Expanding the deck or just reshuffling? What the Crisis Preparedness and Response Toolkit could mean for IDA countries
Authors: Cristina Stefan, Anna DeGrauw
Illustration: Camille Aubry
As international crisis financing confronts the challenges of the 21st century, institutions like the World Bank are under pressure to reassess their approaches. The Bridgetown Agenda and the V20 Accra-Marrakech Agenda offer solutions to how international financial institutions can be more accountable to climate-vulnerable countries, especially those with tight fiscal space. Aligning with external pressure, the Bank’s Board also recommended that it needed to reform to address the scale of development challenges. The Bank has made commendable progress so far, including the launch of the Crisis Preparedness and Response Toolkit, but what can we expect in terms of measuring real adoption for low-income countries and those in fragile and conflict situations? Are the tools truly accessible and affordable?
In his first year as World Bank President, Ajay Banga led the adoption of the Evolution Roadmap, aiming to “create a world free of poverty on a liveable planet”. The reform signals a shift in the Bank’s priorities, including Banga’s particular focus on bolstering support for countries eligible for assistance from the International Development Association (IDA), which the Bank determines based on poverty levels and lack of creditworthiness from commercial or International Bank for Reconstruction and Development (IBRD) borrowing. Banga targeted the next IDA replenishment cycle to be the largest in the Bank’s history, which would supersede IDA20’s $93 billion financing package. Additionally, there have been significant advancements in multilateral agreements with regional development banks to scale up financing capacity and boost collective efforts on climate.
Aligning with wider reform, the Bank first announced its Crisis Preparedness and Response Toolkit at the Summit for a New Global Financing Pact in June last year. The Toolkit offered pauses in debt repayments through Climate Resilient Debt Clauses (CRDCs), rapid response options, extended advanced emergency systems, and provided new types of insurance to backstop development projects without adding debt. At that time, some instruments, such as CRDCs or pause clauses, have witnessed significant political interest from bilateral and multilateral creditors since the Bridgetown Agenda called for them.
In early February 2024, the Bank expanded and clarified its original offer to allow countries to quickly access liquidity for emergency response, scale up pre-arranged financing, and expand access to disaster risk transfer instruments such as catastrophe bonds.
However, the latest version of the Crisis Toolkit continues to be surprisingly insular. It is silent on the linkage to the Evolution Roadmap or the partnerships that the Bank pledges to make, including with regional development banks, development insurers (also known as risk pools), and civil society organisations. It also misses linkages to key windows of IDA, such as the Crisis Response Window. There are three ways in which the Crisis Toolkit could be strengthened if it is to rise to President Banga’s ambition to be a “better and bigger bank”, especially for IDA-eligible countries: by setting pre-arranged financing targets across the Toolkit with a particular focus on IDA countries; by basing new response finance on systems’ preparedness; and by linking the Toolkit with IDA and other partners’ capabilities.
Set pre-arranged financing targets across the Toolkit with a particular focus on IDA countries
Building on the work that the Centre has done on the state of pre-arranged financing, additional research suggests that the World Bank (IDA & IBRD) is doing better than other institutions on pre-arranged financing (13.4% in comparison to only 2.2% of total crisis financing between 2017 and 2021). But if we concentrate on IDA from 2017-2021, only 8.3% of all IDA crisis financing was pre-arranged. Pre-arranged financing is defined as financing that has been approved in advance of a crisis and that is guaranteed to be released to a specific implementer when a pre-identified trigger condition is met.
The Crisis Toolkit could be a step to address gaps in pre-arranged financing for IDA countries, given that it largely focuses on budget instruments used to respond to increased post-disaster financial needs, that can be prepared ‘ex-ante’ or before the crisis occurs. From the five instruments proposed by the Toolkit – Rapid Response Option (RRO), Catastrophe Deferred Drawdown Option (Cat DDO), Investment Policy Finance with Deferred Drawdown Option (IPF DDO), Disaster Risk Transfer (DRT) and CRDCs – only two are entirely new instruments: IPF DDOs and CRDCs. The remaining three are instruments that existed either under a different name and design (RRO) or that are simply being scaled up (Cat DDOs and DRT as Cat Bonds/Insurance). However, the design across the entire Toolkit and integration of instruments shows a clear intention of the Bank to reduce the number of new operations and increase efficiency and reduce approval timelines by using existing operations to channel more funding after a crisis. Cat DDOs, in particular, can now be topped up with undisbursed funds from other projects.
