Needed: Global Risk Pooling Reserve Fund

Business Standard     27th May 2020     Save    

Context: There is a need to reorient multilateralism towards chronic risks faced by the world. A global Risk pooling Reserve Fund presents the solution.

Impact of COVID pandemic:

  • On Poverty: According to the World Bank, 60 million people worldwide will fall back to poverty (living less than $1.9 per day).
  • On Economy: Contracted global output (5% this year) will reverse the gains made in poverty reduction in past 3 years.
  • On Multilateralism: Countries will fall back to insular approaches and limited scope for grand bargains.

Low Outcome Relief Measures:

  • Emergency financial assistance by the International Monetary Fund (IMF)
  • The Rapid Credit Facility: concessional loans to help with balance of payments of low-income countries (LICs). However, the Interest payments will keep accumulating leading to higher debt burdens.
  • The Catastrophe Containment and Relief Trust: established after the 2015 Ebola outbreak, gives grants for debt relief to countries affected by natural disasters or public health crises.
  • Moratorium by G20: on bilateral government loan repayments for LICs. It , however, does not cover the losses suffered due to catastrophe.
  • Pandemic Bonds: issued by the World Bank will pay out a minuscule even less than the insurance to be received by Wimbledon due to pandemic.

Collective Insurance Mechanism: 

  • A Global Risk Pooling Reserve Fund would pool the risks of environmental and health shocks across countries. It would rest on 3 premises :
    1. Different countries, different problems: Pooling reserve can lower the peaks of risk curves for individual countries.
    2. No immediate payments: Each countries’ share of Special Drawing Rights (SDRs) under IMF can be voluntarily used. Plotting a climate risk atlas to lower the burden on fiscal crunch.
    3. Transferring the risks: to major insurance firms, multilateral development banks and other market-based insurance mechanisms. The reduced climate risk profile could be leveraged to lower the cost of finance.

Conclusion: The solution to the crisis needs to be taken amidst it and not waiting for it to be over. There is not many “win-wins” in multilateralism today, but we can start with “don’t lose”.