What we learned from a recent literature review of disaster risk finance, public financial management and COVID-19
Responding to a pandemic is expensive. So, as countries around the world grapple with the COVID-19 outbreak, they also ask: How will they pay for it? What other challenges can they expect for their public financial management (PFM) systems? And how can they better prepare for them in the future?
The Maintains programme is undertaking research in six countries on what it takes to build health, education, nutrition, and social protection systems that can quickly respond to shocks such as a pandemic. Finances are critical: if there is no money to pay for the response, there is no response. In times of COVID-19, public finances can become a question of life and death. We asked ourselves: How do public finance systems cope with a pandemic in low- and lower middle-income countries (LICs and LMICs)? What can be improved? For this, we looked at the latest research and commentary.
Key findings include:
- Despite the much-studied Ebola outbreak in West Africa in 2014-16, and despite more innovative financial instruments being used by LICs and LMICs to counter risks from natural hazards, health shocks seem to have been largely ignored by financial planners, leaving financial systems unprepared.
- Key challenges for PFM systems include resource mobilisation, rapid budget execution and maintaining effective controls.
- Many LICs and LMICs increasingly use innovative financial mechanisms to better manage the financial costs of natural hazards such as droughts and storms. “Disaster risk financing” (DRF) holds useful lessons that could be applied to managing health shock risks more effectively, too.
- To be better prepared for future health shocks, experts agree that countries need to invest more in preparedness, including financial preparedness. The international community should create stronger incentives for countries to invest.
Large health shocks engender direct cost, mostly related to the response, recovery and potentially needed fiscal stimulus. They can also create indirect losses such as workforce absenteeism, wages not earned, lower tax revenue, informal health costs (e.g. for patient transport), impacts on the health workforce, agriculture sector losses, reduced tourism and travel, reduced trade and retail activity, environmental impacts, and educational losses.
Researchers have attempted to model the potential economic cost of a pandemic, though they face the challenge that many of the greatest potential diseases remain under-researched. Estimates range from an annual expected loss of USD 60 billion, to USD 500 billion, 2.2-4.8% of global GDP, or even 5% of global GDP for a severe pandemic like the 1918 Spanish influenza.
Current economic loss estimates for COVID-19 vary widely, given the many uncertainties and the unprecedented scale of the event. Many expect the global downturn in 2020 to be worse than that in 2008. Health impacts may be worse for LICs and LMICs – social distancing may be harder to implement, health and nutrition services were weak at the outset, influenza vaccination rates low, supply chains vulnerable, resources extremely constrained, and debt levels already high. LICs and LMIC economies will be badly affected – the World Bank (WB) expects economic losses of USD 37 – 79 billion (2.1 – 4.6% of GDP) in Sub-Saharan Africa – but may be better insulated than in higher-income countries: For example, the International Monetary Fund’s (IMF) World Economic Outlook for 2020 projects GDP growth to be -6.1% in advanced economies but +0.4 percent in LICs.
Impact on public finances in LICs and LMICs
Health-related shocks can have a serious impact on government revenues, including lost VAT receipts, lost taxes on companies, lost income tax (as people file for unemployment or are forced to take unpaid leaves of absence), lost indirect taxes, or loss of human capital. This was the experience in all three countries affected by the West African Ebola outbreak 2014-16 .
The source of reallocated budget for response is often other health expenditures, leading to funding shortages there. For example, the West African Ebola crisis caused disruptions to maternal and neonatal care in Liberia, as health facility staff and resources were redirected to the response. And during the most recent Ebola outbreak in the Democratic Republic of Congo, the lack of vaccinations helped create one of the largest measles outbreaks in a single country since the vaccine was invented in 1963.
LIC and LMIC response to large health shocks
Large health shocks tend to require additional funds to finance response cost and possibly fiscal stimulus, and thus often engender a fiscal shock. But many LICs and LMICs lack strong PFM systems, impeding their capacity to respond swiftly and effectively. So financial shock response of LICs and LMICs is often characterised by a lack of preparation, a lack of speed, and dependency on donor contributions.
