DECEMBER 2019 Lesotho Disaster Risk Financing Diagnostic Lesotho Disaster Risk Financing Diagnostic LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC 3 Table of Contents Abbreviations 5 Acknowledgments 6 Executive summary 7 1. Introduction and rationale 11 2. Vulnerability to natural disasters 13 2.1 Poverty and vulnerability of the population to disasters 13 2.2 Occurrence of natural disasters 14 3. Case studies of natural disasters 17 3.1 Case study 1: Economic and fiscal impact of the 2015/16 El Niño–induced drought 17 3.2 Case study 2: Economic and fiscal impact of the 2010/11 floods 19 4. Statistical simulation of disaster response cost 21 5. Institutional and policy frameworks for disaster risk management 23 6. Existing ex ante mechanisms to finance disaster response 25 6.1 Budget mobilization 25 Contingency funds 25 Contingent credit 26 Sovereign insurance 28 Agricultural insurance 30 6.2 Budget execution 30 Social safety nets 30 6.3 Comparing disaster risk financing approaches 32 Key recommendations 35 References 37 4 LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC Boxes, Figures, and Tables Box 1: Malawi’s National DRF Strategy   24 Box 2: Mozambique’s Disaster Management Fund   27 Box 3: World Bank’s Development Policy Loan with Catastrophe Deferred Drawdown Option   28 Box 4: Sovereign Insurance in the Sahel   29 Box 5: Using Shock-Responsive Safety Nets to Build the Resilience of Rural Households against Natural Disasters in Northern Uganda    31 Figure 1: Estimated average loss due to disasters of different return periods   7 Figure 2. Ex ante disaster risk financing instruments available to the GoL   8 Figure 3: Estimated cost of response based on Lesotho Vulnerability Assessment Committee (LVAC) and humanitarian financing  9 Figure 4: Number of people affected by droughts, floods, and storms in Lesotho   14 Figure 5: Vegetation index (NDVI) anomalies   17 Figure 6: Price of white maize meal in Maseru   18 Figure 7: Estimated cost of response based on Lesotho Vulnerability Assessment Committee (LVAC) and humanitarian financing  21 Figure 8: Estimated average loss due to disasters of different return periods   22 Figure 9: Ex ante disaster risk financing instruments available to the Government of Lesotho   25 Figure 10: Allocations to contingency fund and Disaster Management Fund    26 Figure 11: Government disaster risk financing approaches: Existing vs. proposed   32 Figure 12: Expected costs of funding disaster response (US$ millions)   33 Table 1: Estimated funding gap due to disasters, for various return periods   8 LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC 5 Abbreviations AFD French Development Agency IDA International Development Association ARC African Risk Capacity INGC National Institute of Disaster Cat-DDO Development Policy Loan with a Management (Mozambique) Catastrophe Deferred Drawdown Option IPC Integrated Food Security Phase CERC Contingent Emergency Response Classification Component LVAC  esotho Vulnerability Assessment L CERF Central Emergency Response Fund Committee CRW Crisis Response Window MoF Ministry of Finance DDMT District Disaster Management Team MoU Memorandum of Understanding DFID U.K. Department for International NDVI normalized difference vegetation index Development NGO nongovernmental organization DMA Disaster Management Authority NISSA National Information System for Social DRF Disaster Risk Financing Assistance ECHO European Civil Protection and NRSF National Resilience Strategic Framework Humanitarian Aid Operations PDNA Post-Disaster Needs Assessment EU-ACP  uropean Union–African, Caribbean and E PPP purchasing power parity Pacific Group of States SACU Southern African Customs Union GDP gross domestic product SADP Smallholder Agriculture Development GoL Government of Lesotho Project GoM Government of Mozambique UN United Nations ha hectare UNOCHA United Nations Office for the HEA Household Economy Approach Coordination of Humanitarian Affairs HIV human immunodeficiency virus USAID U.S. Agency for International IBRD International Bank for Reconstruction and Development Development VDMT Village Disaster Management Team 6 LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC Acknowledgments This report was prepared at the request of the Minis- The World Bank Group team would like to thank the try of Finance (MoF), Government of Lesotho (GoL). It GoL, and especially the MoF, for supporting this study. was authored by Barry Maher (Senior Financial Sector Similar thanks are due to many other public institutions Specialist, World Bank Group) and Alejandra Campero that assisted in the study, including the Disaster Man- Peredo (Consultant), with inputs from Mareile Drechsler agement Authority, Ministry of Development Planning, (Consultant) and Felix Lung (Consultant). and Ministry of Social Development. The team would also like to thank the many development partners that Country-specific guidance on the report was provided provided useful input to this study. by Janet K. Entwistle (Country Representative). The report greatly benefited from peer review by Megha The diagnostic was financed through the EU/ACP Africa Mukim (Senior Urban Economist), Joachim Boko (Senior Disaster Risk Financing Initiative. Social Protection Specialist), and Tatiana Skalon (Disas- ter Risk Finance Consultant). LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC 7 Executive summary This diagnostic study is prepared at the request of Natural disasters in Lesotho jeopardize efforts to the Ministry of Finance (MoF), Government of Leso- eliminate extreme poverty and boost shared pros- tho (GoL), and aims to identify options to strengthen perity. Poverty in the country is declining slowly, and as the country’s financial resilience to disasters. It of 2017 remained high, at 49.7 percent (at the national includes a review of disaster response costs and the cur- poverty line). Disasters disproportionally impact poor rent disaster risk financing (DRF) arrangements of the and vulnerable households, pushing them back or fur- GoL, including institutional and legal frameworks, and ther into poverty (Hallegatte et al. 2017). According proposes some recommendations. to the World Bank (forthcoming) Poverty Assessment, without the 2015/16 drought, poverty in Lesotho would Lesotho is prone to weather-related perils such as have decreased twice as fast over the past 15 years. droughts, floods, and storms. Drought affects the largest number of people. For instance, a drought in Natural disasters can also impact the macro-fiscal 2015/16 affected almost half of the population. Over situation of the country. The average annual cost two-thirds of the population—71 percent—is involved of disaster response is estimated at US$19.3 million, in some form of agricultural activity. The majority of the or 1.6  percent of the total budget expenditure in the rural population engages in subsistence agriculture, 2019/20 fiscal year. For more infrequent and severe working on small rain-fed farms or are livestock pro- shocks, the costs can be much higher: US$31.8 million ducers. Disasters can severely impact agriculture, thus (or 2.6 percent of total budget) for shocks that occur devastating livelihoods and increasing food insecurity in every 10 years, and US$45.3 million (or 3.8 percent a country already characterized by low agricultural pro- of total budget) for shocks that occur every 50 years ductivity and reliance on food imports. (figure 1). Figure 1: Estimated average loss due to disasters of different return periods 80 70 Estimated annual loss 60 (US$ million) 50 40 30 20 10 0 Annual 1-in-5-year 1-in-10-year 1-in-25-year 1-in-50-year 1-in-100-year Highest Most recent average historical annual loss annual loss Return period 95% confidence interval Source: World Bank calculations based on Lesotho Vulnerability Assessment Committee data. 8 LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC Figure 2: Ex ante disaster risk financing instruments available to the GoL Low frequency/ high severity Insurance of public Insurance for Risk transfer Transfer assets homeowners and No risk transfer No insurance of public small businesses instrument available assets available Limited penetration Contingent credit No contingent credit currently available Retention High frequency/ low severity Contingency budget Ministry of Finance: Contingency Fund Disaster Management Authority: Disaster Management Fund Emergency funding Reconstruction Source: World Bank 2014. Table 1: Estimated funding gap due to disasters, for various return periods Annual 1-in-5-year 1-in-10-year 1-in-25-year 1-in-50-year 1-in-100-year US$ million average event event event event event Estimated loss US$19.3 US$25.8 US$31.8 US$39.4 US$45.3 US$51.5 MoF contingency fund US$6.5 Disaster Management Fund US$0.327 Funding gap US$12.5 US$18.9 US$24.9 US$32.6 US$38.5 US$44.7 The Government of Lesotho has taken steps toward considerable time to materialize and diverted resources stronger disaster resilience. It enacted the Disaster from planned investments. Management Act of 1997, which establishes the Disas- The GoL does not use risk transfer instruments to ter Management Authority (DMA). The act is supported mobilize financing after disasters, although sovereign by the Multi-Hazard Contingency Plan 2015–2018, insurance options are available in the Africa region. which targets a variety of hazards threatening Lesotho. Agricultural insurance is still in its infancy, and property The National Resilience Strategic Framework (NRSF) has catastrophe risk insurance has a very low uptake. Fig- also recently been approved by the Cabinet. ure  2 shows the ex ante DRF instruments available to The GoL does not have a comprehensive financial the GoL. protection strategy. It has set up two contingency The GoL faces an estimated average annual fund- funds, one at the MoF and one at the DMA. These funds ing gap of US$12.4 million, as pre-planned financial are often depleted early in the budget cycle, leaving resources are less than the average annual cost of the GoL exposed when disasters occur later in the fis- disasters. The funding gap would increase for more cal year. The GoL often relies on budget reallocation; severe events (table 1). for instance, it mobilized US$21 million (M 318 million)1 for the 2015/16 drought. This budget reallocation took The funding gap means that the GoL will have to rely on ex post financing, including budget reallocation 1 Based on 2016 exchange rate of 15.29 Lesotho maloti per U.S. dollar. and humanitarian funding, for disaster response. LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC 9 Figure 3: Estimated cost of response based on Lesotho Vulnerability Assessment Committee (LVAC) and humanitarian financing 40 35 30 US$ millions 25 20 15 10 5 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Cost of response (based on LVAC data) Humanitarian financing Source: World Bank calculations based on data from Financial Tracking Service, https://fts.unocha.org/; and LVAC. While donor support is critical after disasters, both the respond to disasters (for example, the World amount to be made available and the activities to be Bank Development Policy Loan with Catastro- funded can be uncertain and slow to materialize. Donor phe Deferred Drawdown Option, or Cat-DDO); support is usually mobilized only for extreme events, n Purchase of sovereign catastrophe risk insur- which may leave the GoL financially exposed, especially anceto cover severe disasters. for more frequent disasters (figure 3). 