Contingent liabilities from natural disasters: Sri Lanka

The objective of this report is to identify and quantify the liabilities that may arise when natural disasters occur in Sri Lanka, and to present options to manage them. Expenditures made in response to disasters are referred to as disaster-related contingent liabilities. These expenses arise only if a contingent event, such as a disaster, happens. The quantity of contingent liabilities is determined by the frequency and severity of natural hazards, the exposure and vulnerability of people and assets, and the response of the government to events. On average, Sri Lanka experiences LKR 50 billion (US$313 million) in annual disaster losses related to housing, infrastructure, agriculture, and relief. Most of this figure, LKR 32 billion (US dollar 200 million), is accounted for by losses from floods. Cyclones or high winds account for LKR 11 billion (US dollar 68 million), with droughts and landslides accounting for LKR 5.2 billion (US dollar 32 million) and LKR 1.8 billion (US dollar 11 million) respectively. This is equivalent to 0.4 percent of gross domestic product (GDP) or 2.1 percent of government expenditure. These losses place a large financial burden on the Government of Sri Lanka (GoSL). With a better understanding of the financial burden disasters pose for the GoSL, the Ministry of Finance will be further empowered to develop and implement suitable mitigation and management strategies. Identifying and quantifying liabilities that may arise when natural disasters occur is important for Sri Lanka, which is subject to acute climate and financial vulnerability. Sri Lanka was ranked second among countries most affected by extreme weather events in the last 20 years by the Global Climate Risk Index 2019. Moreover, Sri Lanka is also financially vulnerable with a high level of public debt (77 percent of GDP), substantial debt repayments in recent years, and large amounts of contingent liabilities held in state-owned enterprises (estimated to be 14 percent of GDP). With a better understanding of both disaster and financial vulnerability, the GoSL can develop appropriate strategies to manage these areas of risk. In this context, the World Bank– Global Facility for Disaster Reduction and Recovery (GFDRR) Disaster Risk Financing and Insurance Program is collaborating with GoSL to define, assess, and quantify the costs affecting GoSL after a disaster happens. Increased understanding and accurate quantification of post-disaster liabilities will help GoSL make informed decisions about how to best to manage these liabilities. The expectation is that having assessed risks, the government will be better able to secure financing, use and monitor funding, and reduce financial risk. Securing financing may include integrating disaster risk into fiscal risk and public debt management, improving the post-disaster budget response capacity, and clarifying post-disaster financial assistance. Effectively managing disaster risk should also help reduce the negative impact of fiscal shocks to the economy,