World Bank Plans to Issue First Drought Bond and Expand Catastrophe Bond Offerings
The World Bank is considering issuing its first drought bond within the next 12 to 18 months and expanding its catastrophe bond offerings to support countries devastated by storms and earthquakes. The drought bond would be a new instrument in the World Bank's range of "cat bonds," which are fixed-income financial instruments that make payments to countries in the event of a natural disaster.
Over the past decade, the World Bank has established and issued catastrophe bonds through its subsidiary, the International Bank for Reconstruction and Development (IBRD), to help emerging economies mitigate the consequences of storms and earthquakes. It has paid out $568 million in insurance indemnities through these instruments.
The majority of the World Bank's existing cat bonds cover countries in the Pacific and Caribbean regions, with Mexico being the largest issuer. This time, there is a high probability that the mobilized resources will focus on Africa. The Southern African region is currently experiencing a severe drought, caused by the natural phenomenon of El Niño and higher average temperatures due to greenhouse gas emissions.
Since last year, the World Bank has offered vulnerable low-income countries the option to include clauses in their loans from the bank, which would allow governments to defer repayments for up to two years if they are hit by a severe natural disaster. No African country has taken advantage of this option yet. The planned issuance would provide an opportunity to extend this mechanism to countries on the continent.