For this new Toolkit to deliver on its intended purpose and ensure more pre-agreed finance is made available to countries, it needs to set measurable targets that can track the adoption of this new Toolkit and build on IDA’s existing pre-arranged financing baseline. In terms of targets on pre-arranged financing, the Bank has already set a plan to expand its use of DRTs for member countries by up to 400% over the next five years mostly in the form of Cat Bonds, thus reaching a total outstanding amount of Cat Bonds issued by the World Bank to $5 billion. The risk of having a target on only one of the instruments in the Toolkit is that this can lead to a bias in the advice the World Bank gives to countries. It creates an artificial incentive for Bank staff to promote a particular type of instrument, such as Cat Bonds, over other risk transfer products rather than advise countries on their relative merits. Not to mention that the World Bank has yet to issue a Cat bond for a low-income country. Concretely, we would expect the World Bank to propose and monitor a transparent and overarching target to increase the amount of pre-arranged financing from its current 8.3% baseline. This would translate into targets on the volume of pre-arranged finance from Cat DDOs and IPF DDOs, similar to the ones already in place for DRT.**
However, since the devil is in the details, tracking the uptake of the Toolkit with pre-arranged financing targets for all World Bank countries will not be enough. Because IDA countries remain less represented in the total volume of the Bank’s contingent lending, the Bank should place special attention to the accessibility and affordability of these instruments for lower-income countries. The Bank needs to develop a level playing field in terms of the concessionality with which it can offer instruments, while offering impartial advice to countries on which to choose. If the World Bank intends to provide impartial advice and finance to countries to cover their protection gap, it should also remain agnostic to the type of instrument countries select.
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The IPF DDO has caught our attention, because it attempts to bridge the tension between contingent and development finance. The instrument is innovative because it links a development objective achieved through a classical Investment Policy Finance (IPF) operation with a contingent component aiming at protecting the gains obtained by the said investment finance operation. In this case, the beneficiary or loan holder can be a national agency or a line ministry taking a loan to improve areas related to its mandate. Then, the activation criteria of the contingent component (the DDO) will also be objectively linked to a measured impact of a crisis relating to the same activities supported by the IPF. This instrument was until recently missing from the World Bank portfolio to leverage funding for IDA countries, and its introduction could now allow the Bank to link the preparedness investments more broadly to planned response finance.
Base new response finance on systems’ preparedness
Even if funding is available and timely, getting it to the right people is most important. Good disaster risk financing rests on predictable, pre-arranged finance (‘money in’) flowing to people in vulnerable situations through systems fit for purpose and following pre-agreed plans (‘money out’). In other words, where the money goes is just as vital as the money on the table.
When it comes to preparedness, it is best to take a country-driven approach focusing on both getting more money in the system as well as ensuring national systems (e.g. social safety nets, mobile money, social registries) can absorb this new finance. This approach ensures money is spent efficiently and equitably. The Bank can already learn and scale from its own success stories, such as Malawi’s bespoke layered approach to financing its shock-responsive social protection system by using a combination of contingency budgets provided by IDA funding and an insurance policy from ARC Ltd., a regional development insurer.
Because the Bank invests heavily in analytical tools and processes to prepare multiyear country strategies, it is also well placed to identify and prioritise systems strengthening investments through existing frameworks such as Country Partnerships, or newer frameworks such as the Crisis Preparedness Financing Tracking Indicator and the Crisis Preparedness Gap Analysis (CPGA).
