Contingent lines of credit are loans that provide countries with immediate financial liquidity following a defined event. They can help countries face natural disasters, including extreme weather events such as droughts, hurricanes, and typhoons. They have also been used to address health crises, such as the COVID-19 pandemic.
The Asian Development Bank, Inter-American Development Bank, and World Bank have contingent credit facilities for natural disaster emergencies that disburse funds to countries that are impacted by a verifiable disaster event. The terms of the loan are negotiated in advance to enable the borrower to rapidly meet its financing requirements during times of shortfall due to disasters. The terms include the types of natural disasters that are covered (such as hurricanes and floods), the parametric triggers used to confirm that a disaster has occurred, the payout, and the timeline of the payout.
Current or potential adaptation-relevant sector applications:
- disaster risk reduction – early warning and observation systems, and
- social infrastructure – health facilities.
Additional insights:
- This is a mature instrument introduced by the World Bank in 2008.
Considerations for using liquidity facilities:
- Multilateral development banks typically require that other measures be in place, such as a disaster risk management program, to mitigate the probability of accessing the facility.
- Recipients require an adequate macroeconomic policy framework and satisfactory disaster risk management program.
Adapted from the following sources:
Bruce, G. L. (2019, September 10). What is the Contingent Credit Facility? Inter-American Development Bank. https://blogs.iadb.org/caribbean-dev-trends/en/what-is-the-contingent-credit-facility/
Development Asia. (2018). Explainer: Mobilizing contingency funds for climate-related disasters. https://development.asia/explainer/mobilizing-contingency-funds-climate-related-disasters
Lu, X., & Abrigo, R. (2019). Contingent disaster financing under policy-based lending in response to natural hazards. Asian Development Bank. https://www.adb.org/sites/default/files/institutional-document/518061/disaster-financing-policy-paper.pdf