Awareness Raised on Finance Embedded Risk Transfer

The COVID-19 pandemic has prompted a renewed focus on the need for governments to strengthen their resilience to similar crises in the future. The occurrence of such events often induces multiple adverse effects on economies. In their immediate aftermath, crises create significantly increased government financing requirements as a result of policy responses.  There could also be deterioration in market conditions which may make it more difficult for governments to roll over or service debt. On the economic front, crises induce significant economic contractions, resulting in low economic growth rates, dwindling domestic fiscal revenues and foreign exchange receipts, and so adversely impacting on governments’ capacity to support recovery.

Innovative risk transfer instruments can be used to create the much-needed breathing space when such crises occur. With the occurrence of a predefined event, such as a pandemic or a drought, risk transfer instruments can allow sovereign borrowers to forgo certain obligations under the existing agreement. This can be as little as being granted a one-year break of interest payments (liquidity solution), and as much as a complete write-down of the full notional debt obligation (capital solution). A core element of the solution is that the insurance is not purchased as a standalone product, but rather as an integral component of the debt instrument.

Embedding risk transfer solutions in public borrowing is a relatively new development. As part of the effort to raise awareness and support member countries’ efforts to strengthen their resilience strategies, MEFMI hosted a Webinar to explore opportunities for using finance embedded risk transfer instruments in sovereign borrowing. A total of 48 officials participated in the Webinar, drawn from 16 countries, including ten (10) MEFMI member countries, namely Botswana, Kenya, Lesotho, Mozambique, Malawi, Rwanda, Tanzania, Uganda, Zambia and Zimbabwe. Other participants were from MEFMI’s technical and financial cooperating partners, namely Trade and Development Bank (TDB), West African Institute for Financial and Economic Management (WAIFEM) and Collaborative Africa Budget Reform Initiative (CABRI). Of the 48 participants, 32 (18 male and 14 female) were from MEFMI’s client institutions.

The Webinar raised awareness on the potential for member countries to use innovative instruments such as finance embedded risk transfer in sovereign borrowing to strengthen their resilience to crises similar to those induced by the COVID-19 pandemic. Governments are expected to further explore opportunities for embedding similar instruments in the design of medium debt management strategies to enhance the resilience of their borrowing to shocks and sustainability of public debt.

The Webinar was facilitated by two (2) resource persons from Swiss Re, namely Dr. Gerry Lemcke, Head of Product Management; and Dr. Mario Wilhelm, Head of the Swiss Re’s Middle East and Africa Public Sector Solutions team. Mr. Thomas Wiechers of the Financial Sector Deepening (FSD) Africa moderated the discussions.

Prepared by Tiviniton Makuve