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Strengthening Indonesia’s Fiscal Resilience to Natural Disasters and Health-Related Shocks

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The World Bank’s Board of Executive Directors today approved a $500 million loan to strengthen Indonesia’s financial and fiscal resilience. The loan will help the country build and strengthen its financial response to natural disasters, climate risks, and health-related shocks.

Such shocks and disasters have become a constant threat to Indonesia’s development progress. From 2014 to 2018, the central government spent between US$90 million and US$500 million annually on disaster response and recovery, while local governments spent an estimated additional $250 million over the same period.

The cost of disasters is expected to increase further due to climate change and urban growth, adding to the burden on public spending. The needs are particularly acute now, with Indonesia experiencing multiple financial, fiscal, and social impacts due to the COVID-19 pandemic.

“Financial preparedness for disasters, climate shocks, and health crises such as COVID-19 is increasingly important for Indonesia. This support will help the government deliver a more targeted and timely response, reducing the impact of disasters and helping to protect Indonesia’s development progress,” said Sri Mulyani Indrawati, Minister of Finance of the Republic of Indonesia.

Planning an effective financial response after disasters and climate shocks helps to protect the budget and ultimately the population. By reducing the impacts of disasters, such planning can help protect the poor and vulnerable who often bear the brunt of disasters as they tend to live in hazard areas, lack access to basic services, and have limited access to financial resources to cope with the aftermath.

The new project will support the Government’s National Disaster Risk Finance and Insurance Strategy by strengthening Indonesia’s fiscal and financial resilience through a Pooling Fund for Disasters. This fund will become the central mechanism through which post-disaster financing can flow from different sources. The fund will look to leverage domestic and international insurance markets to provide financial capacity to backstop the fund.

The project will also help ensure effective and transparent flow of the funds to relevant government agencies, including budget tracking on disaster-related expenditures, faster social assistance payments for victims of disasters, and improved preparedness planning for health shocks. Central and local government agencies will receive additional, faster, and more effective financial support after a disaster.

“The improved availability and flow of funds will ultimately support the population of Indonesia who will benefit from faster and better targeted response to disaster and health shocks. This will particularly benefit the poorest and most vulnerable, who are most affected by delayed disaster response and often lose their livelihoods and incomes, which keeps them in poverty,” said Satu Kahkonen, World Bank Country Director for Indonesia and Timor-Leste.

The project is supported by a $14 million grant from the Global Risk Financing Facility (GRiF) to assist building technical capacity, environmental and social management systems, bring new technology to the management of the Pooling Fund, and invest in evaluations and learning, including how to best serve the most  vulnerable groups. Supported by a Multi-Donor Trust Fund with over $200 million from Germany and the United Kingdom, GRiF provides grants and technical expertise to help developing countries safeguard progress and recover more quickly from the financial impacts of climate shocks, disasters, and crises.

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Climate Finance: Climate Actions at Center of Development and Recovery

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The Asian Development Bank (ADB) called access to climate finance a key priority for Asia and the Pacific as governments design and implement a green and resilient recovery from the coronavirus disease (COVID-19) pandemic.

Speaking at the United Kingdom Climate and Development Ministerial—one of the premier events leading up to the United Nations Climate Change Conference (COP 26) in November—ADB President Masatsugu Asakawa said expanding access to finance is critical if developing economies in Asia and the Pacific are to meet their Paris Agreement goals to reduce greenhouse gas emissions and help adapt to the adverse impacts of climate change.

“We can no longer take a business-as-usual approach to climate change. We need to put ambitious climate actions at the center of development,” Mr. Asakawa said. “ADB is committed to supporting its developing member countries through finance, knowledge, and collaboration with other development partners, as they scale up climate actions and push for an ambitious outcome at COP 26 and beyond.”

ADB is using a three-pronged strategy to expand access to finance for its developing members as they step up their response to the impacts of climate change.

First, ADB has an ambitious corporate target to ensure 75% of the total number of its committed operations support climate change mitigation and adaptation by the end of the decade, with climate finance from ADB’s own resources to reach $80 billion cumulatively between 2019 and 2030. ADB has also adopted explicit climate targets under its Asian Development Fund (ADF), which provides grant financing to its poorest members. ADF 13, which covers the period of 2021–2024, will support climate mitigation and adaption in 35% of its operations by volume and 65% of its total number of projects by 2024.

Second, ADB is enhancing support for adaptation and resilience that goes beyond climate proofing physical infrastructure to promote strong integration of ecological, social, institutional, and financial aspects of resilience into ADB’s investments.

Third, ADB is increasing its focus on supporting the poorest and most vulnerable communities in its developing member countries by working with the United Kingdom, the Nordic Development Fund, and the Green Climate Fund on a community resilience program to scale up the quantity and quality of climate adaptation finance in support of local climate adaptation actions.

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Improving Transport Connectivity in Central Asia Requires a Coherent Approach

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The combination of infrastructure and logistics improvements, reduction in border delays and tariffs, and harmonized standards across countries could have a significant positive impact on Central Asian economies, said experts during an online regional briefing “Connectivity in Central Asia: Challenges and Opportunities” hosted by the World Bank.

