensive mining and manufacturing. ### Risk drivers and exposure - SSA population projection: current population projected to more than quadruple to nearly 3.7 billion by 2100, with 1 out of every 3 citizens on the planet being from the region (IMF, 2015). - Region is least prepared for climate change effects due to heavy reliance on rain-fed agriculture, limited resources for resilience, and elevated levels of poverty and food insecurity. - Chart finding: SSA populations are highly exposed to droughts — a quarter of the population affected on average during the worst droughts that countries experience after 2000. - Given rising intensity and unpredictability of climatic events, building resilience is paramount. --- ### Annex III. Policies to Enhance Resilience: Examples ### Regional approaches and agricultural focus - African countries emphasize cost-effective policies focused on agriculture and infrastructure investment, often aided by new technologies and local-level interventions. - Agriculture interventions: - Adoption of new crop varieties resilient to droughts and water stress. - Rainwater harvesting at local level (example: Burkina Faso uses large cisterns in sugarcane fields distributed via efficient irrigation). ### Technology and information - Mobile technology used in countries including Ethiopia, Rwanda, Kenya to deliver rainfall forecasts to farmers to optimize planting and support crop insurance uptake. - Improved coordination and logistical preparedness helped mitigate the social impact of the 2015 drought in Ethiopia through better targeting of food delivery. ### Disaster-resilient infrastructure and planning - Countries pursuing risk-informed planning and relocation from hazard-prone areas (examples: São Tomé and Príncipe, Zambia). - Kenya diversified energy generation away from drought-prone hydropower to include gas and geothermal. ### Country case: Fiji - Fiji actions: - Hosted the 23rd Conference of the Parties to the UNFCCC. - Pledged to transition completely to renewable energy sources by 2030. - Adopted a reforestation policy for carbon storage. - Launched “Build Back Safer” program after 2016 cyclone Winston to rebuild homes more resiliently. - Exploring parametric insurance instruments for households that are uninsurable or “semi” insurable. - Established a Construction Implementation Unit to ensure resilient reconstruction in education and health sectors. - Incorporated findings of the 2017 Climate Vulnerability assessment into the National Development Plan. - Prioritized strengthening infrastructure in transport, flood risk management, coastal protection, water and energy sectors, and investments in education and health infrastructure; seeking private sector financing. - Issued a sovereign Green Bond on the London Stock Exchange in 2017 — first developing country to do so; take-up mainly by domestic investors. - Fiji: Investment Needs by Sector (Percent of total) - Transport: 51% - Floods and Coastal Protection: 23% - Water: 12% - Health/Education: 6% - Energy: 5% - Other: 3% ### Country case: Bangladesh - Bangladesh actions: - Introduced a Climate Fiscal Framework (CFF) in 2014 to monitor public spending on climate change; CFF integrated in the medium-term budgetary framework and supported by a budget accounting classification system developed with IMF support. - Bangladesh Planning Commission formulated the Bangladesh Delta Plan 2100 focusing on flood protection, river erosion control, river management including navigability, water supply and waste management, and flood control and drainage. - As of May 2018, Bangladesh received grants from the Green Climate Fund amounting to $85.4 million for three climate change projects. - The Bank of Bangladesh issued Policy Guidelines of Green Banking for scheduled banks and nonbank financial institutions (NBFIs), covering green banking policy and governance, environmental risk in credit risk management, and creation of a Climate Risk Fund. - Banks and NBFIs requested to allocate ten percent of their corporate social responsibility budgets to finance economic activities in flood, cyclone, and drought-affected areas. - Remaining needs and priorities: - Domestic revenue is low at less than ten percent of GDP; raising domestic revenue is a clear priority to adequately invest in mitigation and adaptation while addressing SDG 2030 objectives. - A carbon tax could raise significant revenues; addressing energy subsidies is a related priority. - Additional longer-term infrastructure investments and a greater fiscal buffer are needed to cope with immediate consequences of potential natural disasters. --- ### Annex IV. The Structure of Cat Bonds ### Basic structure and mechanics - Cat bonds are fixed income securities where the coupon paid to bondholders is enhanced by a premium commensurate to the risk of losing part or all invested capital if a predefined natural disaster occurs. - The premium paid by sovereigns to date has averaged 1.9 times the expected loss for the investor, with the “insurance multiple” ranging from 1.2 to 3.2 times depending on the risk metrics of the coverage. - Typical structure involves a special purpose vehicle (SPV): - SPV issues the cat bond to investors and invests the proceeds in highly rated securities. - Government