3. Strengthen budget execution systems for tar- The GoL may want to consider the following recom- geted support to affected households, includ- mendations, in light of this diagnostic. ing through the following: 1. Develop a national DRF strategy to formalize n Shock-responsive social protectionto deliver policy priorities based on a risk layering approach targeted early assistance to poor and vulnera- and to address both budget mobilization and ble households after disasters; budget execution. n Strong operational rulesfor the disbursement 2. Increase the amount and improve the timeliness of disaster risk finance instruments. of resources mobilized for disasters, including through the following: 4. Explore the feasibility of agricultural insurance to protect farmers and herders against disasters n Dedicated contingency fundwith clear rules through a public-private partnership with domes- for replenishment and disbursement targeted tic insurance companies. at recurrent natural disasters, building on the existing contingency funds; n Contingent line of credit,which could pro- vide additional liquidity to the government to LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC 11 1. Introduction and rationale In December 2018, the Lesotho Ministry of Finance prolonged period of slow growth in South Africa, which (MoF) requested the World Bank to conduct a diag- has led to falling Southern African Customs Union nostic study and provide recommendations for (SACU) revenue and liquidity challenges. From 2015 improving the disaster risk financing (DRF) land- to 2017, economic growth averaged 1.7 percent. In scape in Lesotho. The World Bank reviewed the cost 2017/18, Lesotho faced a revenue contraction equal to of responding to natural disasters in Lesotho, the cur- 0.6 percent of GDP as a result of a contraction in agricul- rent strategies of the Government of Lesotho (GoL) ture output and fiscal challenges. Growth is projected for financing them, the country’s legal and institutional to recover in the coming years, boosted by an increase frameworks, and its existing DRF mechanisms. This in construction associated with the second phase of the review is the result of consultations with government Lesotho Highlands Water Project, a second compact agencies, as well as development and humanitarian from the Millennium Challenge Corporation, and dia- partners. It also relies on data from (i) the EM-DAT Inter- mond mining (World Bank 2019a). Earlier, in 2010/11, national Disaster Database reporting impacts of major the country faced its largest-ever budget deficit—12.3 disasters; (ii) the Lesotho Vulnerability Assessment Com- percent of GDP—as a result of the global economic mittee (LVAC) on the annual number of food-insecure crisis and the decline of SACU revenues, which at that people; (iii) when available, Post-Disaster Needs Assess- time accounted for 50 percent of government revenues ments detailing disaster impacts; and (iv) budget data as (Government of the Kingdom of Lesotho 2011). Depen- reported by the Ministry of Finance. The report lays out dence on SACU revenue has slowly declined, and in the results of this review and presents recommendations 2019 SACU revenues amount to 35 percent of govern- for improving the current system. ment revenues (GoL 2019). Social factors pose further challenges to Lesotho’s economy, including reliance on Lesotho’s economy is vulnerable to shocks. Lesotho is subsistence agriculture and high poverty rates (detailed a small, landlocked lower-middle-income country, with in section 2). a gross domestic product (GDP) of US$2.6 billion, GDP per capita of US$1,318 as of 2017, and a population of Lesotho frequently experiences different natural 2.2 million people. Lesotho is among the poorest coun- disasters, most significantly droughts. Major droughts tries in southern Africa. It is also among the “least devel- over the last decades have affected large parts of the oped countries” according to the United Nations (UN) population, making hundreds of thousands food inse- classification, meaning the country confronts severe cure and triggering humanitarian response both from structural impediments to sustainable development and the international donor community and the govern- is accordingly highly vulnerable to economic and envi- ment.3 Beyond droughts, Lesotho is also exposed to ronmental shocks.2 The country’s economy relies mainly heavy rainfall and floods, snowfall, hailstorms, strong on agriculture, the textile industry, water exports, min- winds, and early frost. ing, and remittances. Financial resilience to these disasters is an impor- Over the past four years, Lesotho’s economy has faced tant concern, because governments tend to shoulder challenges emanating from political instability and a most of the disaster-related costs. It is often the case 2United Nations, Economic Analysis and Policy Division, “LDCs at a Glance,” 3 Based on data from the UNOCHA Financial Tracking Service, https://fts.unocha https://www.un.org/development/desa/dpad/least-developed-country- .org/; and historical data on population affected by disasters from the Lesotho category/ldcs-at-a-glance.html. Vulnerability Assessment Committee (LVAC). 12 LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC that these costs are financed ex post through budget lower education enrollment, reduced food con- reallocation and donor support. However, these sources sumption, and ultimately loss of lives. Response of financing are often uncertain and take time. Budget costs decrease if financing is available immediately. reallocation can also move resources away from devel- 3. Reliability. When financing mechanisms that opment projects, causing abrupt funding stops, shifts in operate according to clearly predefined rules are government priorities, and potential harm to economic established in advance, funding becomes more growth in the long term. These can augment disaster predictable. For vulnerable people, knowing that impacts on vulnerable people (Hill, Skoufias, and Maher support will be provided—and provided at a cer- 2019). tain time—can create more individual freedom to Prearranged financing can support more timely, plan ahead. cost-effective, and reliable disaster response. To This report aims to analyze how disaster response meet the financial needs associated with disasters, gov- is financed and how it could be further improved in ernments can either arrange financial instruments in Lesotho. This analysis could be used to develop a com- advance (ex ante) or arrange financing once a disaster prehensive DRF strategy that would allow for a mix of has occurred (ex post). Prearranged financing has some policies and prearranged financing instruments to bet- important benefits: ter respond to disasters. 1. Timeliness of disaster response. Response imme- The remaining report is organized as follows: Sec- diately after a disaster is important, but the pro- tion  2 presents the economic and fiscal costs of natu- cess of raising resources to enable the response ral disasters in Lesotho, including information on the often takes time. By ensuring ahead of time that vulnerability of the population and the occurrence sufficient finance is in place to respond to a shock, of natural disasters. Section 3 offers case studies of governments can speed up the response. By con- two extreme events in Lesotho, the El Niño–induced trast, arranging finance after a disaster can lead drought in 2015/16 and the floods of 2010/11. Section 4 to costly delays, thus aggravating disaster impact. presents a statistical simulation of the costs of disaster 2. Cost-effectiveness. Ex ante financing instruments response in Lesotho. Section 5 provides an overview of can also be more cost-effective than ad hoc bud- the institutional framework for disaster risk management get mobilization for disaster response. This is in the country. Section 6 describes the financial instru- particularly true for slow-onset disasters such as ments that are used in Lesotho to respond to disasters. drought that incur continuing losses over time. Finally, section  7 provides policy recommendations to These go beyond agricultural production losses strengthen the country’s financial resilience to natural and can include reduction of productive assets, disasters. LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC 13 2. Vulnerability to natural disasters 2.1 Poverty and vulnerability While agriculture matters for a large part of Leso- tho’s population, the sector contributes just 10 per- of the population to disasters cent to GDP (World Bank forthcoming b). Livestock Half of the population in Lesotho lives under the is an important source of income, representing around national poverty line. Lesotho has been making slow 30  percent of total agricultural outputs (World Bank progress in poverty reduction since the 2000s, lowering 2017a). Livestock production focuses on sheep and its national poverty rate from 56.6 percent in 2002 to goats for wool and mohair, as well as cattle and pigs 49.7 percent in 2017 (World Bank forthcoming a).  The (CIAT and World Bank 2018). More than 85 percent of country’s high HIV prevalence rate (24 percent) has cultivated land is used for growing maize, sorghum, and created some particularly vulnerable groups, including wheat. Productivity in Lesotho is low, averaging about orphans. Poverty is concentrated among children (the US$70 per hectare annually, compared to the regional highest rate, 60.9 percent, is for those ages 6–14), fol- average of about US$120 per hectare. The sector’s low lowed by the elderly (52.0 percent). In addition, Lesotho productivity is largely a result of low investment in irriga- is ranked in the top 20 percent of most unequal coun- tion and other infrastructure, low uptake of new technol- tries, with a Gini index estimated at 44.6 in 2017 (World ogies and inputs, poor-quality extension and advisory Bank forthcoming a). In Lesotho as in countries around services, and limited access to credit (World Bank forth- the world, the poor are the most impacted by shocks coming b). Climate change may further decrease the such as natural disasters. This is because their liveli- productivity of agriculture by reducing the crop yield, hoods depend on fewer assets, their consumption is increasing the occurrence of crop failure, and decreas- closer to subsistence levels, they cannot rely on savings ing livestock production. to smooth shock impacts, their health and education On Lesotho’s small rain-fed farms, irrigation is used are at greater risk, and they may need more time after for less than 1 percent of crop production (World Bank a shock to recover and reconstruct (Hallegatte et al. forthcoming b). Challenges to medium and large irriga- 2017). Natural disasters can send people into extreme tion schemes include Lesotho’s topography and geol- poverty or cause people who are recovering from pov- ogy, as well as the fact that irrigation may be expensive. erty to fall back into it, preventing poverty reduction. While water is available, it is not yet being used produc- In Lesotho, the poverty rate is highest in rural areas, tively for agriculture, and there are few water harvesting where more than half of the population lives (World schemes (World Bank 2017a). Unsustainable land man- Bank forthcoming a). Rural households are largely agement practices in Lesotho increase soil erosion and dependent on agriculture for their livelihoods. Agricul- decrease soil fertility, leading to decreased productivity ture is dominated by small rain-fed farms of less than (World Bank forthcoming b) and aggravating disaster 1  ha per household (World Bank 2019a). This contrib- risks. Domestic food production covers approximately utes to rural households’ vulnerability to weather- 30 percent of the national food requirements, with the related disasters. In addition, settlements in rural areas remaining 70 percent imported from South Africa (Kar- are scattered, impeding the provision of social services. dan, O’Brien, and Masasa 2017). 