The World Bank is looking to issue its first drought bond in the next 12 to 18 months with an aim of expanding its offering of catastrophe bonds to further support countries suffering devastation from storms and earthquakes.
The drought bond would be a new instrument in the multilateral lender’s suite of so-called cat bonds (catastrophe bonds). They are fixed-income instruments that pay out to countries in the event of a natural disaster.
The World Bank has previously issued cat bonds through its lending arm, the International Bank for Reconstruction and Development (IBRD) to help emerging economies mitigate natural disasters. It has made $568 million of insurance payouts on these instruments.
The vast majority of the World Bank’s existing cat bonds cover countries in the Pacific and Caribbean regions, with Mexico dominating issuance. The bank was now in talks with more countries to broaden the geographic scope. Issuing drought bonds, however, comes with a host of challenges, the primary being that the World Bank needs data and history to model the bonds.
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In addition, the World Bank recently offered vulnerable, low-income countries the option of introducing clauses into their borrowing that would allow governments to defer repayments for up to two years if they experienced a severe natural disaster.
So far, seven countries have signed up for the Climate Resilient Debt Clauses (CRDC): Bahamas, Barbados, Belize, Grenada, St. Lucia, St. Vincent and the Grenadines, and Montenegro.
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