Three Ways That Contingent Policy Financing Contributes to Resilience Building Before, During, and After COVID-19

Policy-based financing that is focused on resilience building and on planning for the unforeseen plays an important role in strengthening a state’s capacity to deal with shocks.

Political scientist, Francis Fukuyama recently argued in Foreign Affairs that it takes a state to effectively deal with the COVID-19 crisis. Unfortunately, developing countries—arguably by definition—often lack effective state institutions such as (financial) risk management and social protection systems. The importance of such institutions has garnered renewed attention since the onset of the crisis. In fact, social protection systems have played a key role in virtually every country in mitigating the economic losses experienced by the poorest members of society.

Policy lending is an important tool to lay the foundations for social protection systems that can be scaled up in times of crisis. For example, the Malawi Disaster Risk Management (DRM) Development Policy Financing (DPF) with Catastrophe Deferred Drawdown Option (Cat DDO) catalyzed the government’s adoption of a new social protection plan that contains measures to modernize the system, including by developing shock-responsive social protection. Similarly, the Madagascar Cat DDO has supported better coordination between the humanitarian response and the social protection systems, while the Madagascar COVID-19 response DPF, which is currently being prepared, supports measures to expand cash transfers during the crisis. Such measures include facilitating the opening of electronic money accounts, thereby making it easier to transfer money to beneficiaries of social protection systems while increasing financial inclusion.

1. Cat DDOs have strengthened shock responsive systems (including DRM systems) in more than a dozen countries.

Only with effective DRM systems and adequate preparation can countries execute the logistically complicated response typically required during large-scale emergencies. To this end, the Madagascar Cat DDO included the wholesale reform of the country’s DRM system, which will lead, for example, to a significant increase in the number of local DRM offices. Adequate disaster response capacity at all levels, important at normal times, is even more critical during a pandemic. Such capacity can help mitigate potential feedback effects among rapid-onset disasters—such as a flood or a tropical cyclone—and the pandemic. For example, cyclone preparations might require that people evacuate their homes for crowded shelters, which could amplify the spread of COVID-19. A well-functioning DRM system reduces such compound risk.

2. Contingent policy financing makes available quick-response finance and helps strengthen financial resilience beyond natural disasters.

More than half a dozen countries drew down their Cat DDOs after declaring a state of emergency because of COVID-19. Funds were transferred in less than a week, demonstrating the agility of Cat DDOs to provide quick liquidity for emergency response. Governments used the funds to purchase urgently needed goods, such as personal protective equipment, for pandemic response. More generally, however, governments used the funds to help plug fiscal holes caused by increased expenditure needs and plummeting revenues in the wake of lockdowns and the global economic downturn. Apart from injecting liquidity in times of great need, Cat DDOs can also spur the adoption of additional financial instruments that provide further protection against extreme events. For example, as part of its Cat DDO, the government of Madagascar committed to developing a sovereign insurance solution against the risks associated with tropical cyclones, which are estimated to cause an average annual loss of US$100 million in Madagascar.

3. Contingent policy financing helps improve the assessment and management of the financial risks of disasters.

Like most of us, politicians and government officials tend to focus on the most pressing issues of the day rather than on potentially catastrophic future events. Those who do consider such future events are often a select group of people, such as officials within special fiscal risk units whose focus is on events defined by high uncertainty and potentially devastating impacts. It is therefore essential that administrations carve out space for technical experts who can identify, understand, and manage risks, including the fiscal risks of disasters. DPFs open the space for conversations about different risks and how to manage them. With their multiyear implementation periods and their clearly defined results frameworks, DPFs also ensure that such conversations are ongoing and that commitments to strengthen risk management are honored.

Cat DDOs have supported a variety of measures that help governments better assess and manage financial risks, including the establishment of a fiscal risk unit in Serbia, the adoption of a disaster risk–financing strategy in Malawi, and the creation of a national contingency fund in Madagascar.

The COVID-19 crisis has put risk front and center: in the wake of the pandemic, people now recognize the importance of thinking about risk and preparing for the worst. However, if history is a guide, that current focus on risk will fade as seemingly more pressing concerns again occupy the minds of most decision-makers.

Fortunately, policy financing instruments allow us to support government officials in our client countries who are not only responding to the crisis caused by COVID-19 but also already preparing for inevitable future disasters.

Click here for more information on World Bank CAT DDOs. Learn more about the work of the Disaster Risk Financing and Insurance Program here.

Photo Credit: March 31, 2020 - MADAGASCAR. With Madagascar’s health system under strain from the COVID-19 pandemic and schools shuttered for the foreseeable future, the health, education, and overall wellbeing of the Malagasy people are increasingly at risk. As the pandemic hits more and more countries, the World Bank Group and other organizations are stepping up to provide immediate support in order to quickly get resources to the front lines of fighting this disease. Photo: World Bank / Henitsoa Rafalia.

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Disaster Risk Finance | COVID-19 Blog Series

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