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Results Briefs May 8, 2018

Developing a Cost-Effective Strategy for Disaster Risk Financing to Increase Fiscal Resilience in the OECS Countries

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Caribbean countries are highly vulnerable both physically and fiscally to natural hazards, and as these events intensify due to climate change, past development progress can be jeopardized. Grenada and St. Lucia have been working to improve their fiscal resilience through greater understanding and quantification of their sovereign contingent liabilities to natural disasters and by developing an integrated disaster risk financing strategy.

Challenge

Grenada and St. Lucia are exposed to high levels of risk from meteorological and geophysical hazards that can have significant negative impacts on their economic stability. In Grenada in 2004, for example, Hurricane Ivan caused damages estimated above US$900 million—over 200 percent of GDP. Between 1980 and 2014, hydro-meteorological disasters and earthquakes in Grenada and St. Lucia led to  losses estimated at US$1.098 billion and US$879 million, respectively (according to the DesInventar loss database).  

Disasters can have a large, direct impact on economic conditions through reduced productivity and increased national debt due to reconstruction costs. After Hurricane Ivan, Grenada’s economy contracted, as evidenced by a drastic drop in annual GDP growth from 10 percent in 2003 to -1 percent in 2004. Compounding this, the government incurred high reconstruction costs, resulting in the need to restructure its debt to meet its payments. Meanwhile, the impact of disasters is sometimes disproportionately felt by low-income families. Rapid damage and loss assessments of conditions in St. Lucia following the 2013 trough disaster, which caused flooding and landslides, showed the greatest impact in geographical areas with the highest poverty levels, including Anse-La-Raye and Soufriere, where 44.9 percent and 42.4 percent of the population, respectively, live in poverty. In addition, among the productive sectors, agriculture suffered the greatest damage (13 percent of the total), placing vulnerable families, dependent on agricultural production, at even greater risk of falling below the poverty line.

As the frequency and severity of disasters increase due to climate change, the intensified shocks will likely push people back into poverty, create debt burdens on future generations, and erode development progress. The need to help governments understand their fiscal risk and create cushions against adverse economic impacts is more urgent than ever.

Approach

Evidence shows that when countries have a comprehensive disaster risk management (DRM) framework, including a disaster risk financing (DRF) component, the impact of direct damages and subsequent losses can be reduced. The World Bank Group established the Caribbean Resilience Initiative Programmatic Approach and Caribbean Disaster Risk Finance Program to build more resilient societies through better risk management, forward-looking strategies, and comprehensive investment programs. Four strategic pillars provide a guiding framework: (i) understanding disaster risk, (ii) disaster risk reduction, (iii) financial protection against disasters, and (iv) resilient disaster recovery.

To support Grenada and St. Lucia in increasing their fiscal resilience in the face of natural disasters, the following integral components were developed: (i) quantification of fiscal risk from disasters, (ii) resilience in the domestic catastrophe insurance market to risks from natural hazards, (iii) adoption of a disaster risk-layering approach combining different financial instruments, and (iv) integration of disaster risk into a comprehensive DRM framework (such as public finance reform).

In addition, the Bank’s standalone technical assistance (TA) has helped in the following ways:

  • Disaster Risk Financing TA supported Grenada and St. Lucia in quantifying government contingent liability from natural disasters, identifying financial and nonfinancial options to reduce vulnerability to disaster-induced fiscal shocks, and developing disaster risk financing strategies.
  • The Regional Caribbean Risk Information Program supports all OECS member states in creating and using risk information for physical and infrastructure planning to adequately inform DRM investment implementation with risk analyses.
  • Hazard and Disaster Risk Assessment Framework TA supports the development in St. Lucia of a Climate Adaptation Financing Facility, a private sector–directed initiative under the Disaster Vulnerability Reduction Program. This initiative aims to increase the resilience of private housing and private sector assets and government capacity building for watershed-level flood hazard modeling to further the development of watershed management plans.
  • TA for Measurable Reduction of Public Sector Disaster Risk in St. Lucia (“Vision 2030”) helped provide a methodological framework to support prioritization of investments in specific public assets, based on their contribution to overall risk, and to ensure continuity of risk-development monitoring over time.
  • St. Lucia Study to Measure the Impact of Disaster Events on Poverty and Social Vulnerability aims to improve understanding of the varying effects of disasters on different groups in society. The resulting insights will inform policies and programs to efficiently support those groups prior to, during, and after disasters.   