Studies show that improved transport corridors generate economic development around them. Better road accessibility also allows more people to have access to jobs, education, healthcare, and opportunities, leading to poverty reduction.

“Connectivity is a complex issue and has wide-ranging impacts, affecting businesses, consumers, trade, logistics, economic growth and a country’s overall development,” said Jean-François Marteau, World Bank Country Manager for Kazakhstan. “In Kazakhstan, our analysis shows a clear link between investments in infrastructure and the level of the gross regional product of the oblasts.”

Countries in Central Asia are some of the least connected economies in the world, with the region’s connectivity indicator averaging below 60 percent in terms of the ratio of access to the global GDP – the lowest on the spectrum. The cost to import and export from or to Central Asia remains high, undermining the competitiveness of Central Asian products abroad and resulting in expensive imported goods. For example, the cost of shipping a container from any of the Central Asian countries to Shanghai is five times more expensive than from Poland or Turkey.

“Countries in Central Asia are yet to realize the enormous potential of internal and external trade, and the key here is improving transport connectivity in a holistic way,” said Antonio Nunez, Program Leader for Infrastructure at the World Bank Central Asia. “We see significant returns on investments when they are combined with other improvements in reducing delays and trade tariffs. These measures together could boost the regional GDP by about 15 percent.”

Connectivity within countries in Central Asia is also limited with most areas in the countries suffering from insufficient infrastructure and expensive services, limiting access to services, activities, and jobs, and hindering the tourism potential.

In the past two decades, Central Asian countries invested heavily in improving infrastructure; however, the region still lags behind middle-income countries in terms of both investing and maintaining the infrastructure. Central Asia ranks low on key trade indicators, such as the number of days to clear imports and exports and the Logistics Performance Index.

Despite some recent progress, the latter has either remained at the same level or declined compared with 2010 for all Central Asian countries. According to CAREC data, investing in corridors has paid off in saved travel time due to higher speeds. However, these time savings are often lost at the borders due to inefficient procedures and capacity constraints.

Key challenges in improving connectivity in Central Asia include tackling the low productivity of the state-owned enterprises that dominate the transport sectors in the region, harmonizing the different standards, improving infrastructure quality at local, national, and regional levels, as well as improving governance and efficiency.

“Over the years, the region has launched or become part of numerous connectivity initiatives that vary across types of infrastructure and geographical scope. What is needed now is for the countries to prioritize the connectivity initiatives that work best for their economies,” said Lilia Burunciuc, World Bank Regional Director for Central Asia. “We at the World Bank will continue supporting Central Asia in understanding and improving connectivity through our advice as well as investments, which in the last 10 years have reached over $5 billion in this sector.”

Speakers underlined the importance of greener, more sustainable and smarter transport solutions that are integrated with urban planning to reduce greenhouse gas emissions, improve air quality management systems and reduce air pollution. Globally, transport accounts for a quarter of energy-related GHG emissions. In the Central Asian capitals and larger cities, transport generates particulate emissions that exceed the WHO maximum levels, leading to various diseases and premature deaths.

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Political and Security Uncertainty Slow Down Afghanistan’s Economic Recovery

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 Afghanistan faces a sluggish economic recovery from COVID-19 amid continued political uncertainties and possible decline in international aid, says the World Bank in its latest country update. 

Released today, Setting Course to Recovery shows that robust agricultural growth has partially buoyed Afghanistan’s economy, which shrunk by around two percent in 2020—a smaller contraction than previous estimates. However, lockdowns, weak investment, and trade disruptions have hit hard services and industries, increasing hardship and unemployment in cities.

Growth is expected to reach one percent in 2021 and top around three percent in 2022 as the COVID-19 crisis fades. Per capita incomes are unlikely to recover to pre-COVID levels until 2025 due to fast population growth.

“The current political and security uncertainties have created serious hurdles to Afghanistan’s economic recovery from the COVID-19 crisis. A slower pace of recovery means higher unemployment, lower government revenues, and – ultimately – more difficult living conditions for Afghans,” said Henry Kerali, World Bank Country Director for Afghanistan.

A full recovery will be challenging as many firms have closed and jobs were lost. Private sector confidence has weakened amid difficult security conditions, uncertainty about the outcome of the ongoing peace talks, the possible withdrawal of international troops, and potential sharp declines in future international aid support. Droughts are expected in 2021 and will likely reduce agricultural activity, further weakening growth prospects.

The report emphasizes that a strong and sustainable partnership between the Afghan government and its international partners is key to driving recovery and restoring private sector confidence. In that effort, the government needs to accelerate reforms to improve governance, fight corruption, mobilize revenue, and boost business. Simultaneously, donors can support private sector confidence through clearer multi-year aid commitments and by defining measurable priority reforms that condition continued grant support. 

The Afghanistan Development Update is a companion piece to the South Asia Economic Focus, a twice-a-year World Bank report that examines economic developments and prospects in the South Asia region and analyzes policy challenges faced by countries. The Spring 2021 edition titled “South Asia Vaccinates,” launched on March 31, 2021, shows that economic activity in South Asia is bouncing back, but growth is uneven, recovery remains fragile, and the economic outlook is precarious. The report also focuses on the different dimensions of vaccine deployment and provides a cost-benefit analysis of vaccination in the region.

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