Washington DC, USA.- The World Bank plans to issue its first drought bond in the next 12 to 18 months and expand its offering of catastrophe bonds to support countries suffering devastation from storms and earthquakes, a senior bank executive said.
The drought bond would be a new instrument in the group of so-called catastrophe bonds of the multilateral lender, fixed-income instruments that pay countries in the event of a natural disaster.
“We would love to do something on the drought front, that’s something we’re working on,” George Richardson, director of the capital markets and investment department at the World Bank’s Treasury, told Reuters, adding that the focus would most likely be on Africa.
The World Bank has been issuing catastrophe bonds for more than a decade through its lending arm, the International Bank for Reconstruction and Development (IBRD), to help emerging economies mitigate the consequences of storms and earthquakes. It has disbursed $568 million in insurance on these instruments.
The vast majority of World Bank catastrophe bonds cover countries in the Pacific and Caribbean regions, with Mexico dominating issuance.
The lender is in talks with more countries to expand its geographic reach, Richardson said.
Southern Africa is suffering from its worst drought in years, due to a combination of El Niño – a warming of waters in the eastern Pacific that is causing warmer weather around the world – and rising average temperatures caused by greenhouse gas emissions. Last year saw record-breaking extreme weather events.
According to Richardson, modelling droughts, wildfires and floods is somewhat more difficult than modelling earthquakes or storms for a parametric catastrophe bond, an instrument whose triggering depends on the physical parameters of an event.
“The fundamental challenge is that you need data, and you need to have some history of it so that it can be modeled by various agencies,” Richardson said.
The World Bank has also recently offered vulnerable and low-income countries the option of inserting clauses in their loans to the Washington-based lender that would allow governments to defer payments for up to two years if they were hit by a major natural disaster.
So far, seven countries have signed the so-called Climate Resilient Debt Clauses (CRDC): Bahamas, Barbados, Belize, Grenada, Saint Lucia, Saint Vincent and the Grenadines and Montenegro.
“Some of them are looking at whether they should trigger this clause after Hurricane Beryl, but as far as we know, no decision has been made,” Richardson said.
Beryl left a trail of devastation across several Caribbean islands earlier this month, destroying up to 90 percent of homes in parts of Grenada and St. Vincent and the Grenadines.
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