World Bank to scrap parametric triggers for loan relief after climate disasters

The World Bank’s executive board is set to approve a change to the climate-resilient debt clauses it has applied to some loans, after criticism that the terms were too restrictive, GlobalMarkets can reveal.

The Bank is changing the clauses so that they can be triggered if the borrower declares a national emergency after a natural disaster.

Since June 2023 the World Bank has offered climate-resilient debt clauses (CRDCs) to small states and small island economies, on its IBRD flexible loan product and International Development Association credits. The offer began with new loans, but in late 2023 was expanded to cover existing ones too.

Borrowers can defer paying principal and interest for up to two years, if they are hit by an earthquake or tropical cyclone of a specific magnitude.

However, the 45 eligible countries had complained that other disasters, more frequent but equally damaging, such as floods and droughts did not trigger the payment break.

“A number of countries were telling us that for them, earthquakes and hurricanes are not the relevant perils, but they’re suffering from droughts and floods,” Dirk Reinermann, director of IDA resource mobilisation and IBRD corporate finance, development finance, told GlobalMarkets.

Small island developing states have around 1% of the world’s population, but are in the front line of multiple global crises, notably climate change.

The difficulty for the Bank was that it was hard to come up with an acceptable, objective parametric measure of droughts and floods that could apply to all countries. Instead, Bank officials decided the declaration of a national emergency would be enough to trigger the break clauses.

Currently, hurricane winds must reach 178km/hour for over a minute or 160km/hour as a 10 minute average. Earthquakes must register 7.0 on the Moment Magnitude scale.

“Now we’re going to say any country that declares a national emergency on the basis of a natural disaster or a health disaster [can get relief],” Reinermann said.

Aid agencies had praised the CRDCs as reflecting a broader commitment to making disaster financing more effective and adaptive to the growing climate risks faced by low and middle income countries. The CRDC is offered at no cost to borrowers.

The World Bank was not the first public sector lender to offer the clauses. UK Export Finance, an export credit agency, said it would offer CRDCs on direct sovereign loans in November 2022, followed soon after by the Inter American Development Bank.

Members of the Commonwealth Ministerial Meeting on Small States, which met in Apia, Samoa, this week, called on both public and private creditors to adopt CRDCs and other disaster risk finance initiatives to enhance the resilience of vulnerable countries.

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