Five lessons on disaster risk finance to inform COVID-19 crisis response

Author

Alfonso Garcia-Mora

Olivier Mahul

Source(s)
World Bank, the
People in a street in Hong Kong
HUI YT/Shutterstock

While the world was focusing on battling the COVID-19 pandemic, the small Pacific island countries of Fiji, the Solomon Islands, Tonga, and Vanuatu were hit by Tropical Cyclone Harold. In Africa, desert locusts have ravaged farms and pastureland in several countries, including Ethiopia, Kenya, and Uganda. These tragic events are a painful reminder that climate change and other natural disasters have not been locked down by the COVID-19 pandemic.

Vulnerable countries are especially at risk of being overwhelmed by multiple concurrent shocks, which can exacerbate poverty and inequality. The governments of these countries face certain challenges. For example, natural disasters that affect countries already fighting COVID-19 may further overload health and civil protection systems, or even force actions that could drastically increase in virus cases, such as evacuations. Emergency funds are depleted, leaving public decision-makers less resources for responding to additional shocks. National economies are more vulnerable because the pandemic has left some groups less resilient to further shocks; these groups include firms that have suffered both asset and revenue losses and poor households whose members have lost jobs and income.

A decade of supporting governments on financial preparedness for crises and disasters has taught us some key lessons to better respond to future shocks. Though money by itself is never enough—and financial resilience needs to be complemented by physical and social resilience—reliable and quick financing is necessary for effective disaster response. Advance financial planning, informed by risk analytics and linked to clear actions, is essential for effective preparedness and response. Below are five key lessons on financial protection that could help inform COVID-19 crisis response.

Lesson 1. Pre-arrange financing to respond to future crises holistically.

Comprehensive financial protection strategies should account for all sources of risk, including hydrometeorological and geophysical hazards, health shocks, cyber security, conflict, famine, and displacement. Such strategies should consider how these risks can intersect and create compounding shocks. Over time, financial instruments for these new risks—including pandemics—will mature to be more efficient, appropriately incorporating more complex financial structures, triggers, and targeted contingency plans. This type of planning requires experimentation and innovation in data collection, risk modeling, structuring of financial mechanisms and market-based instruments, testing of forecasts and triggers, feedback loops, and disbursement channels.

Lesson 2. Integrate planning for physical shocks in macroeconomic and fiscal frameworks.

Governments have mobilized unprecedented resources to implement their policy responses to the ongoing health and economic crises caused by COVID-19. In advanced countries, monetary and fiscal measures have been widespread but costly. Developing countries often have less fiscal space and lower implementation capacity. Shock-responsive fiscal planning can help build resilience against future shocks. Several countries have already established dedicated fiscal risk management units, which also account for the impact on the government balance sheet from physical shocks, in addition to the impact from traditional sources of fiscal risk. The continued integration of planning into macroeconomic and fiscal tools—such as macro-models, fiscal risk statements, debt sustainability analyses, public expenditure reviews, public investment diagnostics, and poverty diagnostics—will be a key driver of greater resilience.

Lesson 3. Partner with the private sector.

Where public resources are scarce, stable financial markets help share the risk among public and private stakeholders. A strong private sector can increase the efficiency, transparency, and discipline of fund mobilization and execution. Financial markets, the insurance industry, and technology companies can help develop and deploy innovative disaster risk assessment and financing instruments. Beyond risk transfer, strong payment systems help ensure that financing reaches the intended beneficiaries in an efficient manner.

Lesson 4. Link financing to shock-responsive systems. 

Rapid access to funding after a shock is critical. But just as critical is directing funding to the appropriate systems for effective, timely, and transparent spending. This is true whether that funding is from the budget, international partners, or financial markets. Experience suggests that public assets and social safety nets have significant potential to be directly linked with risk-financing instruments and to become responsive to shocks.

Lesson 5. Leverage technology and innovation.

Technology has the potential to significantly boost systems for enhanced financial resilience against disaster shocks. Remote measurement and monitoring by the latest satellite technology enable powerful new applications to support more accurate and timely financial decisions in response to shocks. The quantity and timeliness of information contribute to improved forecasts, early warnings, and post-event loss estimates. These advances help decision-makers manage new risks and develop forecast-based financing applications for disasters and their associated crises, such as famine, drought, and political conflict. Similarly, innovative technologies such as blockchain, digital payment systems, and digitization of insurance hold significant potential to improve disaster risk finance solutions.

Looking Ahead

To support governments in their efforts to effectively deal with the COVID-19 crisis, we should build financial resilience against future shocks. This requires not only appropriate financial instruments, technology, and delivery channels, but also a supportive institutional environment. To test new financial solutions, the Global Risk Financing Facility—jointly established by the World Bank and the governments of Germany and the United Kingdom—is providing more than U$250 million in grants to help integrate financial preparedness mechanisms into large investment programs. The time is now to build systems that will be responsive to the shocks of future climate change, natural disasters, and other crises.

Over the next two months, a series of curated blogs on disaster risk finance and COVID-19 will address each of these lessons individually. Watch this space each week.

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