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ZIMBABWE DISASTER RISK FINANCE DIAGNOSTIC Summary

Core Content

This report provides an in-depth assessment of Zimbabwe's disaster risk finance (DRF) framework, focusing on institutional, legal, and financial preparedness. It outlines the impact of past disasters, analyzes the current status of risk financing instruments, and offers strategic recommendations to improve financial resilience against climate-related shocks and natural disasters.

Main Points

1. Climate Risk and Disaster Impact

• Climate Risk Profile: Zimbabwe is ranked as a medium- to low-risk country by the World Risk Index, but it faces high impacts due to socioeconomic vulnerability and limited coping capacity.
• Disaster Types: Droughts, floods, and storms are the most significant natural perils, with droughts having the most severe economic and social consequences.
• Historical Impact: Between 1975 and 2022, Zimbabwe experienced 57 disaster events, resulting in total economic losses of at least US$7.5 billion, most of which were uninsured.
• Drought Impact: Drought has affected 95% of disaster-impacted people, with extensive damage to productivity, livelihoods, and food security.
• Flood Impact: Floods occur more frequently than storms but have localized effects. On average, they result in US$94 million in economic losses.
• Storm Impact: Storms account for about a fifth of total damage but affect only 1% of the population, primarily through damage to physical assets and infrastructure.
• Health Disasters: Cholera and typhoid outbreaks account for nearly half of all disaster events and have been the deadliest, though death tolls from drought are hard to estimate due to indirect effects.

2. Legal and Institutional Framework

• Legal Status: The legal framework is relatively well developed, with the Civil Protection Act of 1989 outlining roles at different government levels. However, it lacks provisions for ex ante financing and disaster response disbursement mechanisms.
• DRM Bill: A new Disaster Risk Management and Civil Protection Bill is under preparation to address these gaps and replace the outdated Civil Protection Act.
• Institutional Coordination: The Department of Civil Protection (DCP) centrally coordinates disaster risk management (DRM), with some roles decentralized to the village level. The Cabinet Committee on Environment, Disaster Prevention, and Management oversees DRM, involving all 17 ministries.
• Early Warning System: The DCP manages an early warning system, working with public and private institutions, including development partners.

3. Risk Financing Instruments and Mechanisms

• Pre-arranged Funds: Zimbabwe has limited pre-arranged funds for disaster response, with only US$33 million available.
• Sovereign Parametric Insurance: Zimbabwe has used African Risk Capacity (ARC) drought insurance since 2019/20, but coverage is minimal.
• Ex Ante Funding: Includes drought mitigation fund, flood mitigation fund, and general contingency reserve, though these are not well utilized for disaster response.
• Ex Post Funding: Mainly sourced from budget reallocations, which amounted to US$600 million (12% of the budget) during the 2016 drought.
• Social Safety Nets: Limited, with only 0.4% of GDP allocated to social protection, far below the Sub-Saharan average.
• Insurance Market: Non-life insurance is smaller than regional peers but comparable to other middle-income countries. Only 3% of adults and 4% of MSMEs have insurance policies.

4. Financial Markets and Economic Context

• Macroeconomic Instability: Zimbabwe is a lower middle-income country with GDP per capita of US$1,267. The economy has been unstable, with GDP growth highly volatile and inflation above 100% since 2018.
• Capital Markets: The Zimbabwe Stock Exchange (ZSE) and Victoria Falls Stock Exchange (VFEX) are underdeveloped. VFEX, launched in 2020, has a market cap of US$341 million.
• Financial Inclusion: Limited, with only 15% of adults having access to formal financial services. This restricts the ability of households and businesses to manage financial shocks.

5. Funding Gap and Risk Financing Strategies

• Funding Gap: The average annual cost of disaster response is US$81 million, but pre-arranged funds are only US$33 million, creating an annual funding gap of US$48 million.
• Risk Layering: Current strategy involves US$33 million reserve funds and budget reallocations. More robust strategies (Strategy B and C) propose increasing reserve funds to US$60 million, adding contingent credit/grants of US$142 million, and introducing sovereign multi-peril insurance with maximum payouts up to US$360 million.
• Impact of Shocks: The cost of disaster response can reach US$540 million for 1-in-50-year events, highlighting the need for improved financial preparedness.

Key Recommendations

6.1 Improve the Policy Framework, Public Financial Management, and Risk-Informed Decision-Making

• Short Term: Develop a comprehensive disaster risk finance strategy, fast-track the adoption of the DRM Bill, and strengthen the technical capacity of MoFED.
• Medium Term: Implement a public expenditure tracking system, develop a system for proactive budget reallocations, and create a public asset management policy.
• Long Term: Establish a dedicated multi-year disaster reserve fund and build a national database on natural disaster occurrences and impacts.

6.2 Strengthen the Financial Sector and Enhance the Use of Insurance

• Short Term: Scale up agricultural insurance, review the AYII pilot design, and consider public-private partnerships (PPPs) for insurance awareness and capacity building.
• Medium Term: Develop a capital market strategy to support contingency and climate finance, and support insurance awareness creation among farmers and MSMEs.
• Long Term: Explore risk transfer solutions to protect the national budget from drought impacts on electricity and other critical sectors.

6.3 Strengthen Existing Instruments and Adopt New Risk Financing Instruments

• Short Term: Conduct a feasibility study on public asset insurance and review the national public asset registry.
• Medium Term: Implement a PPP-based public asset insurance program to protect against floods and tropical cyclones.
• Long Term: Strengthen the institutional capacity of the social protection system and improve shock responsiveness.

Conclusion

Zimbabwe is in a polycrisis, facing climate-related disasters, the COVID-19 pandemic, and a growing macrofiscal and food crisis. A stable macroeconomic environment is essential for improving financial resilience at all levels of society. The report emphasizes the need for a comprehensive national DRF strategy, stronger legal and institutional frameworks, and enhanced use of insurance and other financial instruments to reduce the impact of disasters and improve long-term resilience.