Nepal and the World Bank are exploring a catastrophe bond to improve disaster financing after devastating floods caused an estimated $1.66 billion in damage….reports Asian Lite News Desk
Nepal and the World Bank are exploring a catastrophe bond that could provide the Himalayan nation with faster access to funds following a major natural disaster. A newly signed mandate agreement will assess the feasibility of the financial instrument, which could help Nepal transfer part of its disaster risk to international capital markets.
The agreement between Nepal and the International Bank for Reconstruction and Development (IBRD), part of the World Bank Group, marks the beginning of a collaboration to evaluate the proposed bond’s structure and viability.
Under the agreement, the World Bank Group Treasury will work with the Nepal government and market participants to assess the potential transaction, the World Bank said in a statement.
The initiative comes as Nepal seeks to strengthen its financial preparedness for natural disasters following devastating floods in the Bhotekoshi and downstream Trishuli river basins on August 26.
According to Nepal’s National Disaster Risk Reduction and Management Authority, the floods killed nearly 1,500 people, while more than 5,000 remain unaccounted for. The disaster was triggered by an avalanche near the Nepal-China border that blocked the river’s flow.
The resulting floods swept away several settlements, a dozen hydropower projects, a solar plant, and numerous roads and bridges. Physical damage was estimated at $1.66 billion, according to the World Bank’s Global Rapid Post-Disaster Damage Estimation report.
How a catastrophe bond could help Nepal
A catastrophe bond is a financial instrument that enables governments and other entities to transfer specified disaster risks to investors. Depending on the terms, investors could lose part or all of their principal if a defined disaster occurs, allowing the funds to support the affected entity.
“Such instruments can provide an alternative source of disaster financing, potentially enabling governments to access funds more quickly than relying solely on budget reallocations or post-disaster assistance,” the World Bank said.
Also Read: How A Nepal Landslide Triggered Flood Surges Up To 25 Metres
If developed, the proposed bond could give Nepal an additional source of financing to respond to major natural disasters, reducing its reliance on reallocating public funds or waiting for post-disaster assistance.
The World Bank said Nepal is highly vulnerable to earthquakes, floods, landslides and other climate-related hazards. Such events can damage infrastructure, disrupt economic activity and place significant pressure on public finances.
World Bank support for disaster financing
The proposed initiative forms part of the World Bank Group’s established catastrophe bond programme, which has helped countries access international capital markets to transfer disaster risks and obtain financial protection against natural hazards.
The World Bank also supports countries through disaster risk financing programmes, contingent financing and insurance solutions, alongside assistance in developing comprehensive financial strategies.
“A risk financing strategy helps clients determine a balance between retaining risk, for example, through a contingent financing product, and transferring risk, for example, through an insurance product,” the World Bank said.
The appropriate combination of financial instruments depends on the hazards a country faces and the frequency and severity of disaster events.
Developing countries are particularly exposed to the economic and fiscal consequences of disasters because of insurance gaps, inadequate infrastructure resilience and the concentration of populations and economic activities in vulnerable areas.
After a major disaster, governments often have to redirect public spending towards emergency response, relief and reconstruction, potentially affecting other development priorities, the World Bank said.
The proposed catastrophe bond remains at the assessment stage, with the mandate agreement initiating work to determine its feasibility and potential structure. Its development could form part of Nepal’s broader efforts to strengthen financial resilience and improve its capacity to respond to future disasters.
