The Inter-American Development Bank (IDB) has approved a $400 million contingent loan for a program to help offset the possible impact of natural disasters and health emergencies on El Salvador’s public finances.

The project will allow the country to build greater financial resilience against earthquakes, tropical cyclones, volcanic eruptions, and future epidemic and pandemic outbreaks. In addition, it will provide timely access to resources in case of both natural disaster and public health emergencies, funding extraordinary public expenditures to care for affected populations and contribute to a rapid recovery.

The loan was granted under the Contingent Credit Facility for Natural Disaster Emergencies and Public Health (CCF), an innovative and cost-efficient IDB tool to foster greater financial resilience among countries and increase the Bank’s climate funding for the region. With this loan approval, the Bank now provides ex ante financial coverage to fifteen mostly small and vulnerable countries in the region for a total of nearly $2.5 billion.

El Salvador is highly exposed and vulnerable to natural hazards and public health events. As climate change’s effects gradually intensify, these events, which tend to disproportionately affect vulnerable populations – particularly women – are expected to become more frequent and intense. These risks potentially constitute a significant contingent tax liability as they would generate great financing needs.

Given the need to increase the country’s resilience, the operation will structure fast-access, cost-effective ex-ante financial coverage of $400 million under the CCF, with $300 million under modality I for earthquakes and tropical cyclones, and $100 million under modality II for volcanic eruptions, and future epidemic and pandemic outbreaks. Through this coverage, the country will strengthen its capacity to deploy a rapid and effective response to emergencies, including humanitarian assistance activities and the rehabilitation of public services, among other emergency response measures.

The operation also seeks to improve the country’s comprehensive disaster risk management by promoting improvements in the five strategic axes of the Comprehensive Natural Disaster Risk Management Plan (PGIRDN). These axes are: Governance and development of the governing framework, risk identification and knowledge, disaster risk reduction, emergency preparedness, and financial risk management. Disaster risk management operations in the country will also promote a gender equity approach through a gender action plan to address the main gender gaps.

The contingent loan will potentially benefit El Salvador’s population in general and the affected population that will receive emergency assistance under the proposed coverage in particular.

The operation is aligned with Vision 2025 - Reinvesting in the Americas: A Decade of Opportunities, created by the IDB to achieve recovery and inclusive growth in Latin America and the Caribbean in the areas of gender and inclusion and climate change, two of its main priorities.

The IDB loan of $50 million has a 25-year repayment term, a five and a half year grace period, and an interest rate based on LIBOR.