Press Release No. 19/241

IMF Executive Board Discusses Building Resilience in Developing Countries Vulnerable to Large Natural Disasters

June 26, 2019

On May 1, 2019, the Executive Board of the International Monetary Fund (IMF) discussed an IMF staff paper on building resilience to large natural disasters and options for managing associated risks in vulnerable developing countries.

Background

Many developing countries, particularly small states, are vulnerable to natural disasters that can have large human, economic, and social costs. Recent examples of major disasters include Cyclone Idai (March 2019), which caused significant loss of life and widespread economic disruption in Mozambique and neighboring countries, and Hurricane Maria (September 2017), which caused damage to property and infrastructure estimated at some 200 percent of GDP in Dominica. As the frequency and intensity of natural disasters is projected to increase over time with climate change, the economic and social impact of disasters can also be expected to increase.

Given these costs, there are many benefits to taking actions now to enhance preparedness for natural disasters, in terms of lowering the economic and social impact, speeding up recovery, and providing greater continuity in public services. However, in many disaster-vulnerable countries, there is substantial underinvestment in resilience-building efforts, reflecting capacity constraints, large upfront costs, and limited fiscal space. International financial institutions and other development partners make available various forms of support for resilience-building, but domestic institutional capacity constraints often limit the ability of small and poorer countries to fully leverage the resources available to them.

Drawing on a substantial body of existing work by the World Bank and other agencies, the IMF staff paper recommends that vulnerable countries develop comprehensive disaster resilience strategies (DRS) in consultation with development partners and other stakeholders. The DRS should be grounded in a clear diagnostic of disaster vulnerabilities and rest on three pillars: building structural, financial, and post-disaster/social resilience. Such a strategy would support ex-ante planning, provide a framework for coordinating the work of development partners before and after disasters, and help catalyze donor support. Given its expertise in designing macroeconomic policies and frameworks, the IMF can play an important role in supporting resilience building in disaster-vulnerable countries in the context of its operational work with countries and its support for domestic capacity development.

Executive Board Assessment [1]

Executive Directors welcomed the opportunity to take stock of ongoing staff work on building resilience to natural disasters in vulnerable countries, including the efforts being made to incorporate disaster risks into macroeconomic frameworks and into Fund surveillance more generally.

Directors agreed that natural disasters can have significant and long‑lasting effects on economic well‑being in many developing countries, particularly small, fragile, and low‑income states, and that the frequency and intensity of weather‑related shocks are expected to further increase as climate change evolves. They underscored that the social and economic impact of natural disasters can be mitigated through policies to build resilience, including targeted investments in infrastructure and the effective use of available financial instruments.

Directors agreed that incorporating disaster risk is an important component of sound macroeconomic management in countries where risks of large‑scale natural disasters are significant. They agreed that the Fund, in collaboration with the World Bank and other development partners, can help vulnerable countries assess the trade‑offs between development needs, rising debt vulnerabilities, and the benefits of ex ante resilience building. Most Directors agreed that the Fund’s approach to resilience building should extend to slower‑onset disasters, which can also have a detrimental impact on countries.

Directors welcomed the suggested three‑pillar approach to resilience‑building as a useful framework for analyzing policy options in a systematic fashion and for identifying key priorities. They noted that the approach was informed by the Sendai Framework for Disaster Risk Reduction and the work of the World Bank on disaster risk management and insurance strategies. They agreed that many small, fragile, and low‑income countries face significant capacity constraints in developing a full strategy for building resilience, which can severely impair the ability of governments to make effective use of external support, and noted that the Fund and the World Bank are well placed to assist countries in overcoming these capacity gaps. While noting the important role of development partners in supporting national efforts, Directors emphasized that government ownership is crucial in building resilience to natural disasters.

Directors saw merit in governments in vulnerable countries developing a national disaster resilience strategy (DRS), drawing on support from the international financial institutions. The Fund could take a lead role in helping countries develop a macroeconomic policy framework that adequately reflects both disaster costs and returns from resilient investment and that identifies the fiscal actions to support the policy framework. The World Bank and other development banks could take a lead role in helping countries identify and assess disaster vulnerabilities and in prioritizing investment needs. Directors highlighted the need for Fund staff to collaborate closely with the World Bank in supporting country efforts, with a few Directors underscoring the core expertise of the Bank in key areas where support would be needed.

Overall, a DRS would provide a roadmap for policy design and sequencing, and facilitate coordination of donor support for national plans. Directors remarked that the DRS would focus national attention on active preparation for disasters while providing an anchor for support from development partners. Directors noted scope for further clarifying the details of coordination, sequencing, and responsibilities of different stakeholders in developing an effective country‑owned DRS. They also highlighted that the development of a DRS would benefit from peer learning and experience‑sharing among countries and agencies. Directors agreed that a credible DRS could help catalyze higher levels of financial support from bilateral donors, climate funds, and other sources, and welcomed the interest expressed by some Caribbean authorities in developing such strategies.

Directors emphasized that the use of risk‑transfer instruments should figure more prominently in government measures to improve financial resilience to disasters, while recognizing the challenges involved in developing insurance markets that provide reasonable premium levels relative to expected annual payouts. They welcomed the efforts of donor countries to support insurance market development and strengthen risk pooling. Directors broadly supported additional work by the Fund, in collaboration with the World Bank, to analyze the role and potential contribution of state‑contingent debt instruments in helping countries build resilience to natural disasters.

Directors noted that the Fund has a valuable role to play in supporting country efforts to build resilience to natural disasters, as part of its surveillance and capacity building activities. A coherent resilience strategy should fit within a medium‑term macroeconomic policy framework that is consistent with maintaining debt sustainability, including under adverse shocks—an area of core Fund expertise. Staff could also contribute through analysis of the economic impact of disasters and of trade‑offs between public investment and debt accumulation. Directors agreed that the Fund’s lending toolkit was sufficiently flexible to provide support for disaster‑vulnerable countries that face a BoP need, but most saw scope to increase access limits as well as to use the toolkit in non‑traditional ways to support resilience‑building. Directors encouraged giving special attention to countries prone to natural disasters in the upcoming FSAP Review and Comprehensive Surveillance Review.

Directors agreed that disaster resilience strategies need to be based on a robust diagnostic of risks and vulnerabilities and encouraged a pragmatic approach, in coordination with the World Bank. They asked for a full assessment of the Climate Change Policy Assessments being piloted in a handful of small countries, in collaboration with the World Bank, which could provide a valuable diagnostic for national authorities.

Directors noted that building resilience to natural disasters extends to areas in which the Fund does not have relevant in‑house expertise. They underscored that providing effective support to governments would require close collaboration and coordination with other institutions that have the relevant expertise, including in developing disaster resilience strategies, and called for a clear division of labor, based on respective mandates, between the Fund, the multilateral development banks, and other agencies.