Time for a regional disaster fund

Perhaps we need to ask how serious a problem is natural disasters.

The evidence on the cost of natural disasters using the EM-DAT (EM-DAT database is compiled by the Centre for Research on the Epidemiology of Disasters) database over the period 1970 - 2013, shows that the Caribbean was affected by some 302 natural disasters. These caused 233,342 deaths, injured 310,672 and rendered 1,868,477 persons homeless. The estimated monetary value placed on the damage brought on by these disasters was US$41.81 billion. Natural disasters have deleterious effects on economic growth, worsen balance of payments (exports fall and imports rise), negatively affect the fiscal balance (taxes fall and expenditure rises) and last but certainly not least, result in an increase in public debt. In addition, when Caribbean countries are affected by disasters and aggregate demand falls, so does imports from Trinidad and Tobago.

It is also important to remember that a natural disaster might be experienced within a five-year period for many a Caribbean country, with some having disasters more frequently than others. Data suggests that a disaster can affect government revenues on average by more than five percent of annual budgeted revenues.

Heads of Government of the CARICOM asked for World Bank assistance in improving access to catastrophe risk insurance. The Caribbean Catastrophe Risk Insurance Facility (CCRIF) was established to provide its members with access to affordable and effective coverage against natural disasters. However, the sums available are neither wholly adequate to compensate for the destruction and devastation caused, nor are distributions timely in the throes of disaster. Although insured, many Caribbean countries are still forced to fund their emergency expenditures with substantial amounts of debt. The CCRIF is insufficient to address the challenge that natural disasters present to Caribbean countries.

It is against this backdrop that the Prime Minister may want to ask his Minister of Finance to look at establishing a Caribbean Stabilisation Fund and a Catastrophe Fund which will provide the respective budgetary support in the face of a collapse in earnings from the main export sector after a disaster, and funding for replacement of infrastructure damaged in environmental events.

These two facilities are also meant to prevent disasters from adding to national debt as countries should no longer have to borrow the resources required to rebuild infrastructure that may have been damaged or destroyed.

The small island states of the Caribbean do not have the capacity to absorb the financial impacts of natural disasters; this includes our country.

Caribbean countries have been highly vulnerable to natural disasters. A stabilisation fund, designed to serve as emergency financing to help them address the issue of volatile and unpredictable revenue losses that can arise from these disasters, could be of significant value. A regional fund would facilitate the pooling of resources and spreading of risks, as well as provide access to higher levels of financing. This regional fund could be viewed as a safety net for Caribbean countries, contributing to sustained buoyancy of the economies, given their vulnerability to natural disasters. This could prove beneficial to exporters from Trinidad and Tobago who could expect to see sustained exports even in in the face of natural disasters.

Another benefit of such a mechanism is that it could impact on the sovereign rating of individual Small Island Developing States (SIDS).

Without such a fund, the SIDS’ ability to repay debt after a natural disaster can be compromised, and its sovereign rating downgraded. A stabilisation fund would contribute to maintaining the stability of a country’s rating. A potentially stable rating would require less risk capital being set aside by potential investors.

The stabilisation fund would be best implemented in conjunction with an initiative of debt relief for the Caribbean. Whether the debt relief is immediate or phased, the ability of Caribbean countries to contribute to the stabilisation fund would be enhanced if there is increased fiscal space. In this regard, the Prime Minister needs to be urged to pursue his initiative with ECLAC to find a workable plan for debt relief for the Caribbean.

In addition, a Catastrophe Fund should also be considered to operate separately and apart from the CCRIF and will serve as a reserve pool managed similarly to the Stabilisation Fund, which would allow the contribution of each country to accumulate annually if no disaster were to occur. The Fund should have as its main objective the replacement of infrastructure and productive capacity that are destroyed or damaged by weather events, volcanic eruptions, earthquakes, or other disasters over which countries have no control.

Perhaps given the recent experience of Bret, and the good fortune of not more serious and extensive damage, it may prompt us to consider these ideas to put in place mechanisms to deal with far more devastating natural events.