Disaster-prone countries should get ahead of the curve and set aside funds for disasters – before they happen.
Exactly two years ago today, Nepal was hit by a massive earthquake, followed by numerous aftershocks that caused widespread human casualties and property damage.
About 8,790 people died and 22,300 others were injured in the tremors, which affected more than 8 million people in 31 of the country’s 75 districts, 14 of which were severely hit. Half a million houses collapsed, and another 250,000 were damaged. Total economic losses from the disaster were estimated at $7 billion.
The international community rushed to help Nepal. The UN Office for the Coordination Humanitarian Affairs (OCHA) launched a flash appeal to raise $422 million for immediate humanitarian assistance, and at an International Conference on Nepal’s Reconstruction, donors pledged $4.4 billion in further aid.
Nepal’s earthquake in 2015 is a vivid reminder that a country needs a huge amount of money when a major disaster strikes. But countries should not depend on donor aid. Instead, they need to make greater efforts to prepare, through disaster risk financing, for the inevitable financial cost of a major disaster.
International aid sometimes taken for granted
Many disaster-prone countries in Asia and Pacific receive donor assistance for post-disaster relief and reconstruction. Problematically, some governments take this aid for granted. These governments believe they don’t really need to prepare for calamities because donors will step in.
But global experience shows that donor assistance sometimes has less of an impact than expected.
OCHA’s flash appeal for Nepal mobilized only $282 million, or 67% of the total assistance needed as of January 2017. As for reconstruction support from donors, only about $1 billion had been spent by February of this year.
The limited spending is largely due to slow progress on reconstruction projects, but also related to international donors’ own requirements. Donors often have their own sector and geographical priorities, as well as internal processes to release the funding that can take a long time.
In post-disaster recovery and reconstruction, it is rare that a government can cover the full cost from donor assistance alone. A significant gap exists between the actual disaster losses and post-disaster funding.
Why disaster-prone countries need disaster risk financing
Worldwide, economic losses from disasters are increasing, but donor assistance is becoming more unpredictable and unreliable. This is largely due to the global economic downturn and limited resources in donor countries.
As a result, donors are increasingly requesting developing country governments to improve their own disaster preparedness – including finance.
Financially preparing for disasters is an important way to manage and mitigate their impact. Disaster risk financing is normally arranged before a disaster happens, and includes a set of financial solutions to finance disaster relief, recovery and reconstruction.
Typical disaster risk financing solutions include: (i) government contingency budgetary allocation for disasters; (ii) a stand-by credit arrangement, contingent on disasters; (iii) disaster insurance, or reinsurance; and (iv) disaster microinsurance for vulnerable people.
Economic shock should not follow disaster shock
Nepal’s propensity to disasters supports the case for a government disaster contingency budget, and providing microinsurance so poor and vulnerable people can be covered for losses such as crop damaged by droughts or fire.
By having upfront, ex-ante disaster risk financing solutions ready to deploy once a disaster strikes, governments can swiftly respond while maintaining fiscal balance and other development priorities.
In other words, a natural disaster shock should not be followed by an economic shock.
At the household level, financial protection from disasters offers families a better way of coping with disasters. It enables them to maintain their livelihood, and continue essential spending on key areas such as children’s education.
With many conflicting development priorities, arranging disaster risk financing can be challenging for governments. But ex-ante disaster risk financing is cheaper and easier than mobilizing funding after a disaster.
Understanding risk profile crucial to disaster risk financing
The first step is for governments to understand the national disaster risk profile and funding gap. ADB can help support this analysis.
In Bangladesh, ADB technical assistance supported government efforts to identify the right disaster risk financing solutions. ADB also provided a disaster contingent stand-by credit to the Cook Islands in 2016.
Various other disaster insurance solutions are also available from the private sector, including fiscal disaster risk insurance and weather index-based insurance.
It is time for the government, the private sector, and households in Nepal and other disaster-prone countries to put themselves ahead of the curve, and think about how to financially prepare for disasters – before they happen.