Will the World Bank’s IDA20 replenishment help low-income countries stay one step ahead of disasters?
By Michèle Plichta, Research Assistant
Credit: Shutterstock
When the Centre for Disaster Protection convened the Crisis Lookout Coalition in January 2021, it challenged the international system, and the donors that sustain it, to ensure that, wherever possible, finances to pay for disasters are arranged in advance. Doing so could help reduce costly delays associated with the current model where most international aid is agreed and dispersed after a disaster has taken place.
In December, governments officials from around the world agreed to the 20th replenishment of the World Bank’s fund to support development and poverty-alleviation in low-income countries – the International Development Association (IDA). The IDA20 replenishment comes earlier than planned with the covid-19 response having exhausted the 19th allocation and comprises 93B USD of international financing, which will not only be a crucial tool for these countries to build back from the pandemic, but it will also play a vital role in responding to future disasters too.
During the first year of the covid-19 response, the World Bank provided 32% of multilateral funding to IDA countries, which is further evidence of the increasing role of development actors, including the Bank, in paying for crises. With as little as 2.3% of financing for recent disasters counting as ‘pre-arranged’, making sure that the biggest funding mechanisms – such as IDA – engage systematically and at scale with this agenda is crucial in moving the system away from the post-shock ‘begging bowl’ approach that has characterised it to date.
How the World Bank provides access to crisis financing matters.
The guidance agreed alongside the IDA20 replenishment is an important document. In it we see encouraging indications that the Bank is taking concrete steps towards strengthening its crisis financing support to the poorest countries. Most notably, crisis preparedness is established as a cross-cutting issue for the current replenishment. Four additions to the fund’s tools and instruments have the potential to improve its crisis financing offer:
A new tool to assess crisis preparedness. This will be used in some of IDA’s country diagnostics to rate the foundational elements of crisis preparedness such as risk monitoring and financial capacity. It remains to be seen how this will operate in practice and we encourage the Bank to engage with a wide range of local-to-global stakeholders as they develop this tool and to make their methodology and results as transparent and publicly available as possible. This could help governments coordinate their investments and financial preparedness with a wider group of actors.
A new contingent financing instrument. IDA will introduce an Investment Project Financing with Deferred Drawdown Option (IPF-DDO) by July 2022. Since IPF (financing earmarked for specific projects rather than unearmarked financing for policy reforms – known as Development Policy Financing (DPF)) makes up the majority of IDA financing [1] which means that, in theory, a large part of IDA can now include a contingent element for rapid release of funds in the case of crises. The IPF-DDO would not have the same financial incentives as the DPF Cat DDO where only a part of the cost of a crisis is covered by countries’ main IDA allocation with IDA contributing the rest. However, the introduction of the IPF-DDO could be a steppingstone towards a future disaster-specific IPF Cat DDO which could have a similar financial structure.
New favourable terms for existing instruments. Additionally, the already favourable terms of the DPF Cat-DDOs will now include that only 25% instead of 50% would be covered by IDA country allocations. This ‘4-for-1 offer’ means that for every 1 USD of a country’s IDA allocation spent on a Cat DDO, an additional 3 USD becomes available through other IDA resources. This is a promising development. The Centre for Disaster Protection’s research on funding the covid-19 response found that DPF Cat-DDOs were able to disburse more quickly than other instruments and made up 90% of the multilateral pre-arranged funding. Just this week, Tonga received 8m USD after just a few days to help with the tsunami response through this mechanism. Another instrument that could allow for rapid disbursements is the Contingent Emergency Response Component (CERC) that can be included in projects. While most CERCs currently do not seem to have a pre-allocated amount, this is a way that IDA can pre-arrange funding so it becomes available soon after being triggered, which can make the response to crises more effective. It is now proposed that the cap on these pre-allocated CERCs for early response is raised from 12.5m to 25m USD, to further encourage its inclusion in relevant projects.
A new crisis preparedness financing indicator to be introduced at IDA’s mid-term review. It is unclear what instruments or aspects this indicator will take into account. New indicators to measure crisis preparedness considerations by countries have already been defined, e.g., how many countries are developing adaptive social protection mechanisms. Combining these indicators and making sure that sufficient links to evidence are built into this tool would allow monitoring and assessment of how well the World Bank is doing against IDA's crisis preparedness framework as a whole.
We welcome these moves towards improving IDA’s ability to support partner countries to prepare for future shocks. The World Bank must now ensure these new commitments add up to a significant scaling up of risk-based financing options for IDA-eligible countries, and that they represent the kind of high-quality, well-targeted and accountable mechanisms that meet the needs of vulnerable communities, whose lives and livelihoods are threatened by increasing disaster risk.
Here are three things IDA and its stakeholders could do to play their part in making the international crisis financing system smarter, faster, and better targeted:
The World Bank should follow the UK Foreign, Commonwealth and Development Office (FCDO) and the German Federal Foreign Office (GFFO) in agreeing to measure how much of their crisis financing can be classified as pre-arranged. The Centre for Disaster Protection has been working closely with the FCDO to create a common definition that could be adapted to other donors and international organisations. In doing so IDA could include a percentage target to be achieved over the lifetime of future replenishments.
The World Bank should ensure that the disaster risk financing mechanisms are the right ones, and the instruments are designed to release funding quickly and effectively. More pre-arranged mechanisms have the capacity to help with this, such as the pre-allocated CERCs. Ideally, wider use of these would be further encouraged in the future.
To make sure that the existing and newly introduced mechanisms have sufficient uptake, it is important to have the right financial incentives, such as the 4-for-1 offer for DPF Cat DDOs. This is important to ensure that it can also reach countries with larger financial constraints, who are typically more vulnerable to the impacts of disasters. As this currently does not exist for other types of pre-arranged finance, IDA should consider expanding this beyond its Cat DDOs to also increase the accessibility of insurance and other DRF instruments.
[1] 66% in FY20 Q4, which was during the covid-19 response. Usually, the share of IPF makes up a larger percentage. https://documents1.worldbank.org/curated/en/136631594937150795/pdf/World-Bank-Group-COVID-19-Crisis-Response-Approach-Paper-Saving-Lives-Scaling-up-Impact-and-Getting-Back-on-Track.pdf