World Bank Approves New Catastrophe Loan Facility

By | March 5, 2008

The World Bank launched a new catastrophe loan facility on Tuesday, March 4, and revised an existing contingency credit line designed to help increase its business with middle-income countries.

The World Bank board approved the Catastrophe Risk Deferred Drawdown Option that will give middle-income countries access to emergency funds in the event of a natural disaster such as a hurricane or earthquake.

Countries stricken by disaster will be able to access funding of up to $500 million once a state of emergency is declared.

Countries may qualify for the loan facility if they have a hazard risk management program already in place that is monitored by the World Bank.

World Bank President Robert Zoellick said the facility was an example of how the institution could be useful to middle-income countries, a diverse group that includes fast-growing economic powerhouses like China.

In September, Zoellick cut the price the World Bank charged on its loans and simplified a complex set of fees and waivers for emerging economies, which were increasingly tapping global capital markets for funding.

“These financial product enhancements reflect the World Bank Group’s commitment to using creative ways to expand resources for our country partners,” Zoellick said. “As our client relationships with middle-income countries become more sophisticated, the World Bank is responding with development solutions that share knowledge, build markets and institutions, and provide capital,” he added.

The World Bank board separately also approved changes to its existing Deferred Drawdown Option (DDO), a pre-approved line of credit for countries which do not immediately need the funding but have access to it in the future in case of an unforeseen event.

Only two countries — Chile and Latvia — have ever tapped the facility since its launch in 2001. The instrument was unpopular because it was unclear whether the funding would still be available when the country needed it since disbursements were conditional on a World Bank review.

In addition, the loans were more expensive and charged a higher commitment fee as well as a surcharge for a longer maturity.

The changes now allow the World Bank to monitor a borrower’s economy on a continuous basis so that when the country needs funding, it can access the money quickly.

The funds may be drawn down at any time unless the World Bank notifies the borrower that one or more of the drawdown conditions are not met.

The changes also align the pricing of the loans with standard World Bank terms for middle-income countries.

Pamela Cox, World Bank vice president for Latin America, said such changes were attracting middle-income countries back into the bank’s fold and a DDO loan would soon be considered for Colombia and perhaps for Mexico in April.

“What you see in Latin America is that many countries with which we work have access to capital markets and also tend to have borrowing limits and they tend to have fiscal space issues. For them, the facility is interesting because it is an insurance product,” she said.

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