pays interest plus premium to the SPV; SPV uses those payments and investment income to pay the coupon to cat bond investors. - Issuance does not increase sovereign debt stock because the SPV issues the debt. - If a qualifying natural disaster meeting trigger conditions occurs and payout is activated, the SPV liquidates investments to make the payment to the government; if no trigger occurs, investments are liquidated at bond term end and principal repaid. ### Challenges and WBG facilitation - Key challenges to accessing cat bonds: - High costs, particularly when fiscal space is constrained. - Use of parametric triggers that require careful calibration to meet country needs. - Capacity constraints in understanding cat bonds and communicating limitations. - World Bank mitigation: - Acting as intermediary provides cost savings for issuing countries. - Only Mexico and Turkey have issued individual cat bonds so far; the Bank facilitated issuance of a first joint sovereign cat bond for Pacific Alliance members (Chile, Colombia, Mexico and Peru), delivering cost savings and record-low premium rates stemming from high investor demand for diversification, albeit without pooling the risks. --- ### Annex V. Optimal Risk Transfer in Smaller vs. Larger Countries ### Trade-offs and insurance multiples - Countries face a trade-off between insurance implications for debt and for growth; optimal risk transfer varies by country size, exposure, fiscal space, and risk aversion to growth losses. - Best growth-debt tradeoff is provided by packages with the lowest insurance multiple (packages that cost least relative to expected payout). In staff’s analysis, these packages also have the lowest deductibles (insurance starts with higher-frequency disasters). ### Differences between smaller and larger countries - Implications of insurance: - For smaller countries, cost of protecting growth is higher because disaster losses and insurance premia are larger as a share of GDP, adding more to debt. - Debt and growth implications of insurance for larger, less exposed states are significantly smaller. - Payout limits and trade-offs: - Larger countries may face binding constraints on insurance payouts (example: US$100 million in the case of CCRIF), which also limit premium payments and can shift optimal risk transfer toward packages that provide maximum growth protection. - For smaller countries, strong trade-offs between debt and growth may force more debt-biased choices with less expensive packages that provide less growth protection. - Role of donor support: - Smaller countries’ higher risk aversion to growth losses may imply a need for growth-biased but prohibitively costly optimal insurance; choices improve under donor support. *Source: Annex I. The World Bank Group’s Support for Building Resilience (ppea2019020 - Annex I).* ### 1. Debt ### 1. Debt ### Debt–Growth trade-offs: Insurance packages and country characteristics - Each dot in the related analyses shows the average, for a given insurance package, of the difference in debt and growth outcomes between insurance and no‑insurance scenarios over 1000 simulations. - Insurance can raise growth protection but at the cost of higher debt: - Utility‑maximizing packages can offer more growth protection but may carry large debt implications. - Actual small country coverage is often less than optimal due to prohibitive fiscal cost. - A discount on the insurance premium (e.g., through donor support) would allow countries to choose more expensive packages that provide better coverage and hence growth protection. - Borrowing constraints increase insurance benefits: - If borrowing capacity is limited relative to the size of disasters, insurance is more likely to relieve the constraint on financing disaster losses, providing larger growth benefits relative to countries where borrowing constraints are less binding. - If countries anticipate assistance following disasters (akin to a non‑binding borrowing constraint), they may opt for lower insurance coverage due to perceived smaller benefits. - At the same time, larger capacity to borrow would provide an overall better protection to growth and would also reduce debt ratios, helping offset increases in debt due to insurance premia. ### Debt–Growth trade-offs: Risk aversion and premium subsidies - Risk aversion affects optimal insurance choice: - Lower risk aversion and higher risk aversion scenarios shift the set of utility‑maximizing packages and their associated growth and debt outcomes. - Premium subsidies change trade-offs: - Subsidized premiums can shift countries toward packages with higher coverage and better growth protection for a given debt outcome. ### ECCU: Costs and benefits of investing in resilience - Benefits of scaling up resilient investment in the ECCU to 80 percent of the capital stock (model simulations): - Increase in potential output: 3-11 percent over the long term (by country). - Growth dividend during transition to new steady state: 0.1-0.4 percent per year. - GDP gains from reduced damages and losses from natural disasters: 0.7-2.7 percent of GDP a year. - Costs and financing implications: - Additional near‑term fiscal costs of resilient investment would open a transitional financing gap in the range of 0.4-1.5 percent