There is a close relation between disaster risk management, health emergencies, and government finance; and the notion of compound risk is more present today than ever.
Also, it is essential that countries have fiscal safeguards to respond quickly and efficiently.
Although the immediate approach is to respond to the health crisis, the financial risk associated with natural hazards does not cease to exist. One option to address this challenge is to establish, prior to disasters and emergencies, fiscal and financial protection strategies that provide timely and cost-efficient liquidity. As part of these strategies, you could consider these six tools:
- Contingent lines of credit, such as the Catastrophe Deferred Drawdown Option (Cat-DDO), provide immediate liquidity to support the country's recovery efforts after a disaster or public health emergency.
- Reserve funds are budgets that the government has reserved to use in the event of unforeseen events such as disasters, health emergencies, etc.
- Insurance for damage to public property covers a public good that is affected by an unforeseen event.
- Catastrophe bonds are instruments that allow countries to access capital markets to obtain disaster insurance.
- A parametric insurance is a contract that makes payments based on the intensity of an event and the amount of loss caused by it, calculated using a previously agreed model. Therefore, payments can be made very quickly.
- Contingent Emergency Response Components (CERCs) allow the reallocation of funds in investment projects to respond to imminent emergencies or to disasters associated with nature events and public health emergencies. It can be used for the emergency and/or early recovery.
Central American countries move forward
In Central America, thanks to the fluid communication between the finance ministries and disaster risk management teams, countries such as Panama and Guatemala have enacted risk finance strategies, while El Salvador, Costa Rica, Honduras and Nicaragua are advancing in their processes of formulation and formalization. This engagement was initially designed with the support of the Global Facility for Disaster Reduction and Recovery (GFDRR) and will continue over the next two years with additional donor support from Canada, Germany, the European Union, and the United States.
In terms of implementation, in recent years, Panama has added financial instruments to its fiscal planning, such as a Cat-DDO to focus on disaster response. In March 2020, the country’s Ministry of Economy and Finance requested an emergency amendment from the World Bank to change the focus of its Cat-DDO. Instead of using it to manage disasters, the fund would be used to strengthen the government's response capacity to the pandemic. They received a payment of $ 41 million in 48 hours, with all the resources immediately available.
In El Salvador, given the country’s high vulnerability to disasters, the government saw the need to strengthen the management of fiscal risks with a combination of financial instruments, including a CERC. In this context, at the end of 2019, a mock activation was held with GFDRR support for members of various ministries to simulate the activation and implementation of this mechanism through more fluid coordination. In April 2020, the country received $20 million from the World Bank to respond to the pandemic and strengthen the national public health system under the El Salvador COVID-19 Emergency Response Project.
Even if a disbursement of other funds already exists, as in the case of a health emergency like COVID-19, this is the first line of defense immediately after a disaster. So far, CCRIF has made payments of $152 million to 13 member governments after a disaster, benefiting nearly 2.5 million people in Central America and the Caribbean. The facility has demonstrated that regional financial solutions are feasible.
For this reason, a constant dialogue between the entities in charge of finance, risk management and health emergencies will allow prior preparation and planning to respond in a timely manner to the needs of the entire population.
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