14 LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC Figure 4: Number of people affected by droughts, floods, and storms in Lesotho 979,000 725,515 500,000 475,000 500,000 331,500 250 2,001 4,500 2,600 Drought Storm Storm Drought Drought Storm Flood Drought Storm Drought 1991/92 1996 2001 2001/02 2006/07 2008 2010/11 2011/12 2014 2015/16 Source: Government of the Kingdom of Lesotho 2011; EM-DAT Database (The Emergency Events Database—Universite catholique de Louvain—CRED, D. Guha- Sapir—www.emdat.be, Brussels, Belgium). Rates of undernutrition remain high in Lesotho, 2.2 Occurrence of natural disasters increasing the vulnerability of the population to shocks. Around 33  percent of children under the age Lesotho is prone to a variety of perils such as droughts, of five are stunted. Moreover, 27 percent of women floods, storms, snowfalls, hailstorms, strong winds, and 14 percent of men ages 15–49 are anemic (Minis- and early frosts (GoL 2017). According to the EM-DAT try of Health of Lesotho 2014). Undernutrition affects Database, from 1990 to 2018 drought was the most all wealth quintiles in Lesotho. While food insecurity is frequent hazard and the one affecting the most peo- related to low income, other major causes include lim- ple.5 EM-DAT data show that severe droughts occurred ited access to nutritious food and poor infant feeding in 1991/92, 2001/02, 2006/07, 2011/12, and 2015/16. practices. Undernutrition increases the vulnerability of Each of these severe droughts affected on average the population to shocks, since it increases the likeli- 603,000 people. The same database records that Leso- hood of falling sick, the severity of disease, and the like- tho has experienced two floods and four storms since lihood of death (World Bank 2015a). 1990. Figure 4 presents the number of people affected by different disasters since 1990. Food insecurity is among the sources of vulnerability and often augmented by shocks. During the period Climate change is expected to increase the frequency between 2003 and 2018, 450,000 people were food and severity of weather-related disasters. Analysis of insecure on average per year.4 Due to the country’s high past precipitation and temperature trends in Lesotho reliance on rain-fed agriculture, climate change is likely indicates a decrease in precipitation and an increase in to further threaten food security. Lesotho may therefore temperature over the period 1981–2012. Climate pro- become more dependent on imports of most food com- jections for the country suggest that temperatures are modities (World Bank 2018a). likely to increase by an average of 2°C by 2050 and by as much as 2.4°C by 2070. The largest increase is expected Given the above, strengthening the vulnerable popu- to occur in the lowlands along the northwestern border lation’s resilience to natural disasters is critical if Leso- of the country, which is the most drought-prone area in tho is to achieve the twin goals of ending extreme Lesotho (World Bank 2018a). poverty and boosting shared prosperity. 5 EM-DAT data on the number of people affected by disasters considers people who are injured, are homeless, or require immediate assistance during a period 4 Based on Lesotho Vulnerability Assessment Committee data. Estimates on the of emergency (i.e., require basic survival needs such as food, water, shelter, san- food-insecure population in the country have been collected annually since 2003 itation, and medical assistance). While EM-DAT collects data on large reported by LVAC through the yearly Vulnerability Assessment and Analysis. The LVAC disasters by people affected, LVAC collects annual figures on people requiring is led by the Disaster Management Authority coordinating with other national food assistance. EM-DAT figures are used in this section, as LVAC does not dif- and regional government institutions as well as development partner agencies. ferentiate food-insecure people by the type of disaster. LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC 15 High levels of exposure and vulnerability to natural applicable years. The World Bank (forthcoming a) Leso- disasters create fiscal vulnerability and can impact tho Poverty Assessment found that the El Niño–induced Lesotho’s development. Data on the cost of disaster drought significantly impacted poverty reduction: response are not systematically recorded in Lesotho without this shock, it is estimated that poverty in Leso- and were available only for two disasters, the El Niño– tho would have decreased twice as fast over the past induced drought in 2015/16 and the floods in 2010/11. 15 years. For detailed case studies of these two events, The resources needed to respond to these events were including their impact on households, the resources that estimated to be around US$38 million (M 584 million) the government and partners managed to mobilize in and US$67 million (M 462.7 million) respectively.6 This response, and the way these resources were allocated is around 1.7 percent and 3.2 percent of GDP in the see section 3. 6 Based on the 2011 and 2016 exchange rates of 6.90 Lesotho maloti per U.S. dollar and 15.29 maloti per U.S. dollar, respectively. LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC 17 3. Case studies of natural disasters 3.1 Case study 1: Economic dryer than the historical average level. The index also shows how the 2015/16 drought compares to other and fiscal impact of the 2015/16 major droughts such as those experienced in 2006/07 El Niño–induced drought and 2011/12. The 2015/16 drought was the worst experienced The 2015/16 drought affected 979,000 people in Lesotho in 35 years. The intensity of this El Niño– (EM-DAT) and left around 709,000 people food-in- induced event is well captured by the normalized dif- secure (LVAC).8 Cereal production fell by 66 percent. ference vegetation index (NDVI).7 Figure 5 presents the Food prices increased sharply: in April 2016, the price of NDVI anomalies or deviations from the historical aver- a 12.5 kg sack of white maize meal was 58 percent higher age. The vegetation index anomaly around the end of than the five-year average (figure 6). At the same time, 2015 and beginning of 2016 is the largest anomaly since the need for external food assistance and imports rose the beginning of the record in 2001. At the peak of the (LVAC 2016). In rural areas, households’ consumption drought in January 2016, the vegetation was 34 percent Figure 5: Vegetation index (NDVI) anomalies 0.10 0.05 0 NDVI anomaly –0.05 –0.10 –0.15 –0.20 Jan-01 Apr-01 Aug-01 Dec-01 Mar-02 Jul-02 Nov-02 Feb-03 Jun-03 Sep-03 Jan-04 May-04 Aug-04 Dec-04 Apr-05 Jul-05 Nov-05 Mar-06 Jun-06 Oct-06 Feb-07 May-07 Sep-07 Jan-08 Apr-08 Aug-08 Dec-08 Mar-09 Jul-09 Nov-09 Feb-10 Jun-10 Sep-10 Jan-11 May-11 Aug-11 Dec-11 Apr-12 Jul-12 Nov-12 Mar-13 Jun-13 Oct-13 Feb-14 May-14 Sep-14 Jan-15 Apr-15 Aug-15 Dec-15 Mar-16 Jul-16 Oct-16 Feb-17 Source: World Bank calculations using data from MODIS. Note: The NDVI anomalies were calculated as the deviations from the decadal average in the 2001–2017 period (historical average). Calculating the deviations using subsamples in this period did not alter the results. Negative values correspond with vegetation being dryer than the historical average, while positive values reflect vegetation being greener than the historical average. 7The NDVI is one of the most widely used measures for assessing vegetation conditions globally. It uses satellite images to measure the greenness of the 8 EM-DAT figures on people affected include people who require assistance vegetation. during an emergency on a wide range of basic needs in addition to food. 18 LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC Figure 6: Price of white maize meal in Maseru (85 percent) were used to support water and sanitation, 140 and the rest were used for responses in health, nutri- 120 tion, agriculture, and food security. The MoF disbursed 100 resources to line ministries for response six months after M per 12.5 kg 80 declaration of the emergency. 60 The food price subsidy encountered implementation 40 challenges and was very costly. The introduction of 20 the subsidy was designed to reduce the price of maize 0 meal, sugar beans, and split peas by 30 percent for a Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec period of one year. The subsidy lasted from June 2016 2015 2016 5-year average SAFEX to May 2017, managed by the Ministry of Small Business Development, Cooperatives and Marketing in partner- Sources: Lesotho Bureau of Statistics; South Africa Futures Exchange. ship with the Disaster Management Authority (DMA). The government published a national pricing framework dropped on average 23 percent (World Bank forthcom- gazette that legally set the prices of subsidized products. ing a). Further, according to the United Nations Office However, there were challenges in monitoring the imple- for the Coordination of Humanitarian Affairs (UNOCHA), mentation of the program along the supply chain, result- poor and very poor households experienced a 44 per- ing in some suppliers selling above gazette food prices. cent decline in their food and cash income compared The average decrease in maize meal prices between to normal conditions due to this drought (Office of the June 2016 and December 2016 was 12.9 percent at the Resident Coordinator in Lesotho 2019). national level, which was a small decrease compared to the 30 percent fall expected from introducing the food The total funding mobilized to respond to the price subsidy. Furthermore, the subsidy’s universal nature drought was US$82 million (M 1.25 billion), or 3.6 per- was put into question. The subsidy was offered to the cent of GDP in 2016. GoL contributed US$21  million whole population and was not targeted to the poorest (M  318  million) of this amount; humanitarian contribu- and most vulnerable. In the short term, more-targeted tions totaled US$40 million; and the World Bank mobi- assistance through social protection programs would lized US$20 million through the Crisis Response Window have been more cost-effective. In the medium to long (CRW) and US$1.4 million through the Contingent term, it is important to build farmers’ resilience against Emergency Response Component (CERC) under the climate shocks (World Bank, WFP, and FAO 2017). Smallholder Agriculture Development Project (SADP). Two existing contingency funds were already depleted The US$21 million mobilized by the GoL was through at the time of the declaration of emergency. The GoL budget reallocation and included US$10 million has two contingency funds, one in the MoF for unfore- (M  155 million) for the response and an additional seen expenditure, and