2.11 Disaster Risk Financing Framework for Adaptive Social Safety Nets

Most countries in Sub-Saharan Africa mobilize funding ad hoc to respond to shocks, relying on budget reallocations or donor support only after the shock has occurred. Recent global analysis by the Centre for Disaster Protection shows that only 2 to 2.3 percent of shock response funding tends to be prearranged (Crossley et al. 2021; Yang et al. 2020). There are major drawbacks associated with this approach. For one, funding is often slow to arrive as it first needs to be mobilized—for example, in many Sub-Saharan African countries, drought response funds tend to arrive more than six months after the occurrence of a drought shock (Clarke and Hill 2013). Furthermore, it is uncertain whether the amount that is ultimately provided will suffice to cover the response needs—more than 50 percent of humanitarian appeals in Sub-Saharan Africa were left unfunded in 2021 (United Nations Office for the Coordination of Humanitarian Affairs, Financial Tracking Service). Finally, ad hoc funding tends to be relatively expensive, as reallocated resources may be missing in the areas from which they are redirected, and delayed response funds can allow crises such as droughts to escalate into full-blown emergencies.

For shock response measures such as adaptive social safety nets, it is better not to rely on ad hoc measures but to arrange response measures as much as possible in advance, including financing. In the framework of Clarke and Dercon (2016), this includes deciding the following in advance: (1) when the adaptive social protection (ASP) response will be launched (the “trigger”)—for example, when an objective threshold is met (a minimum percentage of population in food insecurity or a satellite data threshold indicating the occurrence of a flood) or when an expert committee decides based on predefined criteria; (2) what the ASP response modalities will be—for example, the provision of emergency cash transfers of a certain size to a predefined number of beneficiaries in a particular target area; and (3) how much funding is needed and arranging it to be available on standby. Another way to think about this is that a trigger activates both the standby funding and the response—when the trigger threshold is met, the funding becomes available, and the response is launched (figure 2.11).

Malawi recently adopted this approach. In 2020, the government started developing a mechanism to scale up its Social Cash Transfer Program in response to droughts. Financing for this will rely on a sovereign insurance product that the Government of Malawi is currently

FIGURE 2.11: Disaster Risk Financing Framework for Adaptive Social Safety Nets Trigger Activates Activates Safety net scales up Pre-arranged financing Finances Source: Adapted from Lung 2020.

procuring (using funds from the Global Risk Financing Facility), alongside contingent project financing. The mechanism stipulates that when satellite-recorded precipitation levels drop below a certain threshold (the trigger) during the agricultural season, funding is released from the financing mechanism. This funding is then used to provide rapid cash assistance to droughtaffected households (World Bank 2019b).

There are various disaster risk financing instruments that can be used to prearrange funds and make them available for shock response when needed. These include, for example, national disaster funds, contingent credit contracts, and sovereign insurance, including the regional African Risk Capacity Group. These instruments differ in many respects, including their data needs, relative cost, and sophistication. However, they all facilitate the smoothing of expenditure over time and ensure that sufficient response funding is available when needed. For example, a government might decide to put aside a fixed amount in its national disaster fund every year or pay an annual fixed insurance premium—although the annual contributions may be relatively small, both instruments will provide a potentially much larger amount of needed response finance upon the occurrence of a shock.

While many low-income economies in Africa have the potential to use disaster risk financing instruments, donor financing will continue to be an important element of the overall financing strategy for adaptive social safety nets. In fiscally constrained environments, governments may be unable to shoulder the full cost in the short to medium term, even if they are aided by disaster risk financing instruments. Donor financing can serve as a stopgap. For example, various donors are supporting the African Risk Capacity, a sovereign drought insurance mechanism that was specifically set up to finance the response efforts of African governments, including through safety nets (Clarke and Hill 2013). Another example pertains to donor-internal contingency funding to help governments scale up their safety nets in case of a shock (for the case of Uganda, see, for example, World Bank 2015). International financial institutions also have special financing windows available, such as the World Bank’s Crisis Response Window or the International Monetary Fund’s Catastrophe Containment and Relief Trust, to support countries with limited fiscal space during times of shock. Furthermore, ASP financing systems can be set up with the capacity to absorb ad hoc external donor support. In this way, they can also help to improve the speed and efficiency of humanitarian aid spending. For example, the Government of Niger scaled up its safety net in response to drought in 2021/22. The United Nations Children’s Fund decided to fund a supplementary response, also using the safety net delivery infrastructure, and thus generating speed and efficiency benefits and, in turn, reinforcing the national adaptive social protection system.

Over the past decade, governments in Africa have started to adopt disaster risk financing instruments to pay for their disaster-related costs. Countries exploring them specifically to finance adaptive social protection include, for example, Kenya (World Bank 2019a), Malawi (World Bank 2019b), Mauritania (World Bank 2020), Niger (World Bank 2018b), Sierra Leone (Rajput and Xu 2020), and Uganda (Maher and Poulter 2018). To derive maximum financial benefits, countries often will not look at a single instrument but at a mix of different ones.