Low-income countries are highly vulnerable to the financial impacts of disasters. These financial impacts can be conceptualised as contingent liabilities: i.e. government obligations that are triggered when a potential, but uncertain future event occurs. Disaster contingent liabilities vary by context and peril, ranging from economic losses due to damage to physical infrastructure, to the cost of a food security response. Considerable progress has been made by countries and their development partners in the domain of disaster risk management in recent years—however, the management of contingent disaster liabilities remains a deep-rooted challenge, related to insufficient incentives, as well as deficits in the public financial management capacity (PFM) required for the systematic consideration of potential future costs. Consequently, many low-income countries remain highly vulnerable to budgetary disruption following disasters, which has a detrimental impact on development objectives and fiscal stability.
The UK government provides an example of a structured and participatory governance process for the systematic identification, approval and management of contingent liabilities, including a contingent liability approval framework and checklist. This process creates a space for a dialogue between the finance department, HM Treasury and departments, leading to a better understanding of the risks faced, and building capacity in the department for managing contingent liabilities.
This discussion paper draws on the relevant learnings from the UK’s Contingent Liability Approval Framework to consider how the International Development Association (IDA) could build on its current efforts in disaster screening and disaster risk financing, to better support the systematic identification and management of contingent disaster liabilities for its client countries. The paper presents the case for where change is required, and a number of options for further discussion and analysis; it does not provide a detailed proposal on how IDA processes should be reformed.