Building Resilience to Natural Disasters in the Caribbean Requires Greater Preparedness

IMF News, December 10, 2018

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Canonical URL: Building Resilience to Natural Disasters in the Caribbean Requires Greater Preparedness

Natural disasters in the Caribbean are becoming more ferocious and frequent even relative to small states.
Category 5 hurricanes Maria and Irma (both in September 2017) caused widespread destruction, loss of life, and weaker economic growth prospects.
Dominica suffered damages amounting to 226 percent of GDP when devastated by hurricane Maria.
That level of damage "means that it would take Dominica's output at least 5 years to recover to pre-hurricane levels."
Climate change—via higher sea-water temperatures, more storms, rising sea levels, and coastal and coral reef erosion—disproportionately affects the poor and vulnerable in highly-exposed areas.
Natural disasters reduce growth, shrink budgetary space, worsen debt, and divert resources from development and social spending, reinforcing a cycle of high debt and low growth.

Policymakers should prioritize resilience building across three complementary pillars:
- Structural protection: resilient infrastructure, adequate land-use, zoning rules and building codes, and resilient social safety nets.
- Financial protection: risk-financing instruments, such as insurance, to reduce the impact of recovery and reconstruction costs on public finances.
- Contingency planning and rapid access to financing for speedy disaster recovery.
As physical and social structures become more resilient, insurance needs and costs and the need for disaster relief should fall.

Only about 14 percent of disaster-related overseas development is devoted to ex-ante resilience.
Very little budgetary room for resilience investment and limited global financing—well short of adaptation needs—are key obstacles.
Complex access requirements to climate funds hinder investment in resilient structures or setting aside dedicated funds.
Weak incentives: donors and recipients may find it difficult to pre-commit to strategies with high upfront costs and long-term benefits.
The average insurance gap is around 66 percent, reflecting high insurance costs and competing demands on scarce resources.
Governments rely mainly on the Caribbean Catastrophe Risk Insurance Facility (created in 2012) for quick payouts, but payouts are limited relative to damages.
Innovative risk-sharing tools such as catastrophe bonds have not been issued by Caribbean states due to complexity and high setup costs.

IMF staff research on the Eastern Caribbean Currency Union suggests resilient public infrastructure investment can raise potential output by 3–11 percent, with an annual growth-dividend of 0.1–0.4 percent.
Short-term costs of resilient infrastructure are estimated to be 25 percent higher than regular infrastructure.
Financial protection through disaster funds, insurance, and other risk-sharing instruments would create a financing gap for countries in the currency union.
This financing gap would make it difficult to attain the currency union’s debt target of 60 percent of GDP by 2030 without additional measures.
Achieving the debt target would require on top of necessary fiscal adjustment, additional concessional financing from the international community, including climate funds.
As physical structures become more resilient in the long term, insurance needs would decline to about one fourth of the current level.

Caribbean countries could:
- Design a climate-resilience strategy with support from international financial institutions, multilateral development banks, donors, and climate funds.
- Incorporate expected disaster costs in macroeconomic frameworks.
- Prioritize actions needed to build resilience and identify financing needs alongside necessary fiscal adjustment.
International financial institutions could:
- Support countries in designing resilience strategies.
- Support capacity building to deepen insurance and financial markets.
- Analyze risk-management strategies on public debt.
- Assess net benefits of innovative risk-sharing tools, including contingent-debt instruments.
Donors could:
- Support strong resilience strategies with credible macroeconomic frameworks endorsed by international financial institutions.
- Provide concessional financing critical to support fiscal adjustment and resilience-building efforts.
Climate funds could:
- Simplify administrative requirements by using endorsements from international financial institutions of countries' resilience-building and economic policies.

Source: International Monetary Fund