another—the Disaster Manage- US$11 million (M 163 million) to provide a food ment Fund—within the DMA. Because both funds had price subsidy. The GoL declared a state of emergency already been depleted at the time of the declaration of in December 2015, which led to the development of a emergency, they were not used to cover the costs of drought response plan, as well as the establishment of the drought response. The Disaster Management Fund a drought response task force. The resources needed to was used to move the resources that the GoL had re- respond to the drought were estimated to be US$38 mil- allocated in the budget for the drought response from lion (M 584 million), or 1.7 percent of GDP, in Decem- FY2015 to FY2016. But resources needed to be moved ber 2015, when the drought was in its early stages; back from the Disaster Management Fund to the MoF of this amount, the government covered US$10  mil- for disbursement, since direct disbursements from the lion (M  155  million). The majority of these resources LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC 19 Disaster Management Fund to the line ministries could million was used to provide additional cash assistance not be made. More details on these two contingency to poor household beneficiaries of the Child Grant funds are presented in section 6. Program, one of the main social protection programs in the country. In addition, US$5.2 million was used as For Lesotho, as for many countries in Sub-Saharan budget support to finance government’s social protec- Africa, international donor assistance plays a key role tion emergency response. Remaining funding was used in financing disaster response.9 During the El  Niño to improve administrative efficiency, equity and shock event, more than US$40 million was raised from human- responsiveness of social assistance systems including itarian partners, but this assistance was received more the four key programs, Child Grant Program, Orphan than six months after the declaration of emergency. Total and Vulnerable Children, Public Assistance and Old Age commitments were US$52.6 million, but by June 2017 Pension, and related capacity building activities. donations covered only US$40.7 million, or 77 percent, leaving a gap of 23 percent. Key donors were USAID Through the CERC, the World Bank provided an (which provided US$10.6 million); DFID (US$8.1  mil- additional US$1.4 million. With these funds, the GoL lion); ECHO (US$5.5 million); CERF (US$4.7 million); the signed a US$1.1  million contract with FAO to (i) pro- Netherlands (US$1.9 million); AusAID (US$1.6 million); tect and improve agricultural livelihoods, (ii) engage in Germany (US$1.6 million); Switzerland (US$1.2 million); capacity development on climate-smart food produc- Canada (US$1 million); and the French Development tion techniques, (iii) protect livestock assets through ani- Agency (AFD) (US$1 million). Other donors, notably mal health, and (iv) address health and nutrition needs. Japan and Sweden, contributed a total of US$2.1 mil- The remaining funds were used by the GoL to replace lion (Humanitarian Country Team 2017). Most of the 22 SADP beneficiary greenhouses that had been dam- humanitarian assistance was received around June aged by wind and hail and to rehabilitate two irrigation 2016, six months after the declaration of emergency schemes identified by the Department of Crop Services in December 2015 and nine months after the first reli- at the Ministry of Agriculture and Food Security. able forecast of the drought in September 2015. The recipients of these funds were United Nations agencies, 3.2 Case study 2: Economic and fiscal in particular the Food and Agriculture Organization of impact of the 2010/11 floods the United Nations (US$4.8 million), World Food Pro- gramme (US$6.7 million), and UNICEF (US$1.7 million), In 2010/11, a series of heavy rains hit Lesotho, caus- as well as nongovernmental organizations (NGOs), ing river floods, runoff from hill slopes, and rockslides. including World Vison (US$8.8 million) and Catholic Additional damages were caused by strong winds and Relief Services (US$1.7 million).10 localized hailstorms. The disaster affected 500,000 peo- ple, or about 28 percent of the total population, includ- The World Bank contributed US$20 million through ing displacement of 3,360 people. The floods severely the CRW. The CRW provides International Development impacted crops, washed away fields, damaged trans- Association (IDA) countries with additional resources port infrastructure, affected or destroyed many houses, that help them respond to severe economic crises and and increased food insecurity. major natural disasters and return to their long-term development paths. The World Bank Board of Directors Following the disaster, the GoL conducted a Post-­ approved the mobilization of such funding for Lesotho Disaster Needs Assessment (PDNA), which esti- in December 2016. As of October 2019, US$13.79 mil- mated total damages and losses at US$67 million lion (68 percent) had been disbursed. A total of US$1.9 (M  462.7  million), equivalent to 3.2 percent of the country’s GDP.11 The disaster affected both the public 9 On average, according to the Financial Tracking Service, Lesotho received a yearly average of US$7.28 million in total donor assistance over the period 2002 to 2018. 11 The PDNA (Government of the Kingdom of Lesotho 2011) is also the source 10 Data are from UNOCHA Financial Tracking Service, https://fts.unocha.org/. for other figures in this section. 20 LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC and private sectors; destroyed assets were split nearly The disaster increased the vulnerability of the pop- evenly between the two. With regard to production ulation, especially of the poor. The impacts varied losses and higher cost of services, 90 percent fell on across the country, with higher impacts in the north. the population and private sector. Forty-five schools The districts with higher losses and damages were were damaged, affecting a total of about 9,841 chil- Maseru, Mokhotlong, Leribe, Butha Buthe, and Berea. dren. Drinking water supplies were contaminated in The PDNA found that the impact of the disaster was rural areas. Three health posts were destroyed, and most severe in districts with the lowest Human Develop- community access to many facilities was interrupted for ment Index (HDI) values. up to 20 days due to transport disruption and closure Short-term recovery needs made up over half of the of some of these facilities. In total, between 2,000 and estimated post-disaster needs. The agricultural sec- 2,500 houses were damaged or destroyed. In addition, tor had the highest needs (with food imports making nearly 75,000 ha of crops were lost and over 44,000 head up the largest share of these needs), followed by the of livestock died. transport sector. Medium- and long-term recovery and Some sectors incurred higher damages and losses reconstruction needs—calculated to include the “build- than others. The PDNA estimated that the sector sus- ing back better” principle and priorities in disaster risk taining the highest damage due to floods was road management—were highest in the transport sector, fol- transportation (33.3 percent), followed by livestock lowed by housing, water and sanitation, and education. (18.6 percent), water, sanitation, and hygiene (15.7 per- The PDNA estimated that without any external sup- cent), and education (11.7 percent). The largest share of port, damages and losses due to the disaster would losses was in the agriculture sector (46.7 percent), fol- reduce GDP growth by 0.5–3.1 percent. This estimate lowed by road transportation (25.9 percent), livestock indicates the GoL’s lack of capacity to deal with the (13.5 percent), and commerce (9.2 percent). disaster on its own. LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC 21 4. Statistical simulation of disaster response cost The simulation was conducted in two steps. A first affected, figure 7 presents the estimated annual cost of statistical analysis of the cost of response to disasters in disaster response in Lesotho from 2003 to 2018. Lesotho was conducted using LVAC data. Specifically, Using the estimated cost of response based on LVAC annual LVAC data on the number of people who require data, further statistical analysis was conducted to food assistance were used to estimate the frequency estimate the frequency and severity of disaster and and severity of shocks in Lesotho.12 The estimation climate shocks in Lesotho. Using Monte Carlo simu- assumes that the average cost of providing assistance lations,13 average annual cost of disaster response was per person affected by a disaster in Lesotho is US$40. estimated at US$19.3 million (figure 8). Given that the This assumption is based on the number of people in analysis is based on the vulnerability assessment data, need of assistance and the amount of humanitarian those estimates are not specific to a type of disaster but funding received in 2016 during the El Niño–induced rather are applicable to any disaster that leaves people drought. Based on this assumption about cost and using in need of assistance in the country. It was also estimated vulnerability assessment data on the number of people Figure 7: Estimated cost of response based on Lesotho Vulnerability Assessment Committee (LVAC) and humanitarian financing 40 35 30 US$ millions 25 20 15 10 5 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Cost of response (based on LVAC data) Humanitarian financing Source: World Bank calculations based on data from Financial Tracking Service, https://fts.unocha.org/; and LVAC. 12 LVAC data were used for this analysis, as EM-DAT data on the number of people affected by disasters had gaps in some years. This is mainly because the EM-DAT Database includes information on severe disasters as reported by various organizations, while LVAC captures food needs every year. LVAC data also have the advantage of reflecting the number of people who require food assistance, the most basic need that government should address when disasters occur, while EM-DAT includes a wider range of needs. A limitation on using LVAC data is that it is not disaggregated by disaster type and includes food 13 Five distributions were considered based on their goodness of fit, and the log insecurity also due to other events. normal distribution was chosen as providing the best fit. 22 LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC Figure 8: Estimated average loss due to disasters of different return periods 80 70 Estimated annual loss 60 (US$ million) 50 40 30 20 10 0 Annual 1-in-5-year 1-in-10-year 1-in-25-year 1-in-50-year 1-in-100-year Highest Most recent average historical annual loss annual loss Return period 95% confidence interval Source: World Bank calculations based on LVAC data. that the costs associated with the 2015/16 El Niño on the number of people who require food assistance. event would occur approximately every five years—i.e., LVAC does not capture data on food insecurity related approximately every five years, as many people would to disasters but general food requirements in the coun- be in need of assistance as during the El Niño event. try. In addition, estimations on frequency and severity of shocks should ideally also consider other losses from It is important to note the limitations of this estima- disasters such