Tracking funding to the Covid-19 response: Improving multilateral targeting

The Centre for Disaster Protection's previous blog provided a first assessment of financial flows from multinational institutions targeted to help countries manage the health and economic consequences of Covid-19. They found that, as of 22 May 2020, a total of US$39 billion had been committed. The funds committed are substantial, reflect new money in some cases, and are being disbursed.

However, because the international system relies on the equivalent of low-interest credit cards to help countries manage crises, our assessment shows that poorer countries have access to less cash to manage the crisis. More cash has been made available in the places that have the largest economic losses, but not the places where poverty will increase most because of Covid-19. If this pattern continues throughout the crisis, the global response might manage the economic fallout very well – but it will not put people back on a secure path out of poverty.

As funds continue to be committed, we need to watch closely and ensure that funds are directed to countries and programmes that allow the poverty impact of the crisis to be reduced. This may require providing more funds on grant terms. Our findings also highlight the need for reform in how the world pays for crises in the first place. Low-interest credit cards are important, but not enough. We also need good insurance.

Funding has prioritised economic losses and not poverty increases

So far, the funding has disproportionately gone to better-off countries. The funds received per capita are higher for those living in richer middle-income economies and lower for those living in countries with higher poverty rates. This may partly reflect the fact that this crisis, so far, is hurting richer countries more. Richer countries have had larger caseloads and larger predicted growth impacts.

Are funds going to countries that have experienced the largest Covid-related losses? The funds received per capita are higher for countries that are ranked as having a higher pandemic risk (Inter-Agency Standing Committee/European Commission INFORM COVID-19 Risk Index)

Figure 1: Benchmarking loan commitments against Covid-19 risk

Source: Centre for Disaster Protection INFORM COVID-19 Risk Index (release: 17 April 2020 v.0.1.2).Note: Loan commitments as of 22 May 2020

The funds received per capita are also higher to countries with a bigger expected shock to gross domestic product (GDP) growth (economic growth estimates from the IMF).

Figure 2: Benchmarking loan commitments against estimated impact on GDP

Source: Centre for Disaster Protection, based on IMF Economic Outlook 2020 GDP estimates.Note: Loan commitments as of 22 May 2020

But countries with the highest expected poverty impacts have received less per capita, showing that funds have been directed towards economic losses rather than the places where poverty will increase most because of the crisis (US$1.90 poverty rate estimates from the World Bank).

Figure 3: Benchmarking loan commitments against estimated impact on poverty

Source: Centre for Disaster Protection, based on World Bank poverty impact estimates.Note: Loan commitments current as of 22 May 2020

Financing disaster response with loans has challenges

This unequal allocation of funds likely reflects the fact that the largest financial flows are loans. Richer countries are better able to pay loans back, so they can access more money. It just isn’t possible to lend the same amount of per capita financing to a poor country at high risk of debt distress as a middle-income country that will be in a better position to pay it back. This is true even though the loans given to the poorest countries are highly concessional (provided at zero or very low interest rates with a 5–10-year grace period). Given loans are the largest overall source of financing in a disaster, disaster finance goes to those that can take loans.

In fact, the World Bank explicitly allocated its lending proportional to GDP. The allocation proposal that was approved by the World Bank board in March stated that ‘Each country would have access to 0.1 percent of GDP subject to floors and caps.’ This allocation rule also reflects the financial position the World Bank was in when the crisis struck. The pandemic hit four months before the IDA replenishment (1 July) leaving IDA countries with access to only what was left in the pot. IBRD had more additional money to lend. Last year half of the money the Bank lent was to IDA countries. In contrast only 32% of anticipated Covid-19 lending was expected to go to IDA countries. The lending from the IMF has followed a similar pattern.

The grants that have been committed to countries through the UN GHRP are more likely to be directed to poorer countries. These funds do make the overall picture more equitable – but these grants are small compared to the overall flows, so they do not make a big difference to the amount of money available to countries now (even though their overall grant value is much higher than a loan).

What needs to change?

More grants and concessional funds are needed to address the lack of funds going to countries experiencing larger poverty impacts. We will monitor whether this situation improves when IDA-19 becomes available from 1 July.

We need to take note of the design flaws in the current system (even while we celebrate that much is working well). Responding to crises with large amounts of lending and small amounts of grant funding inevitably leaves some countries out. Countries, just like people, need insurance when disaster strikes, as well as low interest credit cards. The world needs good development insurance, not just development banks, if countries are to be well-protected against large humanitarian and economic shocks.

A version of this blog was originally published by the Centre for Disaster Protection.

Resources on full results, methodology and datasets are also available.

Over the next few months, the Centre for Disaster Protection will be tracking humanitarian and development funding directed at helping low- and middle-income countries manage the health and economic costs of Covid-19. Future publications by the Centre will examine many of these issues in more depth, and highlight specific countries where needs appear to be great, but funding for response is low.

The author list in this blog has been randomised using the author randomisation tool on the American Economic Association website.