Abdul Wajid Khan

The government has been advised to enhance its current disaster risk finance approach to cover the losses associated with floods and earthquakes, reports WealthPK.

According to a report of the Asian Development Bank (ADB) titled ‘Narrowing the Disaster Risk Protection Gap in Central Asia’, there is an urgent need to enhance the current disaster risk finance approach in Pakistan.

The report said risk retention mechanisms are insufficient to cover the losses associated with even the most frequent of flood and earthquake events, while private insurance solutions for these risks have achieved only minimal market penetration. These challenges are compounded by a challenging external financing context at the sovereign level, making it difficult to access debt quickly and cheaply after a disaster, and low levels of financial inclusion that exacerbate the vulnerability to disaster events of many in Pakistan.

“Previous disaster events illustrate the challenges that Pakistan faces,” it said, citing the example of floods in 2010 and 2015 that caused an estimated loss of Rs32.6 billion ($326 million) to farmers in Punjab province.

To support the affected farmers, it said, the government of Pakistan provided Rs6.7 billion ($67 million) — amounting to only 18.5% of the required amount. It highlighted that there would apparently be a need to increase the breadth and depth of the existing risk retention instruments for high frequency events through enhanced functioning of the national and provincial disaster management funds.

This could be complemented with the use of risk transfer instruments that might support either the emergency response cost and/or the reconstruction of assets damaged or destroyed by lower frequency, higher intensity events. These actions are consistent with the identified workplan of the Disaster Risk Financing Unit of the National Disaster Risk Management Fund.

The report pointed out that both flood and earthquake risk are significant in Pakistan. Floods are associated with an average annual loss (AAL) of around $1.5 billion and earthquakes with an AAL of around $614 million. This rises to $1.6 billion and $644 million, respectively, with the inclusion of indirect losses.

This is the highest absolute amount of loss to any country in the Central Asia Regional Economic Countries (CAREC) region, and across the two perils, direct losses amount to 0.20% of gross national income (GNI), the fourth-highest losses as a percentage of national income of any country in the region.

It said that reflecting the large absolute population of the country, the loss of life associated with these risks is also substantial.  Earthquakes are expected to be associated with an average annual loss of 863 lives, around seven times higher than the country with the next highest expected loss of life from this peril.

The number of people expected to be severely affected by earthquakes is just under 165,000, also the highest figure in the region.

Floods are expected to cause 234 more deaths each year with more than 678,000 people expected to be severely affected. Respectively, these are the second highest and highest numbers for this peril in the CAREC region.

It is striking that the proportion of the population living in multidimensional poverty is much higher in Pakistan than in many other countries in the CAREC region, with more than 50% of the population in Balochistan, Khyber Pakhtunkhwa and Sindh provinces meeting this classification.

While there is a general negative correlation between the direct losses caused by floods and earthquakes and the proportion of people living in multidimensional poverty, Sindh is noteworthy for ranking relatively highly on both metrics.

The reports said that the same broad pattern emerges from considering the relationship between multidimensional poverty and expected loss of life, although when considering this correlation, KP province stands out more as a “hot spot.”

There is a strong agricultural focus on economic activity in KP, accounting for around 40% of the province’s labour force, with key crops including wheat, maize, and sugar beet.

Industrial activity is dominated by small and medium-sized enterprises (SMEs), and focuses heavily on textiles and apparel as well as food, beverages, tobacco and flour mills; though leather, gems, and marble mining can be found in specific parts of the province.

In Sindh province, the report said, most of the poverty is found in rural and semi-urban areas with farming and agribusinesses particularly important sectors for SMEs.

The National Disaster Management Act of 2010 established a National Disaster Management Fund and separate disaster management funds to be administered by each provincial government. These are intended to cover spending on items such as shelter, food, drinking water, medical cover.

However, the ADB reports that significant work remains to be accomplished in operationalization of the funds, adequate provision of financing mechanisms, and standardization of procedures across provinces.

The federal government only has limited contingency funding of around $15-20 million to respond to national emergencies, while a 2019 World Bank paper reported that the federal fund stood at $10.6 million.

Penetration of retail insurance is low, both by comparison to other CAREC countries and more generally. In 2015, reports suggested only 1.9% of the population held any form of insurance policy.

The report said that only around 1-2% of residential properties in the country are insured against disasters. Further, it added, despite insurance of public assets being mandatory, only 30% of public assets are insured, according to the State Life Insurance Corporation (SLIC), and that these are only insured during the construction phase.

Nonetheless, the analysis shows that current disaster risk finance resources are inadequate to meet the costs and losses that are expected to be caused by disaster events each year.

Indeed, the assumptions regarding risk retention and risk transfer imply sufficient funding to only cover 3% of the AAL, leaving a residual “unfunded” AAL of around $2.1 billion (97%).

Consistent with this, current disaster risk finance resources are insufficient to cover the total losses, direct losses or even the emergency response costs associated with events of all frequencies.

Credit : Independent News Pakistan-WealthPk