Needed: Global Risk Pooling Reserve Fund

In the 75th year of the United Nations, few are waving the flag of multilateralism. As argued on these pages, the Covid-19 pandemic has created a strong likelihood that countries will fall back to insular approaches (“This is what a perfect storm looks like”,  March 17; https://bit.ly/2ZmEewK) and there will be limited scope for grand bargains (“New multilateralism with old paradigms?” April 17; https://bit.ly/3cOX6rY). But international cooperation is still possible — to avoid common aversions, catastrophes we all wish to avoid. We can pool resources for collective insurance against calamities in future. We need a global risk pooling reserve fund. 

According to the World Bank, 60 million people worldwide will fall back into extreme poverty (living on less than $1.9 per day) as a result of the severe economic crisis unleashed by Sars-CoV-2. The contraction in global output (by 5 per cent this year) will reverse three years of gains in poverty reduction. 

The International Monetary Fund (IMF) is offering emergency financial assistance through two channels. The Rapid Credit Facility is offering concessional loans ($22.04 billion until  May 20) to help with balance of payments of low-income countries (LICs). The Catastrophe Containment and Relief Trust, established after the 2015 Ebola outbreak, is giving grants for debt relief ($229.31 million until May 20) to the most vulnerable countries affected by natural disasters or public health crises. The World Bank Group plans on spending $160 billion over the next 15 months ($50 billion as grants or highly concessional loans to the poorest countries). The G20 also took action: Effective May 1, it placed a moratorium on bilateral government loan repayments for LICs and least developed countries until end-2020. 

While prompt, the response from multilateral institutions is inadequate for several reasons. For one, IMF debt relief so far (across all regions) is minuscule. G20 moratoriums on debt servicing kick the can down the road. Interest payments will keep accumulating and result in higher debt burdens next year. While the G20 requested private creditors to participate in the initiative, it is voluntary and unlikely to happen. Further, IMF loans/grants to cover debt servicing, while necessary to prevent downgrading of sovereign ratings and currency devaluation, do not cover for the losses suffered due to a catastrophe. 
Moreover, perfect storms of shocks — pandemics, extreme weather events, droughts and crop failure — can make recovery difficult without an insurance cushion. The World Bank’s “pandemic bonds” will pay out just $132.5 million to International Development Association countries, less than the $141 million Wimbledon will receive from pandemic insurance. 

How could the international community and the financial and insurance system respond? In order to be more inclusive of risks facing the most vulnerable countries, the principle of risk pooling offers clues. Even the wealthiest countries can find their financial resources and institutional capacities exhausted against major adversities. When the same crisis occurs more frequently or several emergencies arise simultaneously, physical and financial resources get stretched to breaking point.

A Global Risk Pooling Reserve Fund* would pool risks of environmental and health shocks across countries. In response to partial or entirely missing insurance safety nets for many vulnerable communities, a global reserve fund would rest on three premises. First, different countries face different kinds of risks. Some regions are threatened by coastal storm surges, others face heat stress and drought. Elsewhere, communities might be more exposed to agricultural losses or new infectious diseases. By pooling risks, peaks of risk curves could be lowered for individual countries. 

Secondly, the reserve fund would not require initial payments of public money. The nominal capitalisation of the reserve fund could be based on a voluntary allocation of a share of a country’s Special Drawing Rights (SDRs) at the IMF. There are already calls for more SDRs (at least $500 billion) to be issued to deal with the liquidity crunch that developing countries are facing. The reserve fund would be drawn on only when disasters above a certain threshold strike. The risks and thresholds could be based on plotting a Climate Risk Atlas (and related risk indices) for developing countries. This way, a new financial mechanism could be created without further straining government budgets. 

Thirdly, the reserve fund would assume an initial loss but would transfer bulk of the subscribed risk to existing market-based insurance mechanisms. The reserve fund would be a way to bridge major insurance firms, on the one hand, and developing countries (and stressed communities in developed countries), on the other. Underserved regions would be drawn into a risk-resilience framework associated with chronic climate and pandemic risks. The risks could be also passed through to multilateral development banks and national development finance institutions (DFIs). (Such ideas have been proposed recently for risk mitigation for renewable energy projects in developing countries.) The reduced (or better measured) climate risk profile could be leveraged: DFIs could use this to lower the cost of finance for sustainable infrastructure projects in countries within their portfolios. 

The 1945 San Francisco conference, which established the United Nations, took place while the Second World War was still being fought in some theatres. We cannot wait for all crises to end before finding new purpose for collective action. Human security and planetary boundaries are at risk. We must reorient multilateralism towards chronic risks, to avoid the tragedies that might befall humankind. There are not many “win-wins” in multilateralism today, but we can start with “don’t lose”.
The author is CEO Council on Energy, Environment and Water (http://ceew.in) and a member of the UN Committee for Development Policy. Follow @GhoshArunabha @CEEWIndia 

* “Multilateralism for Chronic Risks,” Global Governance Innovation Perspectives, Washington, D.C.: Stimson Center (forthcoming May 2020)



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