Destructive economic impact of hurricanes

THE Caribbean boasts some of the most pristine natural scenery in the world but is also one of the most vulnerable regions to climate-related and natural disaster risks. The Atlantic hurricane season runs from June to November and the US National Oceanographic and Atmospheric Administration (NOAA) earlier predicted “above-normal activity” for the 2020 season. Already there have been seven named tropical cyclones in the Atlantic – the latest being Gonzalo, which was categorised as a tropical storm on July 22. The human and economic costs associated with natural disasters in the region have been substantial, especially as the frequency and intensity of storms have increased within recent years. In the last two years alone, the Caribbean experienced three category five hurricanes. According to the International Monetary Fund (IMF), approximately 63 per cent of the disasters experienced by small states globally since 1950 have occurred in the Caribbean, killing 250,000 people.

These small and vulnerable island states usually incur costs well in excess of the value of their GDP as a result of natural disasters. According to estimates from the IMF, in 2017 Hurricane Maria cost Dominica 225 per cent of GDP, while the damage for Grenada in 2004 was 200 per cent of GDP as a result of Hurricane Ivan. Hurricane Dorian in 2019, which resulted in extensive loss of lives and livelihood in the Bahamas, cost approximately 25 per cent of the country’s GDP. Economies typically take years to recover from the damage inflicted by tropical storms as they leave behind significant gaps in both physical and human capital.

Reconstruction activity usually provides a boost to the economy in the aftermath of hurricanes and tropical storms, however, the economic costs may persist for much longer. Even though economic growth typically turns positive in the year after due largely to increased government spending to rebuild and provide social support, fiscal imbalances and indebtedness tend to increase considerably. The external account is also impacted negatively due to both increased imports related to reconstruction and loss of export revenue from the downturn in tourism activity, in most cases resulting in a severely weakened balance of payments position.

In light of the high costs associated with natural disasters amid already weakened fiscal accounts, countries have begun to recognise the importance of building resilience and accumulating buffers.

St Vincent and the Grenadines, for example, has instituted a Contingency Fund to protect public finances from the impact of natural disasters and climate change. Established in 2017, the fund now has approximately EC$33 million and its objective is to help to mitigate the economic fallout from any disaster. There are risk management tools available such as the World Bank’s Caribbean Catastrophe Risk Insurance Facility which is a regional fund intended to provide quick liquidity when a major disaster strikes. Catastrophe bonds (cat bonds), according to the IMF, are another risk-sharing tool that transfers the risk to financial markets in exchange for (generous) coupon payments and allows the issuer to forgo repayment of the principal if there is a major disaster.

Many countries in the Caribbean, including St Kitts and Nevis, Antigua and Barbuda, St Lucia and Dominica, have benefited tremendously from successful citizenship by investment programmes. Windfall revenue from these programmes should be used to further enhance economic resilience and to safeguard public finances by providing funding for unpredictable financing needs due to natural disasters. Further, fiscal rules are critical for ensuring fiscal sustainability even when faced with unanticipated weather-related shocks.

This year, the Caribbean will be faced with overlapping crises — the devastating impact of Covid-19, which has stifled activity in the tourism sector, coupled with the increased probability of weather-related disasters given the already active hurricane season. The IMF has repeatedly warned about the deeper global recession, with the Caribbean forecasted to contract by an average of 3.4 per cent in 2020. The tourism-dependent economies are forecasted to record an even more severe decline of ten per cent, with significant downside risks. Regional governments have deployed fiscal stimulus to enhance health care and provide support to the socially vulnerable in light of the pandemic, utilising various sources of funding – mostly from multilateral sources. This has further reduced fiscal flexibility and will worsen the existing onerous debt levels. Any strong tropical storm will have debilitating effects on the region’s current fragile economy. If the region has a repeat of the 2017 hurricane season, where two category five hurricanes (Irma and Maria) ravaged the region, economies will be crippled and the losses will be unimaginable. Building economic resilience is paramount, especially given the inherent vulnerabilities we face as small and open island states.

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