Region innovates on precipice of financial instability

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Gaborone -Experts have issue a stark warning that a protracted COVID-19 pandemic, as well as disaster unpreparedness, elevate the risk of financial instability in the Southern African region.

However, they also commend countries - such as Eswatini, Lesotho, South Africa and Zambia - that have been quick out of the blocks to customise innovative solutions that place them in better stead to holistically respond to emergencies.

World Bank senior financial sector specialist Barry Maher and trade and investment consultant Gracelin Baskaran say the new coronavirus has exposed how vulnerable households, firms, and countries are to shocks, and how unprepared the region is for such emergencies.

“Without a vaccine, we don’t know how long the pandemic will last, but the prospect of finding an effective vaccine is likely. In contrast, analysis carried out by the World Bank shows that the risk of climatic shocks remains,” the duo say in a new report.

They said prior to COVID-19, Lesotho,, Malawi, Mozambique, Zambia and Zimbabwe were already facing financial problems, while climate shocks were also taking their toll on the region.

“In March 2020, South Africa declared two back-to-back states of disaster in an 11-day period, first for drought and then for the pandemic,” they said.

Neighboring countries followed suit soon after, and governments had to make huge unplanned expenditure to mitigate the impact of the disasters.

South Africa announced a R500 billion (roughly 10 percent of GDP) relief package, Namibia announced a stimulus and relief package amounting to N$8,1 billion (4,25 percent of GDP), and Lesotho allocated M1,9 billion (about six percent of GDP) for the National COVID-19 Response Integrated Plan and Emergency Assistance.

The report says existing macro-financial risks facing the region have been exacerbated by the increasing levels of debt distress coupled with expansionary fiscal and monetary policiesneeded to limit the adverse effects of the COVID-19 and other shocks.

This has led to downgrades in credit ratings of Botswana (by S&P Global Ratings) and South Africa (by Fitch, leaving the country without an investment-grade rating for the first time in 25 years).

“The post-pandemic transition to fiscal consolidation is important to improving debt sustainability, but for the Southern Africa region, a key part of this fiscal consolidation is strengthening countries financial resilience to future shocks,” the report says.

The experts say supporting countries to be better financially prepared to respond to shocks is a new yet rapidly expanding area of work for the World Bank Group in the Southern Africa region, embedded in broader crisis risk management strategies.

However, there is movement in the right direction as countries increasingly embrace tools and instruments to strengthen financial resilience, while also driving innovation.

The report cited Zambia as an example which in 2017/2018, bundled agriculture insurance with the government’s Farmer Input Subsidy Programme (FISP).

This increased the number of farmers with access to agriculture insurance from a mere 20,000 to over 900,000 within one year, making it one of the largest agriculture insurance programmes in Africa.

“Although there are implementation challenges to this insurance programme, this bold and innovative move by the government facilitated an expansion of agriculture insurance previously considered unobtainable,” the report says.

The report shows that Eswatini, Lesotho, South Africa and Zambia, among othercountries in Southern Africa, have taken the first steps on increasing their financial preparedness to respond to shocks, by developing a customised suite of risk financing instruments, protecting the budget and GDP, and most importantly, the poor and vulnerable.

“Improving financial preparedness is the first step to strengthening financial resilience – and 2020 has shown has just how important that is,” Maher and Baskaran said .

Countries in the region are also exploring the potential cost savings they can achieve through risk layering, establishing a suite of complementary risk financing instruments such as contingency funds, contingent credit and insurance.

A disaster risk finance diagnostic carried out in Lesotho estimated that, through adopting such an approach, the government could saveon average US$4 million per year, and for an extreme shock as much as US$42 million.

Countries are increasing their preparedness by proactively developing strategies for financing future disaster response.

In 2019, the Government of Malawi became the first country in Southern Africa (and second in Africa) to adopt a national disaster risk financing strategy, which identified strategic response priorities.

 

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