Results

The DRFTA program produced an ongoing integrated disaster risk financing strategy, with strong engagement from the Ministries of Finance (MoF) of Grenada and St. Lucia (as well as the non-OECS countries Belize and Jamaica) on the design and implementation of DRF strategies to reduce fiscal vulnerability to natural disasters. Other aspects of this achievement include:

  • Throughout 2016, in partnership with their MoFs, the Bank team worked with Grenada and St. Lucia to complete the development of historical disaster loss databases and Country Disaster Risk Profiles.
  • The Bank has undertaken further in-depth analysis of the public financial management of natural disasters in Grenada and St. Lucia and of the capacity of their private property insurance markets in relation to natural disasters.
  • In-country analysis and reports completed in fall 2017 include recommendations for building national DRF strategies, with the central aim of improving governments’ ability to understand, quantify, and manage disaster-related contingent liabilities. Outputs of technical assistance to St. Lucia already inform the design of that nation’s Catastrophe Deferred Drawdown Option, currently under preparation.
  • Technical assistance in Grenada has opened the way to ongoing dialogue with the government on potential next steps for DRF strategies.    

Bank Group Contribution

The World Bank, through the International Development Association, supported the OECS countries in building their physical and fiscal resilience to natural disasters and the impacts of climate change through more than US$210 million in investment lending, 46 percent of which represents grants and concessional loans from the Climate Investment Fund’s Pilot Program for Climate Resilience. These funds are being used to strengthen critical infrastructure as well as to build the countries’ technical and project management capacity. The Bank has also mobilized over US$4 million in standalone technical assistance to pilot innovative solutions to the ongoing challenges posed by natural disasters and climate change in the region. Moreover, following the 2017 hurricane season, the Bank supported the OECS countries by (i) working with partners to support the governments in conducting damage assessments, (ii) preparing emergency response projects, and (iii) disbursing US$7 million in cash transfers to Dominica’s farmers.

The Caribbean Disaster Risk Financing Program, financed by the Trust Fund of the Africa, Caribbean, Pacific Region–European Commission (ACP-EU) for an aggregate amount of US$1.2 million, is one of the region’s many Bank-executed DRM trust funds. Technical assistance also complemented Bank operations in the OECS countries, including the Regional Disaster Vulnerability Reduction Program (RDVRP). The current total value of the Bank’s DRM engagement in the eastern Caribbean exceeds US$430 million and addresses disaster risk reduction, disaster preparedness, disaster risk financing, and resilient recovery.

Partners

DRFTA is funded by the ACP-EU and implemented by the Bank’s Social, Urban, Rural, and Resilience Global Practice, in partnership with the Bank’s Disaster Risk Financing and Insurance Program, and jointly with the MoFs in Grenada and St. Lucia. This TA is anchored in, and will benefit from, ongoing dialogue under the Bank’s Disaster Risk Management and Climate Change Adaptation projects in Grenada and St. Lucia. The program, implemented in collaboration with the Caribbean Catastrophe Risk Insurance Facility Technical Assistance Program, also benefits from current risk financing initiatives in the Pacific region and Indian Ocean Islands. (Ongoing Pacific and Indian Ocean catastrophe risk assessment and financing programs are financed by the ACP-EU Global Facility for Disaster Reduction and Recovery Program.) TA has contributed to efforts to draw donor attention to the region and has fostered additional funding opportunities.

Beneficiaries

The DRFTA team organized and facilitated South-South knowledge exchange through a regional workshop on disaster risk financing, held in Barbados in October 2017. Delegates from MoFs of Grenada and St. Lucia and representatives from development partners, including the Caribbean Development Bank, the Caribbean Regional Technical Assistance Center (CARTAC), the UK’s Department of International Development, and an EU delegation, attended. The workshop presented DRFTA’s main findings and recommendations on quantifying pre- and post-disaster contingent liabilities to governments and public financial management. In addition, the team introduced an innovative, participatory post-disaster risk financing simulation that enables stakeholders and attendees to appreciate the importance of building a disaster risk financing strategy. As these strategies are more widely adopted and implemented in the OECS countries, the MoFs will become more financially prepared for and resilient against future natural disaster and climate shocks. Subsequently, in post-disaster relief and recovery, governments should have the resources and means at their disposal to not only finance their direct contingent liabilities more efficiently, they should also be better able to provide additional aid to small businesses and low-income farmers, who are disproportionally impacted by disasters.  

Moving Forward

DRFTA was completed in February 2018, following a decision review meeting held in November 2017. Given the quality and depth of the technical analysis conducted, the team will prepare, in addition to its final reports, an Executive Summary for each country highlighting its main findings, results, and recommendations and a 2-page summary note and short video clip addressing a wider audience. Most importantly, the Bank is following up with each government to identify immediate next steps and priorities based on the recommendations outlined under the TA. The DRFTA team will also continue to work closely with groups both inside and outside the Bank to share and disseminate the knowledge created.

In the meantime, the Bank will leverage the DRFTA findings to inform other Bank lending and TA projects, such as a Development Policy Loan with a Catastrophe Deferred Drawdown Option and eGovernance, and will hold strategic dialogue with other OECS countries to extend implementation of DRFTA work to Dominica and St. Vincent and the Grenadines.