An opportunity to close the protection gap in climate vulnerable countries

The coronavirus pandemic is causing global disruption and uncertainty that will continue for many months to come and will have implications on livelihoods, economic growth, fiscal space, investment, and losses to financial and human capital. It will make even more vulnerable the lives of those already living in precarious economic conditions.

Prior to Covid-19, the Vulnerable Group of Twenty (V20) Ministers of Finance, which represent 48 developing countries, were among the fastest growing in the world, supported by strong demographic trends. While the Covid-19-led economic lockdown causes uncertainty, the growth profile is driven into further uncertainty because of the impacts of climate change, both in the form of disasters that are growing in intensity and frequency, and accumulating long-term financial risks as a result of accelerated climate change, technology, economic and financial headwinds.

There is already mounting debt in climate vulnerable developing countries with more than US 2.3 trillion of external debt and this, in combination with a collapsing GDP, 10-40% decline in remittances, and a large fiscal effort during the Covid-19 lockdown, during recovery and to sustain growth, means more debt. Vulnerable developing countries may be ill-prepared for future shocks and worsening long-term climate-related risks such as sea-level rise, drought and pest infestation.

Conventional financial theory already significantly underestimates risk and consequently underestimates the importance of investments and action to reduce climate vulnerability and increase sustainability. Risk underestimation damages economies, in particular micro, small and medium enterprises (MSMEs), and the poor and vulnerable that rely on them.

Financial protection for the extreme poor and vulnerable people remains low with disaster risk reduction financing per capita at 66 US cents between 2010 and 2018. So far, US$48 billion has been committed by international institutions to help countries manage the fallout from the Covid-19 pandemic with US$23 billion from the IMF, US$10.6 billion from multilateral development banks and US$1.3 billion from the UN Global Humanitarian Response Plan. Of these commitments, 96% has been loans of which 27% are on concessional terms.

Moreover, only 25% of bilateral financing and less than 50% of multilateral financing has targeted the most climate vulnerable countries with climate change adaptation funding. The Covid-19 global pandemic brings with it the consequence of undermining or reversing many development gains so far. Prior to Covid-19 and compounding damages of climate change, the annual international funding gap for social services and social protection alone was US$84 billion with 87% of the total required in low income countries.

While analytics points to the fact that resources are not correlating to where science and practice indicates vulnerability is located, this is a great opportunity for donors to become more effective with their support. Moreover, the recovery packages present an opportunity to drive economic transformation that yield positive welfare effects for the poor and vulnerable and jumpstart the MSME growth engine they rely on.

Some actionable opportunities for actors engaged in the financial protection agenda such as the InsuResilience Global Partnership include: (1) open-source and accessible climate data and treatment of data by enabling cost-benefit analysis towards better risk reduction, risk management and resilience investments; (2) more South-South and country originated activities in vulnerable countries, which relates to increased capacities and streamline of international funding mechanisms to expand beyond capacity building and technical assistance, but also on implementation; (3) while large agencies favor large countries due to scale, there must be more effort and emphasis to work in smaller markets, which are increasingly becoming more exposed to climate change with a growing protection gap; and (4) North-South global cooperation in joint risk sharing can be facilitated through enhanced concessional support.

Contribution by Sarah Jane Ahmed, V20 Finance Advisor




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