Indonesia’s new strategy in disaster financing

  • Indonesia spent an average of IDR4.4tr a year, in the last 12 years, funding emergency responses to natural disasters that hit the country. The funds were disbursed for search and rescue work, the evacuation of victims, and provision of basic needs.
  • But these sums covered only 20%, or less, of the real economic losses on the ground. To make up for the massive shortfall to finance rehabilitation and reconstruction, Jakarta depended on re-allocated funds from the state and regional budgets.
  • All this is set to change. After the 28 Sep 18 earthquake and tsunami that hit the eastern province of Central Sulawesi, Indonesia is adopting a new disaster risk financing and insurance strategy.
  • The country will from next year start insuring key state assets, such as office and educational buildings, with funds earmarked from the state Budget.
  • It will also carry out a study on forming a pooled fund – collected from the state Budget and cash aid, for example – that could be used when disaster strikes. Jakarta is also exploring international financial instruments, such as standby loans from the World Bank and Asian Development Bank. It will also look at issuing “catastrophe bonds”.
  • The government wants to expand insurance coverage for the agriculture and fisheries sector so that ordinary Indonesians would be able to get help during disasters ranging from pest infestation to the impact of climate change.
  • Mr Suahasil Nazara, who heads the fiscal policy office at the Finance Ministry, said earlier this month that the government could sell “catastrophe bonds”, a type of debt where the issuer pays interest, but gets the capital only in the event of a disaster.
  • Dr Saut Sagala, a disaster expert from Bandung Institute of Technology, said while state-asset insurance is important there should first be a thorough study that compares the value of premium spent and the benefits. There should also be a risk analysis prior to deciding on the instrument.
  • He also suggested the allocation of funds to mitigate the impact of earthquakes and tsunamis, such as by strengthening the structures of buildings or bridges, and planting of mangroves.

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