as related to infrastructure. There is, how- tion, which were driven by available data on disas- ever, no systematic data collected on disaster losses or ter losses in Lesotho. LVAC collects annual information disaster spending in Lesotho. LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC 23 5. Institutional and policy frameworks for disaster risk management Lesotho has in place legal and policy frameworks degradation, it is important for the government to for disaster risk management. The Disaster Manage- assess the economic and fiscal impacts of disasters and ment Act of 1997 provided the foundation for disaster ensure the timely availability of financial resources for risk management in Lesotho. Lesotho’s National Stra- disaster preparedness, response, recovery, and recon- tegic Development Plan 2012/13–2016/17 recognized struction. A DRF strategy sets a legal framework to the need for adaptation to climate change. Further, the strengthen the financial management of disaster risks Budget Strategy Paper for 2018/19 to 2020/21 recog- by outlining an optimal combination of risk financing nizes the adverse impacts of disasters on the budget instruments, including both risk retention and risk trans- outlook, and identifies climate change as one of the fer instruments, making response to different types of cross-cutting issues within Strategic Goal 3 (“Promote disasters more cost-­effective. Having certainty about peace, strengthen democratic governance and account- what resources are available for government response ability systems”) (Kingdom of Lesotho 2018a). In 2019, to disasters, and about where these resources will come the Cabinet approved the National Resilience Strategic from, can greatly reduce financial distress and ultimately Framework (NRSF) and Theory of Change. The NRSF reduce the human and economic cost of disasters. recognizes that increasing resilience is a crucial first line A DRF strategy would support the National Strategic of defense against disasters, and it guides the process Development Plan II cross-cutting topic Environment of building the country’s resilience in the face of chal- and Climate Change and particularly the fourth strategic lenges posed by climate shocks. The NRSF includes objective, Improve Environmental and Climate Change a pillar on the need to prepare financially for disaster Governance. Details on the Malawi National DRF Strat- response by developing financial instruments that allow egy are presented in box 1. the public and private sector to retain and transfer risks. Disaster risk management within Lesotho is coor- Finally, Lesotho also has a Multi-Hazard Contingency dinated by the Disaster Management Authority, Plan 2015–2018 (GoL 2015b), which identifies standard which leads the response to emergencies and coordi- operating procedures for a variety of hazards. At pres- nates among agencies in the event of disasters. The ent, a new contingency plan is being developed that DMA, which is within the Office of the Prime Minister, focuses initially on drought. was created through the Disaster Management Act Lesotho does not currently have a DRF strategy. A of 1997 and is responsible for prevention, mitigation, DRF strategy would allow the government to identify preparedness, response, and recovery activities associ- and plan where resources for responding to future disas- ated with disasters (Kardan, O’Brien, and Masasa 2017). ters will come from. Given that disasters will increase The DMA coordinates eight technical working groups in severity and frequency due to climate change, that monitor disaster situations in different areas to population growth, urbanization, and environmental 24 LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC Box 1: Malawi’s National DRF Strategy Malawi is exposed to a variety of natural hazards, with droughts and floods having the greatest impact on the country’s econ- omy and infrastructure and on people’s livelihoods. The Government of Malawi (GoM) is working to strengthen its financial resilience to the impact of natural disasters by introducing different financial instruments that can be used to respond to disasters of different severities and frequencies. More specifically, the GoM is working to set up a Contingency Fund for Disas- ters, a Cat-DDO, and sovereign insurance, and to expand the penetration of private catastrophe insurance and agricultural insurance in the country. Malawi’s Ministry of Finance, Economic Planning and Development is seeking to guide the adoption of such instruments and with technical support from the World Bank has drafted a National Disaster Risk Financing Strategy. This was adopted and signed by the Ministry in May 2019. The strategy outlines the actions the GoM needs to take to adopt or strengthen different DRF instruments. It increases the transparency of, and strengthens decision making on, different potential financial instru- ments that will help cover the costs of disaster response and reconstruction, while taking due account of costs and benefits (GoM 2019). The National Disaster Risk Financing Strategy in Malawi has helped government define its priorities regarding financial plan- ning for disaster response and understand the steps needed to strengthen the government’s financial resilience. ensure preparedness.14 These groups include represen- disaster response have been informed by the annual tatives of UN agencies, NGOs, the private sector, and Vulnerability Assessment and Analysis exercises con- government. ducted by the LVAC, which estimate the number of peo- ple in need of food assistance. The prime minister has the authority to declare an emergency; once an emergency is declared, the dep- After a declaration of emergency, the Ministry of uty prime minister convenes the National Disaster Finance has the task of mobilizing resources to cover Response Task Force. The task force is made up of min- the costs of government response to the event. Line isters from relevant sectors. At the district and village ministries submit requests for supplementary resources to levels, District Disaster Management Teams (DDMTs) the MoF to cover the costs of response activities in each and Village Disaster Management Teams (VDMTs) sup- sector. The MoF then reallocates the budget away from port the coordination and response to disasters. The other projects to meet these supplementary demands. DDMTs and VDMTs are supported by local staff of other Shifting resources away from ongoing or planned proj- government line ministries as well as community vol- ects is a lengthy process and often faces resistance from unteers. Since 2003, declarations of emergency and ministries whose resources are being reduced. 14 The sector working groups are (i) training; (ii) water and sanitation; (iii) health and nutrition; (iv) agriculture and food security; (v) early warning system; (vi) food and logistics; (vii) information; and (viii) LVAC assessment. LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC 25 6. Existing ex ante mechanisms to finance disaster response Following disasters, governments have a range of 6.1 Budget mobilization options for financing disaster-related needs. However, raising sufficient finance once a disaster has occurred can Contingency funds take time, and how much financing can be obtained is often uncertain. To access finance after a disaster, gov- Lesotho has a contingency fund managed by the MoF, ernments often rely on reallocating the government bud- as well as a Disaster Management Fund overseen by get to meet urgent needs, appealing for international the Disaster Management Authority. Generally, con- donor assistance, and arranging for emergency credit. tingency funds are used to cover the needs associated with high-frequency, low-intensity events. Contingency Ex ante DRF instruments can help governments funds require governments to set aside funds that could respond to different types of disasters in a timely otherwise be spent in development projects. Given this manner. There are several instruments that could be high opportunity cost, governments typically have con- used for this purpose, such as contingency funds, con- tingency funds of moderate size to cover the costs of tingent lines of credit, and risk transfer instruments. responding to events that are frequent and not very The GoL has two contingency funds in place that could severe. potentially be used to respond to recurrent disasters (see figure 9). Figure 9: Ex ante disaster risk financing instruments available to the Government of Lesotho Low frequency/ high severity Insurance of public Insurance for Risk transfer Transfer assets homeowners and No risk transfer No insurance of public small businesses instrument available assets available Limited penetration Contingent credit No contingent credit currently available Retention High frequency/ low severity Contingency budget Ministry of Finance: Contingency Fund Disaster Management Authority: Disaster Management Fund Emergency funding Reconstruction Source: World Bank 2014. 26 LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC The contingency fund managed by Lesotho’s MoF is line ministries to finance their disaster response activi- not specifically designated to cover disaster-­ related ties. This adds a major constraint to its use. Decreasing needs, but rather is used to meet needs for a broad annual allocations to the fund and the challenges for its range of different purposes, such as additional disbursement affect Lesotho’s financial preparedness expenses of line ministries. For the past five years, the for disasters. contingency fund has had a constant annual allocation The use of contingency funds is increasing in Sub-­ of US$6.5 million (M 100 million) (figure 10, left). Before Saharan Africa, providing governments with imme- that, the amount was highly variable. Allocations to the diate access to funds to respond to shocks. In fund must be spent within the fiscal year, which runs Mozambique, for example, the government has set from April 1 to March 31. The rainy season in Lesotho, up the Disaster Management Fund to increase the from October to March, falls toward the end of the fiscal availability and predictability of resources for emer- year. Given that resources are not dedicated to disas- gency preparedness and response and to make room ters, by the time droughts or floods strike there are gen- for financing of recovery. The World Bank provided the erally very few resources left in the contingency fund. Government of Mozambique (GoM) with technical sup- The Disaster Management Fund differs from the con- port to elaborate the regulations governing the Disas- tingency fund in that its resources are designated ter Management Fund, as well as financial support to to meet disaster-related needs only and they can top up the government’s resource allocation to the fund accrue over years; however, funding has been declin- (see box 2). ing. While in 2014/15, over US$523,000 (M 8 million) was allocated to the Disaster Management Fund, in Contingent credit recent years, budget allocations to the fund have been Following a disaster, governments could obtain an decreasing (figure 10, right). During the El Niño event in ex post emergency loan. Lesotho’s public debt was 2015/16, the GoL used the Disaster Management Fund estimated to be 41.6 percent of GDP in 2018, up from to shift resources for the drought response from FY2015 36.6  