El Salvador - GFDRR

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