For example, in Ethiopia, a review of government financing practices of health-related emergencies showed that funding tended to be insufficient, slow, and that the vast majority came through external humanitarian donors. In Sierra Leone, anecdotal evidence points towards financing for health shocks being structurally arranged ad-hoc, often arriving late, and being unreliable. And in separate Joint External Evaluations of the Central African Republic, the Republic of Congo, Gabon, Guinea-Bissau, Malawi, and São Tomé e Principe, the WHO recently found, for each country, that health shock contingency funding mechanisms were largely unavailable and that health emergency response efforts were strongly dependent on donor support.
Generally, fiscal shocks such as those triggered by large health shocks, require swift adjustments on the revenue and on the expenditure side:
- On the revenue side, it is key to mobilise response funds quickly. Various instruments can help countries access funding, including contingency funds, budget reallocations, debt instruments, risk transfer solutions such as insurance, or donor support. In many LICs and LMICs, these are often not in place, and countries instead rely on donor support which can be slow and unreliable, thus, literally, costing lives. From dealing with natural hazards such as droughts, floods, and tropical storms, we have learned that it is much more effective to plan in advance how to respond to a potential shock and how to finance it.
- On the expenditure side, the goal is to enable rapid disbursement of funds while maintaining effective controls. However, effective controls are challenging for many LICs and LMICs even during normal times. Some countries allow for emergency procurement rules, although this can open the door to corruption as evidenced during the West African Ebola crisis 2014-16. The IMF and the WB nevertheless call for reliable tracking and communications systems of emergency response expenditure – which will be difficult to implement in many LICs and LMICs.
Reforms to tackle both at national and global levels
At the national level, experts agree that improving preparedness is key to improving PFM in response to pandemics, yet preparedness is vastly underfunded worldwide. Part of preparedness is also to ensure that sufficient funds are available at the right time to service surge needs. Evidence and experience from dealing with disasters show that it is more effective to plan ahead for shocks and put suitable financing arrangements in place in advance. There is also room to better engage the private sector: they can be mandated to take on some of the responsibility and insurance companies should develop further suitable products. Country-owned regional risk pools can also be used to offer health shock coverage – for example, the African Risk Capacity recently announced that it would include coronavirus cover in its forthcoming sovereign epidemics product.
At the global level, resources currently available for pandemics response are insufficient. Experts agree that the international community should strengthen incentives for countries to invest in preparedness. This could for example be done by an international matching fund or more WB lending in this arena. Many also call for more innovative financial mechanisms at the international level to leverage private sector resources and incentivise national preparedness investments. The World Bank’s Pandemic Emergency Financing Facility (PEF) has been a first step in this direction but it has been too slow to activate and needs to incentivise preparedness Some also make the argument that it would send a strong signal to policymakers to include epidemics in financial planning, e.g. in IMF and World economic risk and institutional assessments.
Overall, this review identified many research gaps, and an urgent need to build the evidence base on public financing in response to major health shocks. The Maintains programme will explore some of these key issues and research gaps, in response to the COVID-19 pandemic, alongside its core planned research in Bangladesh, Sierra Leone, Ethiopia, Uganda, Kenya, and Pakistan, as well as exploring sectoral issues at a global level.
The full rapid literature review can be found here.
All Maintains evidence and articles relating to COVID-19 can be found here.
Maintains aims to save lives and reduce suffering for people in developing countries affected by shocks such as pandemics, floods, droughts, and population displacement. This five-year programme, spanning 2018–2023, is building a strong evidence base on how health, education, nutrition, and social protection systems can respond more quickly, reliably, and effectively to changing needs during and after shocks, whilst also maintaining existing services. With evidence gathered from six focal countries – Bangladesh, Ethiopia, Kenya, Pakistan, Sierra Leone, and Uganda – Maintains is working to inform policy and practice globally. It also provides technical assistance to support practical implementation.
This output has been funded by UK aid from the UK government; however, the views expressed do not necessarily reflect the UK government’s official policies. Maintains is implemented through a consortium led by Oxford Policy Management www.opml.co.uk.