of GDP per annum. - If countries aimed to cover 99 percent of the fiscal cost of natural disasters through self‑insurance (regional pool and contingent borrowing), additional fiscal costs would range between 0.5-1.8 percent of GDP in the ECCU, declining gradually as resilience is built. - Fiscal sustainability risk: - Without fiscal consolidation and in the absence of concessional financing, public debt would exceed the regional debt target of 60 percent of GDP by 2030 by 4–20 ppts of GDP due to the higher cost of resilient capital (only about half of the public capital stock would be resilient by 2030 at current investment rates). ### Pacific Islands: Solomon Islands and Vanuatu illustrations - Model simulations extended the Debt‑Investment‑Growth framework to allow government investment in both standard and climate‑resilient infrastructure, accounting for vulnerabilities to natural disasters, low public investment efficiency, and limited access to financing. - Main findings: - Conventional infrastructure has a more favorable effect on growth and private investment in the short term. - Climate‑resilient infrastructure is more likely to be associated with lower public debt and higher growth in the long term, despite higher upfront cost. - Supportive reforms (including strengthening public investment management) are essential to boost gains from resilient investments and should be pursued without delay. - Tapping external concessional financing from development partners would be optimal since domestic borrowing can crowd out the private sector. - Solomon Islands specific metrics (model simulations): - Charts illustrate fiscal deficit and total public debt (Percent of GDP) and Real GDP growth (Percent, deviation from steady state) under Blue — Conventional Infrastructure and Red — Adaptation Infrastructure scenarios over 2016–2044. - Public Debt with Resilient Investment (Ratio of GDP) shown for ECCU countries (ATG, DMA, GRD, KNA, LCA, VCT) based on model simulations. ### Regional examples and lessons (Advanced and Emerging Asia Pacific) - Cross‑cutting lessons emphasized: - Make disaster resilience central in development planning and the budgetary process, with clear planning at ministry, provincial and local government level. - Account for maintenance needs and periodic upgrading of infrastructure. - Consider innovative financing such as catastrophe insurance and reinsurance. - Improve education in disaster preparedness and focus financial inclusion efforts on individuals with limited insurance and basic financial products. - Japan: - Institutionalized and government‑funded “National Resilience” program (kokudo kyoujinka) includes public and private sector spending. - Japan’s resilience program totaled over JP¥24 trillion (US$210 billion) in 2013 and is projected to grow dramatically by 2020. - Structural resilience examples: fireproof districts, Fireproof Promotion Program, subterranean cisterns and tunnels (Metropolitan Area Outer Underground Discharge Channel built at a cost of US$2 billion in 2006). - New Zealand: - Natural Disaster Fund managed by the Earthquake Commission (EQC) insures for land damage, up to caps: NZ$100,000 on residential damage and NZ$20,000 on contents (2019 probably to be amended to NZ$150,000, with contents coverage removed). - The Natural Disaster Fund is funded by insurance premia but was exhausted by the Canterbury and Kaikoura earthquake claims, leading to extra government funding as guaranteed by law. - Expected EQC revenues from insurance levies and liabilities from current and expected claims are tracked as part of the government’s budget with comprehensive reporting requirements. - Philippines: - Disaster Risk Reduction and Management Act of 2010 shifted policy focus from response to risk reduction and preparedness; integrated disaster risk reduction into development planning and budgeting. - 2015 Climate Change Expenditure Tagging system identifies climate‑change related expenditures; budget allocated to this category has been rapidly rising. - Financial resilience strengthened through a Disaster Reduction Financing and Insurance Strategy combining multiple risk financing instruments. - Introduction of a catastrophe insurance program (US$206 million) to protect government assets; a government‑owned insurance agency would provide protection to national and participating local governments, with risks passed on to private international reinsurers via competitive bidding (World Bank as intermediary). - Indonesia: - 2007 law on disaster management established legal basis for prevention, mitigation, emergency response, rehabilitation and reconstruction; BNPB established in 2008. - The 2015‑2019 National Medium‑Term Development Plan (RPJMN) aims to reduce risk and increase resilience of national and local governments. - BNPB’s budget allocation for disaster management increased 500 percent from 2010 to 2014. - Government spends US$300 to US$500 million annually on post‑disaster reconstruction. - Costs during major disaster years reach 0.3 percent of national GDP and as high as 45 percent of GDP at the provincial level. *Source: IMF staff estimates and analyses as presented in the chapter.* --- _Source: https://www.imf.org/-/media/files/publications/pp/2019/ppea2019020.pdf_