El Salvador - GFDRR
El Salvador - GFDRR
El Salvador - GFDRR
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124 | <strong>El</strong> <strong>Salvador</strong>: Damage, Loss, and Needs Assesment<br />
Pillar 5: Financing of Long-Term Reconstruction, Recovery and Catastrophic Risks<br />
Although international cooperation has played an important role during natural disasters in <strong>El</strong> <strong>Salvador</strong>,<br />
the country must develop innovative mechanisms to capitalize the Fund for Civil Protection and Disaster<br />
Protection, Prevention and Mitigation (established by law 777) in order to provide proper attention during<br />
emergencies. The country must have the capacity to respond effectively to the effects of natural disasters,<br />
including the development of risk transfer mechanisms to protect public infrastructure as well as social<br />
and economic networks.<br />
Under the framework of its current risk financing strategy, <strong>El</strong> <strong>Salvador</strong> has access to limited financing<br />
to cope with small- to medium-scale disasters (repeated phenomena). A contingent credit line such as<br />
the Catastrophe Deferred Draw-Down Option (CAT DDO) scheduled with the World Bank will allow it to<br />
respond to emergencies caused by disasters that exceed its current level of reserves in major disasters (medium-<br />
to large-scale phenomena). In this context, the instrument may constitute the government’s second<br />
line of protection; the government could use resources if medium- to large-scale phenomena occur or<br />
when an accumulation of events generates losses that exceed the capacity of the Fund for Civil Protection<br />
and Disaster Protection, Prevention and Mitigation. CAT DDO offers a greater degree of protection if a<br />
major disaster occurs.<br />
Recent analyses show that the probable maximum loss caused in <strong>El</strong> <strong>Salvador</strong> by catastrophic events<br />
with a 50-year period of recurrence may total some US$1.771 billion, while in a 100-year period of recurrence<br />
it may reach US$3.776 billion (IDB 2007).<br />
Any strategy for risk financing must note the difference between the specter of higher frequency/<br />
lower cost phenomena and those of lower frequency/higher cost. In general, risks at lower levels (higher<br />
frequency/lower cost phenomena) are financed through reserve mechanisms, special budget allocations<br />
or budget reallocations. These sources of funds are rarely sufficiently to address higher-level risks, for<br />
which other risk financing instruments are often needed. CAT DDO has been designed to provide liquidity<br />
in those cases of medium-scale (or cumulative) disasters that cannot be financed with internal reserves,<br />
as well as temporary financing while other sources of financing are mobilized in the case of a disaster of<br />
major proportion.<br />
Within the process of financial risk management, the management of contingent obligations, that is,<br />
those monetary obligations that depend on the occurrence of future, uncertain events, plays an increasingly<br />
more important role within the planning, execution and financial control process of public agencies.<br />
Due to the economic impact caused by the occurrence of a natural disaster, countries are beginning to<br />
design financial strategies to reduce their fiscal vulnerability.<br />
In order to offer a greater degree of protection to its contingency liabilities, the Government of <strong>El</strong><br />
<strong>Salvador</strong> could also analyze the feasibility of creating a fund for catastrophes that backs the insurance of<br />
public assets, for the purpose of reducing its fiscal vulnerability to adverse natural phenomena.<br />
In summary, the structure of catastrophe financing must consider 3 pillars (Cummings and Mahul,<br />
World Bank 2008):