The CPGA, a new name for an old unscaled initiative of the Bank, should measure progress in crisis preparedness through a dedicated dashboard. However, the dashboard needs to become an actionable tool that can measure how the instruments in the Crisis Toolkit are connected to ‘money-out’ systems and aligned with the Bank’s system-strengthening approaches. For example, the new IPF DDO can link disbursements with adaptive social protection programmes in IDA countries, but it first needs to build on an assessment of existing capabilities to ensure there is an alignment of incentives between financing agendas and public financial management. Linking the CPGA framework to the Toolkit can help to further fulfil the Bank's IDA20 commitment to crisis preparedness.
Link the Toolkit with IDA and other partners’ capabilities
IDA20 and the Evolution Roadmap both emphasise partnerships. IDA20 encourages partnerships for crisis preparedness with risk pools to “establish new innovative products to meet countries’ needs,” reflecting an ambition that the Centre called for here. The Evolution Roadmap also mentions working with risk pools to enable private risk capital in the context of the Crisis Toolkit.
However, the Crisis Toolkit does not mention how it will ensure its instruments are fit for purpose by working with other development actors, like regional development insurers, who offer different types of financial instruments for IDA-eligible countries. This is critically important for a subset of IDA-eligible countries also considered to be in Fragile and Conflict-Affected Situations (FCS). Out of all pre-arranged financing obtained by FCS countries for the period 2020-2022, initial Centre analysis that builds on the state of pre-arranged financing suggests that roughly 85% was in the form of sovereign insurance products from regional development insurers, with very little in the form of other instruments, such as contingent loans. This means that risk pools, such as African Risk Capacity, were the main providers of pre-arranged financing for FCS. IDA could use the Crisis Toolkit, especially the expanded options for funding DRT products, to enhance its relationship with the development insurers and allow the IDA funds to pay for insurance premiums for products offered by the risk pools. This was proposed in IDA20, but there is not a trace of it in the Crisis Toolkit.
Including partnerships in the Crisis Toolkit would not only fulfil IDA20’s own ambition for crisis response but also ensure it links with IDA itself. For example, there needs to be clearer links between the Crisis Toolkit and IDA’s Crisis Response Window. Aside from it working to leverage the IDA country allocations for Cat DDOs and IPF DDOs, the Crisis Response Window does not seem to have a clear role in this new crisis response architecture, despite it allowing ring fenced funds in IDA19 to be pre-arranged for health and food insecurity crises.
A DRF layering mechanism could be built by the Bank by using products such as contingent loans and DRTs made available and accessible to IDA countries to cover the protection gap for risks that are measurable and predictable. The Crisis Response Window could then be used as a backstop for disasters inherently difficult to predict or for major protracted crises. Layering tools in the Crisis Toolkit with financing already available for IDA would leverage the strengths of the Bank in the ongoing replenishment for IDA21.
Playing the cards right: Unleashing the full potential of the Crisis Toolkit for IDA countries
The Crisis Toolkit is a new deck, with new cards such as IPF DDOs and CRDCs, and a reshuffling, especially for RROs, Cat DDOs, and DRTs. What matters now is how they are played when a shock happens, acknowledging that some cards are still missing for low-income or fragile countries. For some of the new cards such as IPF DDOs, term sheet details in loan agreements are the details that matter to determine whether they will be in the end affordable and accessible, so a level playing field of concessional terms will ensure IDA countries have the opportunity to use the instruments.
As highlighted throughout this analysis, there remains significant room for improvement to the Crisis Toolkit to fully realise its potential, especially in supporting IDA countries. This will require a concerted effort to establish and measure pre-arranged financing targets, strengthen linkages between crisis response and crisis preparedness, and foster deeper cohesion within IDA and with other development stakeholders.
These recommendations could help ensure the deck is not stacked in favour of specific instruments or countries. Additionally, they can keep the Crisis Toolkit accountable towards the Bank’s commitment to being a better, not just a bigger Bank, especially for IDA countries.
* The Pandemic Emergency Facility Cat Bond deal was the only one that was supposed to benefit IDA countries, but this instrument was not targeting a standalone low-income country.
** The RRO is the only instrument that cannot be considered as pre-arranged finance because it builds on existing ‘zero dollar’ CERCs and cannot be fully a pre-arranged instrument since the amounts that will be made available through it after a disaster remain unknown.