Cedric Stephen Disaster recovery strategy emerging
My interest in disaster risk management at the national level began 25 years ago. A US-based multilateral institution asked me to conduct a 10-year review of catastrophe insurance in Jamaica.
Catastrophes or natural disasters were defined as windstorms, hurricanes, floods, and earthquakes. They cause injuries and deaths, property and infrastructural damage, and create economic dislocation.
The most disturbing finding of the study was that 76 per cent of the US$612 million that was being sought by the Finance Ministry to fund recovery from the effects of the 1988 Hurricane Gilbert was in the form of loans. One quarter or 24 per cent of the estimated costs was projected to be in the form of what was politely called “grants from friendly countries”.
Seeking loans to fund recovery post-Gilbert, in the absence of better alternatives, placed the country at a disadvantage vis-?-vis lenders. Providers of loan capital were incentivised to charge high interest rates when the country was in desperate need of funds. That situation, among other things, contributed to what Cheryl Payer called in her 1975 classic The Debt Trap: The International Monetary Fund and the Third World.
Despite its centuries-long history of catastrophes and 22 years after independence, Jamaica had not developed, until quite recently, an ex-ante strategy to finance the disaster recovery costs to which its people and economy are exposed. Further, privately owned insurance companies do not have the capacity or appetite to fund the losses
Even worse, the island was dependent on the largesse of the international community to fund recovery from events that could be analysed and managed by employing a discipline that uses mathematical and statistical methods to assess risk, that is, actuarial science. The insurance, pensions, finance, investment, and other industries use this field of study to assess risks, manage their business affairs, and create value for investors.
While the bipartisan approach that led to the formation of a Fiscal Commission, the selection of a fiscal commissioner, and the provision of funds for the establishment of a Fiscal Research Institute are worthy of applause – as noted by last Wednesday’s Gleaner editorial headlined ‘Welcome Fiscal Commission’ – the persons who wrote it did a disservice to the minister of finance and public service and the technocrats in that ministry.
They mischaracterised his 2023-24 Budget presentation as “overpacked”. I disagree. I viewed the live presentation and read the text of the speech afterwards. It was informative, coherent, comprehensive, and easy to understand – even for someone without training in actuarial science, statistics, mathematics, economics, or finance.
The editorial also ignored the economic and other impacts of COVID-19, a one -in- a-century event. The effects of the pandemic on Jamaica can be compared to the occurrence of a major natural disaster. Gross domestic product was estimated to have declined by four to six per cent for the 2020/21 fiscal year and 3,514 persons died as of March 16, 2023. The tourist industry, a major employer that contributes a major portion of the country’s foreign exchange earnings was decimated as a result.
The mixture of impacts, plus the country’s centuries-long inability to develop and execute strategies to lessen the economic impact of catastrophes, led me to form a different conclusion about the important parts of Dr Clarke’s address than those in the editorial.
The editorial is intended to reflect the opinions of an institution that is 190 years old. Surprisingly, its writers paid no attention to the historical context within which the speech was crafted.
The most significant parts of the finance minister’s presentation were about economic policies to take responsibility for our vulnerability, the National Disaster Fund, and the Precautionary Liquidity Line and Sustainability Facility. Taking the responsibility for our vulnerability means, in my opinion, recognising, among other things, the impact of climate change on SIDS, or small-island developing states, like Jamaica.
UNCTAD, a United Nations agency, says that SIDS “are the most economically vulnerable of all groups of developing countries, according to the Economic Vulnerability Index. SIDS’ geographical conditions make them highly vulnerable to natural disasters, particularly those caused by climate change. In the Caribbean alone, the damage caused by climate-related and earth-related hazards is estimated at US$12.6 billion per year.”
Given what happened when Hurricane Gilbert occurred 35 years ago, and the disturbing findings of the study that I conducted, two parts of Dr Clarke’s speech were of special importance to me.
In his presentation regarding ‘Economic Policies to Take Responsibility for Our Vulnerability’, he listed 17 external adverse episodes or events that occurred between 1974 and 2022 that created serious impacts on Jamaica’s economy. Six were hurricanes. Another six were due to price shocks in oil and alumina. The remaining five were random events: the September 11, 2001, terrorist attacks in the United States; the global financial crisis in 2008-2010; the COVID-19 pandemic; the war in Ukraine; and the global inflation crisis in 2022.
Notably absent was an adverse internal event: the near-meltdown of the local financial system during the second half of the 1990s.
Economic policies should recognise the following:
1. Jamaica is a small, open economy. The country must put in place adequate resource buffers to protect itself from unexpected shocks.
2. Tourism, a significant source of foreign exchange, is sensitive to dips in the United States, Canada, and the United Kingdom economies. Fluctuations in foreign exchange receipts will occur from time to time.
3. Jamaica is situated in a geographical zone that is susceptible to hurricanes, excess rainfall, and other natural disasters. When these events occur, they can interrupt, delay, reduce economic activities, and cause economic shocks.
Regarding the ‘National Disaster Fund’, The Jamaican Constitution makes provision for the creation of a Contingency Fund for emergencies or unexpected outflows. Contingency funds are used mainly during economic crises. Despite Jamaica’s centuries-long history with catastrophes, the maximum allowable size of its fund was set by successive administrations at $100 million. The limit remained at that level even though it was a matter of public record that Hurricane Gilbert resulted in economic losses of US$1.3 billion.
In 2019, the size of the Contingency Fund was increased to $10 billion.
“We followed that up with a historic capitalisation in two instalments that totalled $4.6 billion and that the Contingency Fund proved to be instrumental during the COVID-19 pandemic. It allowed us to respond, paying out benefits under our CARE Programme even before the United States made similar payments and we have since replenished these amounts to the Contingency Fund. We plan to bring legislation to establish a Natural Disaster Fund along with laws that govern when, how, and under what circumstances these amounts can be accessed,” said Dr Clarke.
“The Natural Disaster Fund complements the suite of fiscal instruments designed to provide resources to Jamaica in the event of natural disasters. They include a Contingent Credit Facility with the Inter-American Development Bank, the Caribbean Catastrophe Reinsurance Facility, and the Catastrophe Bond.”
The conclusion to my May 16, 2000, report read: “The Honduran experience (with Hurricane Mitch) demonstrates that the strategy of financing for catastrophes ex-post, based on (loan funds and) the expectation of assistance from friendly countries is, at best (expensive) and very uncertain. In the case of countries such as Jamaica, where the frequency of such losses is not remote, this strategy is inefficient … . The implementation of policies that emphasise catastrophe mitigation, and, generally, taking a fresh look at the way things have been done in the past is crucial.”
– Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: aegis@flowja.com or business@gleanerjm.com