Latin America is being increasingly exposed to natural disasters ranging from earthquakes to climate related events such as hurricanes, storms and floods and they are also causing havoc with public finances, a new report suggests. Recent disasters are still fresh on people’s minds, such as the 2010 earthquakes in Haiti and Chile and, more recently, tropical storms Irene and Sandy.
Over the past decade, natural disasters alone have cost the region more than $8 billion in damages, taking lives, destroying property, wreaking havoc on public finances, and constraining economic growth, says a report from the International Development Bank (IDB). It says that more than ever countries, particularly developing ones, need to be prepared. However, setting aside resources for disasters can mean ignoring some of their most urgent development priorities, the report points out.
A financial toolkit developed by the IDB in 2007 is helping countries cope. Under the Integrated Disaster Risk Management and Finance Approach, countries work with the IDB to better assess their risk, devise prevention and mitigation measures, and ensure they have enough financial resources to deal with emergencies. An important part of the toolkit is financial planning since natural disasters vary in terms of severity and frequency, the toolkit helps countries develop different instruments to deal with emergency costs.
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First, the programme provides technical support to quantify countries’ exposure to natural disasters. Second, it helps countries create special budgetary reserves to cover such emergencies, including events that are less severe but more frequent, such as floods caused by storms. Lastly, the toolkit provides special financing mechanisms, including fast disbursing contingency credit lines and insurance facilities, so that countries can quickly tap into these resources to cover extraordinary expenses linked to catastrophic events.
The Dominican Republic has been the first country in the region to take full advantage of the toolkit, given its limited financial resources and high vulnerability to tropical storms and earthquakes. An IDB study on disaster risk management showed that the country’s current tax revenue would be able to cover only about 25% of public emergency expenses related to a catastrophic natural disaster. Working with the IDB, the Dominican Republic has devised a financial disaster risk-management strategy using the integrated approach. In 2009, it revamped its reserve fund for disaster emergencies and got a contingency loan from the Bank. Those resources will be quickly disbursed in the event of a severe natural disaster.
Also with technical and financial support from the IDB, the Dominican Republic in 2011 created an insurance facility to further protect its finances against the costs of natural catastrophes. The coverage is structured as a parametric insurance policy, and most of the risk will be transferred to international financial markets. The policy provides coverage of the extraordinary public expenditures that could be incurred during emergencies caused by catastrophic earthquakes or tropical storms over an initial period of five years.
‘With all the elements of the toolkit in place, the Dominican Republic is showing a level of preparedness rarely seen in Latin America and the Caribbean. By protecting its public finances, the government is ensuring it will be able to help its citizens at a time when they will need it the most,’ said an IDB spokesman.