percent in 2017. Lesotho has a moderate risk of to FY2016; this was possible given the revolving nature debt distress (IMF 2019) and therefore could have room of this fund. The Disaster Management Fund cannot, for additional borrowing. While significant resources however, be used to disburse resources directly to other Figure 10: Allocations to contingency fund and Disaster Management Fund Alocation to the MoF contingency fund Budget allocation to DMA Disaster 300 6 Management Fund Percent of total budget 250 5 200 200 4 145.38 M millions 150 M millions 150 3 100 2 100 50 1 50 0 0 8.21 5.00 5.00 4.50 FY2000/01 FY2002/03 FY2004/05 FY2006/07 FY2008/09 FY2010/11 FY2012/13 FY2014/15 FY2016/17 0 Mar-15 Mar-16 Mar-17 Mar-18 Oct-18 Source: MoF, Budget Speeches, various years, http://www.finance.gov.ls/official_documents.php?id=budget_documents&div= budget_speeches (left); DMA (right). Note: No data on allocations to the MoF contingency fund are available for FY2002/03 or 2003/04, LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC 27 Box 2: Mozambique’s Disaster Management Fund Mozambique is heavily exposed to multiple natural hazards, especially floods, cyclones, droughts, and earthquakes. The annual average damage caused by natural disasters between 2000 and 2014 was estimated to be US$188.3 million. The negative impact of climate and disaster shocks is exacerbated by high levels of poverty; in 2014, the country’s poverty rate stood at 62.9 percent (based on the US$1.90/day 2011 PPP poverty line). Recognizing the magnitude of climate and disaster risks, the GoM has taken various steps to increase financial protection against disasters. Until recently, an annual contingency budget allocation of around US$2 million was the only ex ante finan- cial instrument for disaster preparedness and response. The limited size of this allocation allowed the GoM to respond to small- or medium-size events only. Moreover, the amounts allocated each year were not predictable. For the financing of emergency response to larger events and post-disaster recovery and reconstruction, the GoM had relied on ex post instru- ments, such as ad hoc budget reallocations and mobilization of donations or loans from the donor community, which are usually slow to materialize and remain insufficient to cover post-disaster recovery needs. Recognizing this challenge, the GoM approved the creation of the national Disaster Management Fund (Fundo de Gestão de Calamidades) in October 2017 and is working toward operationalization. This fund is a dedicated account managed by the National Institute of Disaster Management (INGC). It is expected to receive annual budget allocations of at least 0.1 percent of the state budget (a minimum annual allocation of about US$4.5–5.0 million). The World Bank will top up the fund’s allocation with an additional annual amount of US$9 million in the fund’s first two years and with US$5 million in the following three years. The goal is to increase the availability and predictability of resources for emergency preparedness and response and make room for financing of recovery. With technical assistance from the World Bank, the GoM has elaborated draft regulations that will govern the Disaster Man- agement Fund. The fund will be able to support only immediate disaster preparedness and response activities. This support will be provided in kind and will be procured through pre-agreed contracts to speed up response to disasters. The fund has been designed so that it can purchase a sovereign parametric catastrophe insurance product, which could eventually provide an important backstop to the fund in the event of a large disaster. The regulations also specify, among other things, the mechanism for triggering the use of fund resources; the rules for requesting resources from the fund; requirements of pre-­ negotiated contracts for the delivery of specified goods; requirements for auditing the use of funds and transparency; and the concentration of fiduciary responsibility for the fund at INGC. The GoM is complementing the consolidation of financial protection against disasters with other interventions. These include (i) improving the understanding of risk through acquiring and processing high-resolution spatial and topographic data to improve risk maps for all major perils at the national level; (ii) strengthening capacity for disaster preparedness and response by creating, equipping, and training a network of disaster risk management committees at local levels and strengthening early warning systems for cyclone and river flooding; and (iii) mainstreaming disaster risk management in public investments and territorial planning by approving a decree requiring that new public buildings comply with resilient design standards and environmental requirements. Source: World Bank 2019b. can be mobilized through emergency loans, these can World Bank Development Policy Loan with Catastro- take a long time to negotiate and can contribute to phe Deferred Drawdown Option (Cat-DDO), allows already high debt ratios (World Bank 2014). Moreover, governments to access significant financial resources in interest rates might be higher during a crisis than in nor- the event of an emergency. In most cases, a Cat-DDO mal times, since macroeconomic conditions deteriorate disburses funds based on the declaration of a state of in a crisis and borrowers have more limited negotiating emergency due to a natural disaster. Countries are eligi- power. ble for a Cat-DDO if they are in the process of preparing, or already have, a disaster risk management framework Setting up ex ante contingent lines of credit enables and if an appropriate macroeconomic framework is in governments to access finance at competitive bor- place (World Bank 2018b). The Cat-DDO has a country rowing rates immediately after a disaster to meet limit of US$250 million or 0.5 percent of GDP, whichever emergency needs. Contingent credit, such as the 28 LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC Box 3: World Bank’s Development Policy Loan with Catastrophe Deferred Drawdown Option The Cat-DDO was developed in 2008 for International Bank for Reconstruction and Development (IBRD) countries. In 2017, IDA countries also became eligible for Cat-DDOs. Since the introduction of the instrument, the World Bank has approved 16 Cat-DDOs for a total value of US$3.1 billion. Cat-DDOs have proved to be effective liquidity instruments, providing countries with needed cash in the immediate aftermath of a natural disaster. Funds may be drawn upon declaration of a state of emergency in the borrower’s territory. The Cat-DDO funds act as a fiscal buffer that reduces disaster impact and provides critical bridge financing immediately after a disaster until other domestic funds can be reallocated or international aid is received. The experience of the Philippines suggests the benefits of this instrument and shows how a Cat-DDO can be part of a pro- active approach to DRF. In 2011, the Government of Philippines signed a Cat-DDO with the World Bank, and that same year the country suffered catastrophic human and economic losses when Tropical Storm Sendong struck. The storm killed 1,268, injured 6,071, and left 181 missing. The overall recovery and reconstruction needs were estimated at US$621.4 million. After a national state of emergency was declared, the Philippine Ministry of Finance made a request to withdraw funds, and two days later the World Bank disbursed US$497.5 million to the Government of Philippines—clearly demonstrating the effectiveness of the fast-disbursing instrument. The Philippines signed a second Cat-DDO with the World Bank in 2015 (World Bank 2015b). Now that IDA countries are eligible for Cat-DDOs, the World Bank is seeing interest in developing them grow rapidly. In June 2018, the first IDA Cat-DDO was approved by the World Bank Board of Directors; this was for Kenya—the first IDA country in Africa to develop a national DRF strategy—in the amount of US$200 million. The World Bank has also recently approved a Cat-DDO for Malawi, and more are currently under preparation in Africa. is lower. IDA clients with limits below US$20 million may Program for Southern Africa, and (vii) Education Qual- request a Cat-DDO up to this amount. Lesotho cur- ity for Equality Project. As of October 2019, these proj- rently does not have contingent credit to meet disaster-­ ects totaled US$281.3 million, with US$62.3 million related needs. Given that 0.5 percent of GDP in Lesotho disbursed (22.15 percent). Additionally, two pipeline would be around US$13 million, the maximum amount projects include CERCs: (i) Nutrition and Health System of a Cat-DDO in Lesotho would be US$20 million. More Strengthening Project, and (ii) Renewable Energy and details on the Cat-DDO instrument are in box 3. Energy Access Project. The World Bank can also provide governments with Sovereign insurance additional liquidity for responding to shocks through Contingent Emergency Response Components Sovereign disaster risk insurance can provide coun- (CERCs). CERCs can be included in World Bank projects tries with rapid access to liquidity in the event of during the project preparation stage. Under a CERC, severe disasters. This financing mechanism enables in the event of an eligible crisis or emergency, funds ministries of finance to transfer part of the financial bur- may be reallocated from other project components and den of disaster response to the private sector through used to respond to the crisis. Details on the use of CERC an insurance contract. When such a contract is in place funding are predefined between the World Bank and the and a sufficiently large insured event (such as drought) client country, including coordination and emergency occurs, a payout is triggered under the insurance con- procurement arrangements, time of disbursement, and tract and paid to the ministry of finance as budget sup- measures to address potential environmental and social port. Box 4 offers examples of sovereign disaster risk safeguards risks. In Lesotho, seven ongoing World Bank insurance contracts, looking specifically at how sover- projects include CERCs: (i) SADP, (ii) SADP II, (iii) Social eign insurance against drought has benefited govern- Assistance Project, (iv) Lesotho Transport Infrastructure ments in Senegal, Niger, and Mauritania and enabled and Connectivity Project, (v) Lowlands Water Devel- them to provide affected households with food, cash, opment Project–Phase II, (vi) Agricultural Productivity and livestock feed. LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC 29 Box 4: Sovereign Insurance in the Sahel The Sahel’s generally dry climate and low and irregular rainfall can have a significant economic impact on the region. Repeated drought cycles and the consequent degradation of natural resources have a profound effect on the revenue sources of the Sahel’s population. Poor rainfall in the Sahel in 2018 sparked acute pasture and water shortages, raised food costs, and caused livestock prices to fall, leaving almost 6 million people—across Burkina Faso, Chad, Mali, Mauritania, Niger, and Senegal—in need of food and livelihoods assistance to survive. Responding to droughts in the Sahel can require substantial resources. During the 2018 drought, for example, the UN launched a humanitarian appeal for US$1.37 billion. However, only 26 percent of the appeal had been funded by June 2018 (UNOCHA 2018). To manage the risk from drought, governments in Sahel countries have purchased drought insurance from ARC. Governments can customize the drought insurance policy according to their needs by choosing the levels of risk retention and risk transfer as well as other parameters. To support a quick response to disasters, ARC provides technical assistance to governments to develop contingency plans that identify how the resources from potential insurance payouts could be spent. Since 2014, four Sahel countries—Mali, Senegal, Mauritania, and Niger—have purchased drought insurance from ARC. In 2015 the governments of Mauritania, Niger, and Senegal received payouts that provided needed liquidity to respond to a severe drought. These countries had purchased insurance and paid an annual premium that amounted to US$8 million for the three of them. A payout from ARC to the three countries totaling US$26 million was triggered by the drought.a ARC’s payout arrived earlier than food security contributions by other donors. These funds were then used by the governments to deliver relief to the affected populations. The payout covered the costs of food distribution in the three countries, as well as cattle feed support in Senegal and Mauritania and conditional cash transfers in Niger. The relief activities benefited an estimated 1.3 million people. In Mauritania, the early support prevented drought- affected households from resorting to negative coping strategies, such as migrating, reducing the number of meals per day, and selling livestock, which could have had a long-term impact on their future income. An important lesson from the ARC payout in 2015 is that to ensure a timely response to a disaster, establishing ways to channel resources to beneficiaries is as important as mobilizing these resources. In the case of Senegal and Niger, activities were delayed because funds were blocked in the national treasury of each country, for several possible reasons: government financial systems were not in place to receive funding from ARC, processes for procuring food were inefficient, or the distribu- tion of food and cash to affected households was not well organized (Kimetrica 2016). Sahel countries complement insurance with other DRF and budget execution instruments. In Senegal, for example, the gov- ernment complements sovereign insurance by subsidizing agricultural insurance at a micro level so that farmers can transfer risks to the private sector. The government is also developing a disaster risk finance strategy that includes establishment of different instruments to enhance its financial resilience to natural disasters. In addition to mobilizing resources, countries in the Sahel are strengthening budget execution in case of disasters by developing adaptive social protection systems that can expand to provide support to affected households when disasters strike. This is the case in both Niger and Senegal. Source: Kimetrica 2016. a. Senegal received US$16.4 million, Mauritania US$6.3 million, and Niger US$3.3 million. Sovereign risk pools are also emerging as useful the African Risk Capacity (ARC) is a sovereign risk pool mechanisms to support countries in accessing cost-­ that offers governments insurance against droughts. effective risk transfer solutions. Sovereign risk pools ARC is a Specialized Agency of the African Union estab- can (i) build regional reserves to finance losses from lished to help African governments improve their disas- small- and medium-size events; (ii) attract donor support ter planning, preparation, and response capacities. ARC to capitalize a fund; (iii) pool country-specific disaster uses satellite weather surveillance to estimate and trig- risks into one diversified portfolio, thus allowing access ger payouts to countries hit by severe weather events. to international reinsurance markets on better terms Because severe events do not happen at once across than if each country approached the markets individu- the continent, pooling risk among different countries ally; and (iv) build up a better foundation of risk infor- can significantly reduce the cost of financing emergen- mation and management (World Bank 2017a). In Africa, cies and decrease the reliance on external aid. Note that 30 LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC insurance is not considered an appropriate instrument Expanding the penetration of agricultural insurance to meet the needs associated with recurrent and low-­ against weather-related shocks has been seen to severity disasters, since the insurance premiums would de-risk farmers’ production, leading to increasing be relatively costly in these cases. productivity and access to financial services. With insurance, farmers might be more willing to use higher- At present, Lesotho does not have sovereign disas- quality—and usually more expensive—agricultural ter risk insurance in place. Lesotho signed a Memo- inputs (e.g., seeds, fertilizer, machinery, etc.), which randum of Understanding (MoU) with the ARC in 2012. could lead to productivity and income increases. In addi- Through the MoU, both ARC and the government have tion, de-risking agricultural production could encourage committed resources to provide government officials financial institutions to expand their agricultural lend- with capacity development, which includes training in ing portfolios, given that farmers would be less likely to the software used by ARC to monitor droughts in Africa, default on loans due to unfavorable weather conditions. training in different levels of risk transfer, and training in Agricultural insurance could help transfer farmers’ risk, the preparation of operations plans to ensure optimal currently retained by the farmers or the government, to use of any insurance payout. Lesotho has not partici- the international markets. pated in any of the ARC risk pools, however. Other countries in the region have adopted policy Agricultural insurance actions to expand the penetration of agricultural insurance. In Zambia for example, the government has The insurance sector in Lesotho is small but grow- bundled weather index insurance with the Farmer Input ing rapidly. In 2013, there were seven insurance com- Support Programme (FISP) that reaches around 1 million panies operating in the country. Insurance penetration farmers. In Kenya, the government has put in place a was 4.76 percent in 2017, which is above the African 100 percent premium subsidy for livestock insurance in average excluding South Africa (PwC 2018). The main arid and semiarid counties and a 50 percent premium driver of insurance penetration in the country is funeral subsidy for crop insurance. The Government of Lesotho policies. Non-life insurance penetration remains low. In could carry out a feasibility study to explore the poten- 2009, total gross written premium for non-life insurance tial for agriculture insurance in Lesotho. in the country was US$15.66 million, or about 0.84 per- cent of GDP; and gross written premium per capita was US$7.87 (Africa Information Highway 2016). Moreover, 6.2 Budget execution around 2 percent of businesses have insurance (Fin- Social safety nets Scope 2016). Systems to channel post-disaster emergency Agricultural insurance could help households and response to the affected households are as import- businesses manage disaster risks, but the develop- ant as prearranged financing. Using the existing infra- ment of this market is still in the very early stages structure of social protection programs, governments in Lesotho. In 2017, Alliance Insurance, a private insur- can provide poor households with rapid, timely, pre- ance company and the only company offering agricul- dictable, and targeted assistance during and after a tural insurance products, piloted a livestock insurance disaster (see box 5 for the example of Uganda). Social program for the wool and mohair industry. The product protection programs can be scaled up in at least two covered livestock against mortality due to accidents, ways: (i) by providing additional grant money to exist- diseases, and theft. The pilot was rolled out in the dis- ing beneficiaries during a disaster (vertical scale-up), tricts of Mokhotlong, Butha Buthe, Thaba Tseka, and or (ii) by adding newly eligible beneficiaries who have Qacha’s Nek. In Mokhotlong, around 100 farmers were become temporarily vulnerable due to disasters (hori- covered, while only around 30 farmers were covered in zontal scale-up). all the other districts combined. LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC 31 Lesotho is working on a shock-responsive social other areas need to be strengthened, particularly pay- protection system. Lesotho has an extensive social ment systems and coordination between the social protection system that makes regular transfers to its protection and the disaster management agencies. Pay- beneficiaries, covering vulnerabilities throughout the ment systems for social protection programs in Lesotho life cycle. As indicated in section 3.1, Lesotho used its remain relatively expensive, in part as a result of Lesotho’s Child Grant Program to provide additional assistance topography, which includes hard-to-reach areas. In 2017, to existing beneficiaries (vertical scale-up) during the 45.6 percent of the population ages 15 and over had El Niño event in 2015/16 and is currently strengthen- an account at a financial institution or access to mobile ing its social protection system to provide assistance to money. Strengthening its payment systems and in partic- additional vulnerable beneficiaries who are not part of ular mobile money would offer Lesotho two advantages: the regular program (horizontal scale-up) in response to the ability to transfer benefits to recipients at lower cost, shocks. and the flexibility to increase the caseload in response to disasters. While Lesotho’s National Social Protec- As part of its effort to scale up its social protection tion Strategy recognizes the need to strengthen shock- system in response to disasters, Lesotho is currently responsive social protection (GoL 2015a), the need to seeking to update, extend, and strengthen the strengthen coordination between social protection and National Information System for Social Assistance disaster management agencies remains. Closer coordi- (NISSA) database. This would allow the GoL to iden- nation will be key in enabling shock-responsive social tify the poor and vulnerable households affected when protection, which will in turn promote good integration disasters happen, in turn allowing more efficient target- of responses to chronic food insecurity through regular ing of the people in need of assistance. In order to build safety net transfers and temporary assistance through a shock-responsive social protection system, however, vertical and horizontal expansions of safety nets. Box 5: Using Shock-Responsive Safety Nets to Build the Resilience of Rural Households against Natural Disasters in Northern Uganda Background. Uganda’s rural population is predominantly smallholder farmers and pastoralists who are subject to several pro- duction constraints and have limited capacity to cope with recurrent shocks. Vulnerable households in Uganda face consider- able climatic risks, primarily related to drought. World Bank engagement. The US$130 million Northern Uganda Social Action Fund (NUSAF) III project has a US$12 million DRF component. This