Sierra Leone

Sierra Leone: Crisis and Disaster Risk Finance Diagnostic

Attachments

Executive Summary

Sierra Leone remains vulnerable to the financial impacts from a variety of disaster-related shocks and crises, including large annual floods, epidemics like Ebola, and man-made hazards such as severe fires. As a country, Sierra Leone is very reliant on ex post assistance for response and recovery. For instance, in the aftermath of the Ebola outbreak, over US$700 million was received in financial assistance from development and humanitarian partners. Whether in the aftermath of regular flood events or large flood and landslide events such as those in 2017, the country remains dependent on aid from international partners. But despite regular donor inflows for disaster response, Sierra Leone remains without a robust system for tracking use of donor funds. Given this long-standing support from donors, the lack of well-developed systems for response, and the vast competing development challenges that must be managed with a fiscally constrained budget, Sierra Leone’s shift toward proactive financial planning will take time. Sierra Leone has been establishing institutional structures to improve its management of disasters. The Parliament recently enacted the National Disaster Management Agency (NDMA) Act of 2020. It outlines the entire institutional architecture to manage disasters and similar emergencies, from the chiefdom to the national level. The act also details the need to establish the NDMA, including a functioning board to govern it. The act clearly delineates the functions of the NDMA, as well as the roles for the agency’s chiefdom, regional, and district offices. To be able to effectively respond to disasters, the country needs to invest much more in proactive risk management and build its capacity for emergency preparedness and response. In 2020, the country decided to take the first step toward systematically planning for financial impacts from future disasters. The Ministry of Finance requested that the World Bank undertake a crisis and disaster risk finance diagnostic. The result is this report, which aims to (i) assess the impacts of past events; (ii) assess the current approach for financing such events; (iii) estimate the resource gap based on losses from historical events and the resources available to manage those losses; and (iv) propose options for creating a set of instruments linked to delivery channels as a means of moving toward more proactive financial planning. While undertaking this analysis, the World Bank team encountered challenges related to the scarce availability of data on historical crises and disasters, particularly concerning government expenditures. The team therefore expanded its approach and used humanitarian data to estimate potential losses from past events, determine average response costs, and extrapolate government expenditures for years where such information was not available. The necessity of this approach highlights the need for better tracking of expenditures. Robust historical data on post-disaster costs are essential for designing any financial solution the government may choose to establish. At present, the country does not have any pre-arranged financial instruments in place. It also lacks any data-driven decision-making process for how and when the use of disaster-related funds should be triggered, and it further lacks adequate systems to trigger emergency funds quickly and securely, and to ensure necessary fiduciary safeguards are in place for use of these funds. The only budgetary instrument available to the government is the Contingencies Fund in Section 36 of the Public Financial Management Act of 2016. This fund is not to exceed 2 percent (equivalent to US$11 million or Le 113 billion) of non-extractive industries revenues presented in the main estimates of the financial year. However, this is insufficient to cover the costs of most historical disasters for which data are available. In this context, to reduce reliance on post-humanitarian finance, countries typically create different instruments that can respond to shocks of varying magnitudes. Sierra Leone does have experience enabling post-disaster emergency cash transfers to affected populations through social protection systems. For instance, in the past decade, the country utilized such a mechanism three times: first, to respond to the Ebola outbreak in 2014–2015; second, to respond to the 2017 mudslides and floods; and most recently to respond to the COVID-19 pandemic. However, in each case, the systems were adjusted following the particular disaster event. Developing systematic shock-responsive systems linked to pre-arranged finance would offer quicker and more efficient government responses. This diagnostic presents a few recommendations for the government’s consideration, specifically on how to strengthen financial planning to manage future shocks and crises: • Post-disaster expenditure tracking: The availability of robust data on historical losses and expenditures is fundamental to making sound financial planning decisions. The government should strengthen its public financial management systems, particularly by more robustly tracking post-disaster budget expenditures on an annual basis. In most countries, this effort is led by the ministry of finance. Tracking such expenditures would allow the government to make informed decisions about how to manage these costs; it would also help the government determine which risks to hold on its balance sheets and which to transfer to international markets. • Trigger mechanisms: Currently, the country does not have a very robust process for triggering a declaration of disaster. There is also little evidence of rules for what constitutes eligible expenditures following disasters. The government could review the existing structure for triggering a disaster and develop a more robust process for formulating objective decision-making criteria. Rules could also be developed for pre-identifying eligible expenditures, pre-negotiating contracts, and auditing the use of funds. • Pre-arranged finance: Based on the diagnostic, the country can consider how to move toward more strategically planning its finances to manage disaster shocks. This effort could include setting priorities for the kinds of instruments the government can prioritize for development and criteria for when such instruments would be used. Based on these policy priorities, the government could then seek to establish budget mobilization and execution systems to protect the relevant stakeholders from the impacts of shocks. For example, this could include the following actions: »» Establishing a dedicated contingency fund for disasters to provide timely resources in response to recurrent natural disasters »» Securing a contingent line of finance, such as a World Bank Catastrophe Deferred Drawdown Option (CAT-DDO), that could complement the Contingencies Fund and be triggered for slightly more severe events »» Purchasing market-based instruments over time, such as an insurance policy, which could be structured to provide additional funding when the costs of responding to a disaster exceed the amount in the Contingencies Fund and contingent line of credit • Pre-identified disbursement channels: The country has used social protection mechanisms to deliver postdisaster assistance on three occasions. In each scenario, systems were developed on an ad hoc basis after the event. Given that the country has already seen the value of using safety nets as post-disaster delivery channels, the government may wish to consider building longer-term systems linked to pre-arranged finance and using modern digital payment systems. Such systems could then be activated to respond to disasters. This approach would also help in coordinating the post-disaster flow of funds, thereby reducing delays in delivering assistance. The analysis in this report offers two proposed financial strategies, based in part on assumptions that helped to generate relevant data (given the scarcity of existing data). The strategies should therefore be viewed only as a tool to advance dialogue in the country so that Sierra Leone can develop its own risk financing strategy. By itself, the analysis in this report cannot justify the size of instruments that are being proposed as part of the government’s financial planning toolkit. Rather, the recommendations should be viewed as indicative and as intended to prompt thinking about how to prioritize the instruments the country would like to develop following technical work on the prioritized instrument(s). Developing any instrument would require more in-depth technical and financial modeling as well as establishing associated systems and delivery channels.