GAR 2013 Main Report

In many countries, following a disaster, implicit liabilities bring uncertainty to the national account when reconstruction and disaster relief expenditure have to be accommodated (see highlights in Table 5.2). For example, many governments act implicitly as ‘insurers of last resort’ for low-income households even if this responsibility is rarely enshrined in law.

This kind of ad hoc compensation provides disincentives for risk reduction. Worse, ‘compensation inflation’ can occur when households expect at least the same level of compensation as provided in previous disasters, which increases the government’s fiscal burden (World Bank, 2012b

World Bank. 2012b.,The Sendai Report. Managing Disaster Risks for a Resilient Future., Government of Japan, GFDRR and World Bank., Washington DC,. .

). Establishing an ex-ante legal framework is needed to decrease the level of fiscal uncertainty and ensure clear incentives for risk reduction.

Based on different risk metrics and criteria for measuring government fiscal capacity, a number of examples illustrate the potential scale of these financing gaps.

In Honduras, analysis based on results from a hybrid loss exceedance curve (see Chapter 4 of this

report) shows significant losses even from frequently recurring events (Figure 5. 4).

These results enabled an analysis of anticipated relief obligations of the government and its available sources of funding, illustrating the financial vulnerability of the Honduran Government to disaster risk (Figure 5.5).

The analysis shows that the government depends largely on traditional sources to cover for losses from frequently occurring small to medium-sized floods and storms ( GAR 13 paper

Hochrainer et al., 2013

Hochrainer, S., Timonina, A., Williges, K., Pflug,G. and Mechler, R. 2013.,Modelling the indirect and fiscal risks from natural disasters using the CatSim model., Background Paper prepared for the 2013 Global ASsessment Report on Disaster Risk Reduction., Geneva,Switzerland:UNISDR..
Click here to view this GAR paper.

). However, for events with a relatively low return period of one-in-33 years, the government would still face a significant financing gap with potentially significant economic development setbacks, rendering it unable to provide timely relief and reconstruction efforts (Ibid.).

Another case in point is Madagascar, where a financing gap would appear from any event more severe than a one-in-23 year cyclone (Figure 5.6). And losses from one-in 100 year events could cause financing gaps of almost US$1 billion (Hochrainer, 2012

Hochrainer, S. 2012.,Financial and Economic Disaster Risk Estimation in Madagascar for the Implementation of CatSim., Summary report for the project "Mainstreaming Disaster Risk Management and Climate Change in Economic Development. Technical Assistance to the Republic of Madagascar"., IIASA,. .

). These estimations were based on

(Source:

Hochrainer et al., 2013

)

Figure 5.5 Fiscal vulnerability of Honduras to disaster loss