component provides additional post-disaster support to vulnerable households through an automatic expansion of the NUSAF III Labor Intensive Public Works (LIPW) activities. The component seeks to develop and test a system for rapidly scaling up LIPW in response to shocks in order to build the resilience of beneficiary households. The DRF component was initially piloted in Karamoja, where households are acutely vulnerable to drought. The World Bank Group team worked closely with the Government of Uganda to (i) streamline data collection and analysis to help officials better understand drought conditions in Karamoja and develop an appropriate index to monitor drought; (ii) establish clear triggering rules for disbursement of funds from the DRF mechanism; and (iii) establish a US$10 million reserve fund (using project resources) that can be drawn down to finance the expansion of LIPW. Impact. The 2016 El Niño caused widespread drought in the Karamoja region. The parametric index developed under the NUSAF project captured the drought and triggered a scale-up of LIPW. As a result, US$4.1 million was disbursed to finance disaster assistance to approximately 30,000 households, or 150,000 people, in Karamoja. These numbers were in addition to the core beneficiaries of approximately 5,000 households—or nearly 25,000 people—who were already receiving assistance. Over the life of the operation, the DRF component of NUSAF III is estimated to finance the cost of scaling up LIPW to a total of 80,000 additional households (400,000 people). Source: World Bank 2017b. 32 LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC Figure 11: Government disaster risk financing approaches: Existing vs. proposed 70 60 Funding available (US$ million) 50 40 30 Reserve fund 20 Emergency ex post budget reallocation Ex post sovereign borrowing 10 Line of contingent credit 0 Insurance Existing approach Proposed approach A Proposed approach B 6.3 Comparing disaster risk financing estimated cost of US$1 million per year and an average annual payout of US$0.7 million. For severe shocks, the approaches sovereign insurance payout would increase—for exam- The GoL faces a significant funding gap in case of ple, up to US$5.3 million for a shock that occurs on disaster shocks. If the most recent disaster, the El Niño average once every 20 years. It is assumed that the gov- event in 2015/16, is taken as an example of the GoL’s ernment could borrow resources after a disaster when existing approach, no more than US$21 million could other available resources are depleted. be mobilized through a budget reallocation to respond Figure 12 presents the expected costs of funding disaster to disasters. Based on the estimated costs of response response under the existing and proposed approaches to shocks with different return periods, there would be for different return periods. The expected costs of fund- a funding gap for shocks that happened every 10 or ing shown in figure 12 are higher than the estimated more years. For a 1-in-25-year disaster, approximately average losses due to disasters (shown in figure 8), due US$39.4 million would be required to respond, leaving to the costs associated with the financial instruments a US$14.4 million funding gap to be addressed by the used to mobilize resources for funding the response. GoL or donor partners. Under the existing approach, the analysis assumes that Figure 11 compares Lesotho’s existing approach with two budget reallocations carry a high opportunity cost by proposed approaches, A and B. The existing approach pulling resources away from other planned investments considers that GoL can mobilize only US$21  million that would otherwise have a return.15 through budget reallocation. The proposed approach A The GoL could achieve significant cost savings under includes a contingency fund of US$10 million (exclusively the proposed approaches. Based on the evaluation for disaster response) and a contingent line of credit of framework developed by the World Bank for risk financ- US$20 million. The proposed approach B further consid- ing instruments (World Bank 2014), both proposed ers sovereign insurance on top of the contingency fund approaches would lead to an average savings on disas- and contingent line of credit. The sovereign insurance ter response costs of US$4 million per year. Furthermore, instrument assumes that the GoL transfers 70  percent for extreme shocks, the proposed approaches would of the risk to capital markets and retains 30 percent for potential losses over US$30 million. With these characteristics, the sovereign insurance would have an 15 The analysis assumes a social rate of return on investments of 12 percent. LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC 33 Figure 12: Expected costs of funding disaster response (US$ millions) 100 Expected cost of funding loss 90 86 80 73 75 70 62 (US$ million) 60 50 45 44 40 40 32 33 32 30 24 25 26 20 20 20 10 0 Annual average 1-in-5-year 1-in-10-year 1-in-50-year 1-in-100-year Existing approach Proposed approach A Proposed approach B Source: World Bank calculations based on LVAC data. lead to even more significant cost savings: US$11 mil- which is costly during disaster scenarios.16 Further- lion and US$42 million under proposed approach A and more, introducing insurance under proposed approach proposed approach B, respectively, for a 1-in-100-year B reduces funding costs significantly for extreme and event. These saving arise in part by avoiding budget infrequent shocks (see figure 12). reallocations and in part by limiting ex post borrowing, 16 The analysis assumes an ex post borrowing rate of 12 percent. LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC 35 Key recommendations The GoL largely relies on post-disaster government to the fund to ensure sufficient funding is avail- budget reallocation and donor assistance to finance able in the event of a disaster. Resources not post-disaster response. This approach has often used in a given year could be rolled forward for resulted in uncertain and insufficient funding, as well as future use. Drawing on its experience in other delays in response. The following recommendations are countries in the region, the World Bank could designed to help improve Lesotho’s financial resilience offer technical assistance to the GoL in setting to disasters: up this fund. 1. Develop and adopt a national disaster risk n Accessing a contingent line of credit. The financing strategy. Such a strategy could formal- GoL could consider complementing the contin- ize the policy priorities of the GoL for financing gency fund by establishing a contingent line of disaster response. Based on these policy prior- credit, such as a World Bank Cat-DDO. Through ities, the GoL could then seek to establish both a Cat-DDO, the GoL could have access to a budget mobilization and budget execution sys- contingent line of credit of up to US$20 mil- tems to protect the relevant stakeholders from the lion, which could provide immediate liquidity impacts of shocks. To mobilize funding, GoL could to address shocks related to natural disasters. explore the appropriateness of different financing Funding mobilized through a Cat-DDO could instruments as part of a risk layering strategy. This help meet the needs associated with more work could be led by the Ministry of Finance with severe disasters that exceed the budget of the support from international partners. contingency fund. 2. Increase the amount and improve the timeliness n Purchasing sovereign insurance. Insurance can of resources mobilized for disasters, including provide timely liquidity needed for response to through the following means: infrequent and severe disasters that have the potential to cause large damages. An insurance n Setting up a dedicated contingency fund for policy could be structured to provide addi- disasters so it can provide timely resources tional funding when the costs of responding to in response to recurrent natural disasters. disasters exceed the GoL contingency fund and A contingency fund could be used to meet contingent line of credit. The GoL has already the costs of response to frequent, less severe participated in exploratory discussions with the disaster shocks. Lesotho has made significant African Risk Capacity on sovereign insurance progress in setting up contingency funds and solutions. now has such funds both in the MoF and in the DMA. These funds are a solid foundation 3. Strengthen budget execution systems for tar- to build upon, but their resources are often geted support to affected households, includ- not enough to cover disaster-related costs. ing through these means: The GoL could consider setting up a disaster-­ n Leveraging shock-responsive social protec- dedicated contingency fund within the Ministry tion to deliver early assistance to poor and of Finance with clear rules for the replenish- vulnerable households after a disaster. Unlike ment and disbursal of the resources. Specifi- a food price subsidy, social protection could cally, regular budget allocations could be made 36 LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC be used to deliver targeted assistance to the fund; requirements of pre-negotiated contracts people who need it the most. This approach for the delivery of specified goods; require- could leverage the existing social protection ments for auditing the use of funds and trans- program systems. Further key steps in enabling parency; and the role that different government shock-responsive social protection include entities play in channeling assistance to end designing a mechanism allowing social protec- beneficiaries. Together with the DMA, the MoF tion programs to scale up in response to disas- could lead the development of the operational ters; developing supporting systems, such as rules for disaster risk finance instruments such NISSA and e-payments, to channel resources as a disaster-dedicated contingency funds and to affected beneficiaries; and making resources Cat-DDOs. available to finance scale-ups. The Ministry 4. Explore the feasibility of agricultural insurance. of Social Development is already conducting The GoL could explore the feasibility of agricul- some of these activities, in coordination with tural insurance in Lesotho as part of a broader the DMA and with the support of development agriculture risk management and finance agenda. partners. Through a feasibility study, the MoF could work n Developing strong operational rules for the with the Ministry of Agriculture to explore the disbursement of disaster risk finance instru- potential for agricultural insurance in Lesotho. ments. The operational rules would clearly out- By acting on the above recommendations, the GoL could line the eligible expenditures for immediate ensure that sufficient and timely financial resources are disaster preparedness and response. The rules available to meet the financing needs associated with could specify (among other things) the mecha- disasters of different frequencies and severities. nism for triggering the use of fund resources; the rules for requesting resources from the LESOTHO: DISASTER RISK FINANCING DIAGNOSTIC 37 References Africa Information Highway. 2016. African Financial Sec- Hallegatte, Stephane, Adrien Vogt-Schilb, Mook Banga- tor Database. http://dataportal.opendataforafrica lore, and Julie Rozenberg. 2017. 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